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Other service fees comprise of fees related to letters of credit, wire fees, fees on foreign exchange transactions and other immaterial individual revenue streams. 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Table of Contents

 UNITED STATES

securities and exchange commission

Washington, D.C. 20549

 

form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2020

OR

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

 

For the transition period from to
   
Commission file number 001-31830

 

Cathay General Bancorp 

(Exact name of registrant as specified in its charter)

 

Delaware   95-4274680
(State of other jurisdiction of incorporation    (I.R.S. Employer
or organization)   Identification No.)
     
777 North Broadway, Los Angeles, California   90012
(Address of principal executive offices)    (Zip Code)

 

Registrant's telephone number, including area code: (213) 625-4700

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock

CATY

Nasdaq Global Select Market

 

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

 

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

 

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

 

Large accelerated filer ☑  Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐  

                                                               

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

 

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

 

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

 

Common stock, $.01 par value, 79,660,767 shares outstanding as of October 31, 2020.

 

 
Table of Contents
 

 

 

CATHAY GENERAL BANCORP AND SUBSIDIARies

3Rd quarter 2020 REPORT ON FORM 10-Q

table of contents

 

 

PART I – FINANCIAL INFORMATION 3
     
Item 1. FINANCIAL STATEMENTS (Unaudited) 3
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 8
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 45
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 72
Item 4. CONTROLS AND PROCEDURES. 73
     
PART II – OTHER INFORMATION 73
     
Item 1. LEGAL PROCEEDINGS. 73
Item 1A. RISK FACTORS. 74
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. 76
Item 3. DEFAULTS UPON SENIOR SECURITIES. 77
Item 4. MINE SAFETY DISCLOSURES. 77
Item 5. OTHER INFORMATION. 77
Item 6. EXHIBITS. 77
     
SIGNATURES   78

 

 
Table of Contents
 

 

 

Forward-Looking Statements

 

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

 

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

 

 

●

local, regional, national and international economic and market conditions and events and the impact they may have on us, our customers and our operations, assets and liabilities;

 

 

●

the impact on our business, operations, financial condition, liquidity, results of operations, prospects and trading prices of our shares arising out of the COVID-19 pandemic;

 

 

●

possible additional provisions for loan losses and charge-offs;

 

 

●

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

 

 

●

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

 

 

●

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

 

 

●

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

 

 

●

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

 

 

●

potential goodwill impairment;

 

 

●

liquidity risk;

 

 

●

fluctuations in interest rates;

 

 

●

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

 

 

●

inflation and deflation;

 

 

●

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

 

 

●

environmental liabilities;

 

 

●

our ability to generate anticipated returns from our investments and/or financings in certain tax advantaged-projects;

 

1
Table of Contents

 

 

●

our ability to compete with larger competitors;

 

 

●

our ability to retain key personnel;

 

 

●

successful management of reputational risk;

 

 

●

natural disasters, public health crises (including the occurrence of a contagious disease or illness, such as the COVID-19 pandemic) and geopolitical events;

 

 

●

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

 

 

●

our ability to adapt our systems to the expanding use of technology in banking;

 

 

●

risk management processes and strategies;

 

 

●

adverse results in legal proceedings;

 

 

●

the impact of regulatory enforcement actions, if any;

 

 

●

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

 

 

●

changes in accounting standards or tax laws and regulations;

 

 

●

market disruption and volatility;

 

 

●

fluctuations in the Bancorp’s stock price;

 

 

●

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

 

 

●

issuances of preferred stock;

 

 

●

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

 

 

●

the soundness of other financial institutions.

 

These and other factors are further described in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2019 (Item 1A in particular), other reports and registration statements filed with the Securities and Exchange Commission (“SEC”), and other filings Bancorp makes with the SEC from time to time. Actual results in any future period may also vary from the past results discussed in this report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements. We have no intention and undertake no obligation to update any forward-looking statement or to announce publicly any revision of any forward-looking statement to reflect developments, events, occurrences or circumstances after the date of such statement, except as required by law.

 

Bancorp’s filings with the SEC are available at the website maintained by the SEC at http://www.sec.gov, or by request directed to Cathay General Bancorp, 9650 Flair Drive, El Monte, California 91731, Attention: Investor Relations (626) 279-3296.

 

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PART I – FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS (Unaudited)

 

 

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

   

September 30, 2020

   

December 31, 2019

 
   

(In thousands, except share and per share data)

 

Assets

               

Cash and due from banks

  $ 128,896     $ 177,240  

Short-term investments and interest-bearing deposits

    1,305,170       416,538  

Cash and cash equivalents

               

Securities available-for-sale (amortized cost of $1,060,975 at September 30, 2020 and $1,443,730 at December 31, 2019)

    1,080,540       1,451,842  

Loans

    15,565,779       15,075,481  

Less:  Allowance for loan losses 

    (179,130 )     (123,224 )

Unamortized deferred loan fees, net

    (4,210 )     (626 )

Loans, net 

    15,382,439       14,951,631  

Equity securities 

    22,964       28,005  

Federal Home Loan Bank stock 

    17,250       18,090  

Other real estate owned, net 

    4,918       10,244  

Affordable housing investments and alternative energy partnerships, net

    325,013       308,681  

Premises and equipment, net 

    103,438       104,239  

Customers’ liability on acceptances

    12,973       10,694  

Accrued interest receivable 

    57,102       53,541  

Goodwill 

    372,189       372,189  

Other intangible assets, net 

    5,631       6,296  

Right-of-use assets - operating leases 

    32,591       33,990  

Other assets

    167,124       150,924  

Total assets

  $ 19,018,238     $ 18,094,144  
                 

Liabilities

               

Deposits:

               

Non-interest-bearing demand deposits 

  $ 3,306,421     $ 2,871,444  

Interest-bearing deposits:

               

NOW deposits 

    1,767,227       1,358,152  

Money market deposits 

    3,227,359       2,260,764  

Savings deposits 

    784,076       758,903  

Time deposits

    6,949,165       7,443,045  

Total deposits 

    16,034,248       14,692,308  

Short-term borrowings 

    —       25,683  

Advances from the Federal Home Loan Bank 

    230,000       670,000  

Other borrowings of affordable housing investments 

    23,788       29,022  

Long-term debt

    119,136       119,136  

Deferred payments from acquisition 

    —       7,644  

Acceptances outstanding 

    12,973       10,694  

Lease liabilities - operating leases 

    35,116       35,873  

Other liabilities 

    188,254       209,501  

Total liabilities

    16,643,515       15,799,861  

Commitments and contingencies 

    —       —  

Stockholders’ Equity

               

Common stock, $0.01 par value, 100,000,000 shares authorized; 90,394,359 issued and 79,659,396 outstanding at September 30, 2020, and 90,064,382 issued and 79,729,419 outstanding at December 31, 2019

    904       900  

Additional paid-in-capital 

    955,742       950,466  

Accumulated other comprehensive income, net 

    6,389       2,302  

Retained earnings 

    1,743,106       1,659,153  

Treasury stock, at cost (10,734,963 shares at September 30, 2020, and 10,334,963 shares at December 31, 2019)

    (331,418 )     (318,538 )

Total equity

    2,374,723       2,294,283  

Total liabilities and equity

  $ 19,018,238     $ 18,094,144  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

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Table of Contents

 

 

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME

(Unaudited)

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
   

(In thousands, except share and per share data)

 

Interest and Dividend Income

                               

Loans receivable, including loan fees

  $ 167,556     $ 187,827     $ 513,575     $ 548,395  

Investment securities

    4,115       8,687       17,130       24,454  

Federal Home Loan Bank stock

    216       301       735       903  

Deposits with banks

    347       1,016       1,538       4,289  

Total interest and dividend income

    172,234       197,831       532,978       578,041  
                                 

Interest Expense

                               

Time deposits

    26,247       40,378       92,213       113,992  

Other deposits

    5,761       6,626       19,671       17,591  

Advances from Federal Home Loan Bank

    1,251       1,661       4,119       5,976  

Long-term debt

    1,456       1,948       4,336       6,087  

Deferred payments from acquisition

    15       93       115       502  

Short-term borrowings

    —       125       234       198  

Total interest expense

    34,730       50,831       120,688       144,346  
                                 

Net interest income before provision/(reversal) for credit losses

    137,504       147,000       412,290       433,695  

Provision/(reversal) for credit losses

    12,500       (2,000 )     62,500       (2,000 )

Net interest income after provision/(reversal) for credit losses

    125,004       149,000       349,790       435,695  
                                 

Non-Interest Income

                               

Net (losses)/gains from equity securities

    (1,605 )     364       (1,928 )     7,764  

Securities gains/(losses), net

    —       (121 )     1,153       (108 )

Letters of credit commissions

    1,792       1,602       4,992       4,733  

Depository service fees

    1,263       1,119       3,678       3,617  

Other operating income

    8,527       7,424       23,474       20,097  

Total non-interest income

    9,977       10,388       31,369       36,103  
                                 

Non-Interest Expense

                               

Salaries and employee benefits

    33,341       31,915       92,477       97,200  

Occupancy expense

    5,295       5,579       15,435       16,617  

Computer and equipment expense

    3,044       2,741       8,218       8,453  

Professional services expense

    5,241       5,952       15,586       17,209  

Data processing service expense

    3,772       3,246       11,004       9,737  

FDIC and regulatory assessments

    1,993       2,582       6,854       7,190  

Marketing expense

    1,089       2,436       3,890       5,556  

Other real estate owned expense/(income)

    423       190       (3,229 )     839  

Amortization of investments in low income housing and alternative energy partnerships

    16,173       6,997       42,997       26,909  

Amortization of core deposit intangibles

    172       172       515       515  

Other operating expense

    5,454       3,770       14,672       15,871  

Total non-interest expense

    75,997       65,580       208,419       206,096  
                                 

Income before income tax expense

    58,984       93,808       172,740       265,702  

Income tax expense

    2,190       20,973       14,773       53,944  

Net income

  $ 56,794     $ 72,835     $ 157,967     $ 211,758  
                                 

Other Comprehensive (Loss)/Income, net of tax

                               

Unrealized holding (losses)/gains on securities available-for-sale

    (2,496 )     1,233       8,880       21,216  

Unrealized holding gains/(losses) on cash flow hedge derivatives

    532       (793 )     (3,981 )     (4,119 )

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

    -       (85 )     812       (76 )

Total other comprehensive (loss)/income, net of tax

    (1,964 )     525       4,087       17,173  

Total comprehensive income

  $ 54,830     $ 73,360     $ 162,054     $ 228,931  
                                 

Net Income Per Common Share:

                               

Basic

  $ 0.71     $ 0.91     $ 1.98     $ 2.64  

Diluted

  $ 0.71     $ 0.91     $ 1.98     $ 2.64  

Cash dividends paid per common share

  $ 0.31     $ 0.31     $ 0.93     $ 0.93  

Average Common Shares Outstanding:

                               

Basic

    79,628,372       79,736,814       79,599,288       80,096,855  

Diluted

    79,764,318       79,993,830       79,758,943       80,330,616  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

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Table of Contents

 

 

 

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

                           

Accumulated

                         
   

Common Stock

   

Additional

   

Other

                   

Total

 
   

Number of

           

Paid-in

   

Comprehensive

   

Retained

   

Treasury

   

Stockholders'

 

Three months ended

 

Shares

   

Amount

   

Capital

   

Income/(Loss)

   

Earnings

   

Stock

   

Equity

 
   

(In thousands, except share data)

 

Balance at June 30, 2020

    79,619,984     $ 903     $ 953,616     $ 8,353     $ 1,710,994     $ (331,418 )   $ 2,342,448  

Dividend Reinvestment Plan

    37,420       1       866       —       —       —       867  

Restricted stock units vested

    1,992       —       —       —       —       —       —  

Shares withheld related to net share settlement of RSUs

    —       —       (4 )     —       —       —       (4 )

Stock -based compensation

    —       —       1,264       —       —       —       1,264  

Cash dividends of $0.31 per share

    —       —       —       —       (24,682 )     —       (24,682 )

Other comprehensive loss

    —       —       —       (1,964 )     —       —       (1,964 )

Net income

    —       —       —       —       56,794       —       56,794  

Balance at September 30, 2020

    79,659,396       904       955,742       6,389       1,743,106       (331,418 )     2,374,723  

 

 

                           

Accumulated

                         
   

Common Stock

   

Additional

   

Other

                   

Total

 
   

Number of

           

Paid-in

   

Comprehensive

   

Retained

   

Treasury

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

(Loss)/Income

   

Earnings

   

Stock

   

Equity

 
   

(In thousands, except share data)

 

Balance at June 30, 2019

    79,818,003     $ 900     $ 945,250     $ (1,358 )   $ 1,568,351     $ (313,846 )   $ 2,199,297  

Dividend Reinvestment Plan

    23,508       —       841       —       —       —       841  

Purchases of treasury stock

    (135,000 )     —       —       —       —       (4,692 )     (4,692 )

Stock -based compensation

    —       —       1,789       —       —       —       1,789  

Cash dividends of $0.31 per share

    —       —       —       —       (24,701 )     —       (24,701 )

Other comprehensive income

    —       —       —       525       —       —       525  

Net income

    —       —       —       —       72,835       —       72,835  

Balance at September 30, 2019

    79,706,511       900       947,880       (833 )     1,616,485       (318,538 )     2,245,894  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

 

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

                           

Accumulated

                         
   

Common Stock

   

Additional

   

Other

                   

Total

 
   

Number of

           

Paid-in

   

Comprehensive

   

Retained

   

Treasury

   

Stockholders'

 

Nine months ended

 

Shares

   

Amount

   

Capital

   

Income

   

Earnings

   

Stock

   

Equity

 
   

(In thousands, except share data)

 

Balance at December 31, 2019

    79,729,419     $ 900     $ 950,466     $ 2,302     $ 1,659,153     $ (318,538 )   $ 2,294,283  

Dividend Reinvestment Plan

    109,988       2       2,571       —       —       —       2,573  

Restricted stock units vested

    188,879       2       —       —       —       —       2  

Shares withheld related to net share settlement of RSUs

    —       —       (1,903 )     —       —       —       (1,903 )

Stock issued to directors

    31,110       —       800       —       —       —       800  

Purchases of treasury stock

    (400,000 )     —       —       —       —       (12,880 )     (12,880 )

Stock-based compensation

    —       —       3,808       —       —       —       3,808  

Cash dividends of $0.93 per share

    —       —       —       —       (74,014 )     —       (74,014 )

Other comprehensive income

    —       —       —       4,087       —       —       4,087  

Net income

    —       —       —       —       157,967       —       157,967  

Balance at September 30, 2020

    79,659,396     $ 904     $ 955,742     $ 6,389     $ 1,743,106     $ (331,418 )   $ 2,374,723  

 

 

                           

Accumulated

                         
   

Common Stock

   

Additional

   

Other

                   

Total

 
   

Number of

           

Paid-in

   

Comprehensive

   

Retained

   

Treasury

   

Stockholders'

 
   

Shares

   

Amount

   

Capital

   

(Loss)/Income

   

Earnings

   

Stock

   

Equity

 
   

(In thousands, except share data)

 

Balance at December 31, 2018

    80,501,948     $ 898     $ 942,062     $ (18,006 )   $ 1,479,149     $ (282,237 )   $ 2,121,866  

Dividend Reinvestment Plan

    70,798       1       2,521       —       —       —       2,522  

Restricted stock units vested

    123,199       1       —       —       —       —       1  

Shares withheld related to

                                                       

net share settlement of RSUs

    —       —       (2,300 )     —       —       —       (2,300 )

Stock issued to directors

    21,160       —       749       —       —       —       749  

Purchases of treasury stock

    (1,010,594 )     —       —       —       —       (36,301 )     (36,301 )

Stock-based compensation

    —       —       4,848       —       —       —       4,848  

Cash dividends of $0.93 per share

    —       —       —       —       (74,422 )     —       (74,422 )

Other comprehensive income

    —       —       —       17,173       —       —       17,173  

Net income

    —       —       —       —       211,758       —       211,758  

Balance at September 30, 2019

    79,706,511     $ 900     $ 947,880     $ (833 )   $ 1,616,485     $ (318,538 )   $ 2,245,894  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

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Table of Contents

 

 

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Nine months ended September 30,

 
   

2020

   

2019

 
   

(In thousands)

 

Cash Flows from Operating Activities

               

Net income

  $ 157,967     $ 211,758  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Provision/(reversal) for credit losses

    62,500       (2,000 )

Provision for losses on other real estate owned

    717       494  

Deferred tax (benefit)/provision

    (10,305 )     9,911  

Depreciation and amortization

    5,644       5,009  

Amortization of right-of-use asset

    6,624       6,248  

Change in operating lease liabilities

    (757 )     (5,298 )

Net gains on sale and transfer of other real estate owned

    (4,216 )     (193 )

Net gains on sale of loans held for sale

    (219 )     (795 )

Proceeds from sales of loans held for sale

    6,406       38,742  

Originations of loans held for sale

    (6,187 )     —  

Amortization on alternative energy partnerships, venture capital and other investments

    42,904       27,009  

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

    (1,153 )     108  

Amortization/accretion of security premiums/discounts, net

    6,211       2,376  

Loss on sales or disposal of fixed assets

    45       —  

Unrealized loss/(gain) on equity securities

    1,928       (7,764 )

Stock based compensation and stock issued to officers as compensation

    4,608       5,597  

Net change in accrued interest receivable and other assets

    (13,000 )     (31,640 )

Net change in other liabilities

    (26,597 )     64,186  

Net cash provided by operating activities

    233,120       323,748  
                 

Cash Flows from Investing Activities

               

Purchase of investment securities available-for-sale

    (272,961 )     (539,979 )

Proceeds from sale of investment securities available-for-sale

    107,539       149,725  

Proceeds from sale of equity securities

    3,112       —  

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

    543,114       233,058  

Purchase of Federal Home Loan Bank stock

    (840 )     (975 )

Redemptions of Federal Home Loan Bank stock

    1,680       975  

Net increase in loans

    (496,732 )     (803,291 )

Purchase of premises and equipment

    (4,372 )     (5,125 )

Proceeds from sales of other real estate owned

    4,308       1,905  

Net increase in investment in affordable housing and alternative energy partnerships

    (60,129 )     (35,952 )

Net cash used for investing activities

    (175,281 )     (999,659 )
                 

Cash Flows from Financing Activities

               

Net increase in deposits

    1,342,019       955,679  

Advances from Federal Home Loan Bank

    1,450,000       3,610,000  

Repayment of Federal Home Loan Bank borrowings

    (1,890,000 )     (3,540,000 )

Cash dividends paid

    (74,014 )     (74,422 )

Repayment of other borrowings

    (7,663 )     (39,918 )

Proceeds from other borrowings

    —       25,507  

Purchases of treasury stock

    (12,880 )     (36,301 )

Repayment of short-term borrowings

    (25,683 )     —  

Proceeds from shares issued under Dividend Reinvestment Plan

    2,573       2,522  

Taxes paid related to net share settlement of RSUs

    (1,903 )     (2,300 )

Net cash provided by financing activities

    782,449       900,767  
                 

Increase in cash, cash equivalents, and restricted cash

    840,288       224,856  

Cash, cash equivalents, and restricted cash, beginning of the period

    593,778       600,290  

Cash, cash equivalents, and restricted cash, end of the period

  $ 1,434,066     $ 825,146  
                 

Supplemental disclosure of cash flow information

               

Cash paid during the period:

               

Interest

  $ 133,151     $ 137,422  

Income taxes paid

  $ 35,490     $ 43,507  

Non-cash investing and financing activities:

               

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

  $ 8,068     $ 21,292  

Net change in unrealized holding loss on cash flow hedge derivatives

  $ (3,981 )   $ (4,119 )

Transfers to other real estate owned from loans held for investment

  $ —     $ 860  

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

  $ —     $ 75,285  

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

7
Table of Contents

 

CATHAY GENERAL BANCORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

1. Business

 

Cathay General Bancorp (“Bancorp”) is the holding company for Cathay Bank (the “Bank” and, together, with Bancorp, the “Company”), ten limited partnerships investing in affordable housing investments in which the Bank is the sole limited partner, Asia Realty Corp. and GBC Venture Capital, Inc. Bancorp also owns 100% of the common stock of five statutory business trusts created for the purpose of issuing capital securities. The Bank was founded in 1962 and offers a wide range of financial services. As of September 30, 2020, the Bank operates 25 branches in Southern California, 13 branches in Northern California, 10 branches in New York State, four in Washington State, three in Illinois, two in Texas, one in Maryland, Massachusetts, Nevada, and New Jersey, one in Hong Kong, and a representative office in Taipei, Beijing, and Shanghai. Deposit accounts at the Hong Kong branch are not insured by the Federal Deposit Insurance Corporation (the “FDIC”).

 

 

2. Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. For further information, refer to the audited Consolidated Financial Statements and Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

The preparation of the Condensed Consolidated Financial Statements in accordance with GAAP requires management of the Company 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 could differ from those estimates. The Company expects that the most significant estimates subject to change are the allowance for loan losses.

 

 

3. Recent Accounting Pronouncements

 

Accounting Standards Adopted in 2020

 

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

 

In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. As ASU No. 2018-13 only revises disclosure requirements, there was no material impact on the Company’s Consolidated Financial Statements.

 

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Other Accounting Standards Pending Adoption

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”  This update requires an entity to use a broader range of reasonable and supportable (“R&S”) forecasts, in addition to historical experience and current conditions, to develop an expected credit loss estimate, referred to as the Current Expected Credit Loss (“CECL”) model, for financial assets and net investments that are not accounted for at fair value through net income.  Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses to the amount by which fair value is below amortized cost. 

 

The FASB issued additional ASUs containing clarifying guidance, transition relief provisions and minor updates to the original ASU. These include ASU 2018-19 (issued November 2018), ASU 2019-04 (issued April 2019), ASU 2019-05 (issued May 2019), ASU 2019-10 (issued November 2019), ASU 2019-11 (issued November 2019), ASU 2020-02 (issued February 2020) and ASU 2020-03 (issued March 2020). ASU 2016-13 and subsequent ASUs are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. This amendment is required to be adopted using a modified retrospective approach with a cumulative-effect adjustment to beginning retained earnings, as of the beginning of the first reporting period in which the guidance is effective. 

 

As previously disclosed, the Company formed a multidisciplinary project team and implementation plan, developed a conceptual framework, and engaged an outside firm to develop econometric regression models for net losses during the R&S forecast period.  Our approach for estimating expected life-time credit losses includes, among other things, the following key components for all loan portfolio segments: a. The use of a probability of default/loss given default methodology; b. A number of scenarios based on forecasts from an outside economic forecasting company to develop economic forecasts for the R&S period; c. An initial R&S forecast period of eight quarters for all loan portfolio segments, which reflects management's expectation of losses based on forward-looking economic scenarios over that time; and d. A post-R&S reversion period of four quarters using a linear transition to the historical loss rates for each loan pool. Model back testing, third party model validation and management review of model results are substantially underway, and are nearing completion.

 

As previously disclosed, the Company has elected to delay its adoption of ASU 2016-13, as provided by the Coronavirus Aid, Relief, and Economic Security (the “CARES Act”), until the date on which the national emergency related to the COVID-19 outbreak is terminated or December 31, 2020, whichever occurs first. Upon adoption of ASU 2016-13, the Company expects to recognize, as of January 1, 2020, a one-time cumulative effect adjustment through retained earnings of between $10 million to $12 million and expects to increase its allowance for credit losses (“ACL”) by $15 to $17 million. As of September 30, 2020, the Company’s process for estimation of the ACL under the CECL model is in progress as to the March 31, 2020 ACL, the June 30, 2020 ACL and the September 30, 2020 ACL. Based on its preliminary analysis as of September 30, 2020, the Company preliminarily estimates an addition to its ACL of between $10 to $15 million for the first quarter of 2020, an addition of between $5 million and $10 million for the second quarter of 2020, and a reduction of between $15 to $25 million for the third quarter of 2020 above the $25 million reported under the incurred loss method for both the quarter ended March 31, 2020 and the quarter ended June 30, 2020 and below the $12.5 million recorded under the incurred loss method for the quarter ended September 30, 2020.

 

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

 

 

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740); Simplifying the Accounting for Income Taxes.” This ASU removes specific exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. It eliminates the need for an organization to analyze whether the following apply in a given period: exception to the incremental approach for intra-period tax allocation; exception to accounting for basis differences when there are ownership changes in foreign investments; and exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax-related guidance and simplifies GAAP for: Franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacted changes in tax laws in interim periods. This ASU is effective for public business entities, for fiscal years beginning after December 15, 2020 with early adoption permitted for public business entities for periods for which financial statements have not yet been issued. The Company does not expect the adoption of ASU 2019-12 to have a material impact on the Company’s Consolidated Financial Statements.

 

In January 2020, the FASB issued ASU No. 2020-01, “'Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint-Ventures (Topic 323), and Derivatives and Hedging (Topic 815). Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” This ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early application is permitted, including early adoption in an interim period for public business entities for periods for which financial statements have not yet been issued. An entity should apply ASU No. 2020-01 prospectively at the beginning of the interim period that includes the adoption date. This ASU, among other things, clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments—Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. The new ASU clarifies that, when determining the accounting for certain forward contracts and purchased options, a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. The Company does not expect the adoption of ASU 2020-01 to have a material impact on the Company’s Consolidated Financial Statements.

 

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In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU No. 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. Therefore, it will be in effect for a limited time through December 31, 2022. The Company is evaluating the impact of adopting ASU 2020-02 on the Company’s Consolidated Financial Statements.

 

 

 

4. Cash, Cash Equivalents and Restricted Cash

 

The Company manages its cash and cash equivalents based upon the Company’s operating, investment, and financing activities. Cash and cash equivalents, including for purposes of reporting cash flows, consist of cash on hand, amounts due from banks, and short-term investments with original maturity of three months or less.

 

The Company is required to maintain reserves with the Federal Reserve Bank. Reserve requirements are based on a percentage of deposit liabilities. The average reserve balances required were $78 thousand and $110 thousand for the nine months ended September 30, 2020 and for the year ended December 31, 2019, respectively. As of September 30, 2020 and December 31, 2019, the Company had $39.0 million and $17.7 million, respectively, on deposit in a cash margin account that serves as collateral for interest rate swaps. These amounts included $13.2 million and $7.1 million, respectively, on deposit in a cash margin account that serves as collateral for the Bancorp’s interest rate swaps. As of September 30, 2020 and December 31, 2019, the Company held $21.8 million and $18.9 million, respectively, in a restricted escrow account with a major bank for its alternative energy investments.

 

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5. Earnings per Share

 

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

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
   

(In thousands, except share and per share data)

 
                                 

Net income

  $ 56,794     $ 72,835     $ 157,967     $ 211,758  
                                 

Weighted-average shares:

                               

Basic weighted-average number of common shares outstanding

    79,628,372       79,736,814       79,599,288       80,096,855  

Dilutive effect of weighted-average outstanding common share equivalents RSUs

    135,946       257,016       159,655       233,761  

Diluted weighted-average number of common shares outstanding

    79,764,318       79,993,830       79,758,943       80,330,616  
                                 

Average restricted stock units with anti-dilutive effect

    117,621       32,321       97,110       47,690  

Earnings per common share:

                               

Basic

  $ 0.71     $ 0.91     $ 1.98     $ 2.64  

Diluted

  $ 0.71     $ 0.91     $ 1.98     $ 2.64  

 

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6. Stock-Based Compensation

 

Pursuant to the Company’s 2005 Incentive Plan, as amended and restated, the Company may grant incentive stock options (employees only), non-statutory stock options, common stock awards, restricted stock, RSUs, stock appreciation rights and cash awards to non-employee directors and eligible employees.

 

RSUs are generally granted at no cost to the recipient. RSUs generally vest ratably over three years or cliff vest after one or three years of continued employment from the date of the grant. While a portion of RSUs may be time-vesting awards, others may vest subject to the attainment of specified performance goals and are referred to as “performance-based RSUs.” All RSUs are subject to forfeiture until vested.

 

Performance-based RSUs are granted at the target amount of awards. Based on the Company’s attainment of specified performance goals and consideration of market conditions, the number of shares that vest can be adjusted to a minimum of zero and to a maximum of 150% of the target. The amount of performance-based RSUs that are eligible to vest is determined at the end of each performance period and is then added together to determine the total number of performance shares that are eligible to vest. Performance-based RSUs generally cliff vest three years from the date of grant.

 

Compensation costs for the time-based awards are based on the quoted market price of the Company’s stock at the grant date. Compensation costs associated with performance-based RSUs are based on grant date fair value, which considers both market and performance conditions. Compensation costs of both time-based and performance-based awards are recognized on a straight-line basis from the grant date until the vesting date of each grant.

 

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The following table presents RSU activity during the nine months ended September 30, 2020:

 

   

Time-Based RSUs

   

Performance-Based RSUs

 
           

Weighted-Average

           

Weighted-Average

 
           

Grant Date

           

Grant Date

 
   

Shares

   

Fair Value

   

Shares

   

Fair Value

 

Balance at December 31, 2019

    273,200     $ 35.90       297,744     $ 32.65  

Granted

    3,013       24.89       212,369       19.66  

Vested

    (79,630 )     25.39       (193,240 )     21.68  

Forfeited

    (8,162 )     39.41       (14,071 )     39.08  

Balance at September 30, 2020

    188,421     $ 40.01       302,802     $ 30.24  

 

The compensation expense recorded for RSUs was $1.3 million and $1.8 million for the three months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020 and 2019, the compensation expense recorded for RSUs was $3.8 million and $4.8 million, respectively. Unrecognized stock-based compensation expense related to RSUs was $8.0 million and $11.5 million as of September 30, 2020 and 2019, respectively. As of September 30, 2020, these costs are expected to be recognized over the next 1.7 years for time-based and performance-based RSUs.

 

As of September 30, 2020, 2,150,724 shares were available for future grants under the Company’s 2005 Incentive Plan, as amended and restated.

 

Tax deficiency from share-based payment arrangements increased income tax expense by $0.4 million and a tax benefit from share-based payment arrangements reduced income tax expense by $0.6 million in the nine months ended September 30, 2020 and 2019, respectively.

 

 

7. Investment Securities

 

The following tables set forth the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of securities available-for-sale as of September 30, 2020, and December 31, 2019:

 

   

September 30, 2020

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

         
   

Cost

   

Gains

   

Losses

   

Fair Value

 
   

(In thousands)

 

Securities Available-for-Sale

                               

U.S. treasury securities

  $ 99,968     $ 12     $ —     $ 99,980  

U.S. government agency entities

    104,661       465       530       104,596  

Mortgage-backed securities

    709,756       20,045       557       729,244  

Collateralized mortgage obligations

    222       —       11       211  

Corporate debt securities

    146,368       288       147       146,509  

Total

  $ 1,060,975     $ 20,810     $ 1,245     $ 1,080,540  

 

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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  

 

The amortized cost and fair value of securities available-for-sale as of September 30, 2020, by contractual maturities, are set forth in the tables below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties.  

 

   

September 30, 2020

 
   

Securities Available-For-Sale

 
   

Amortized Cost

   

Fair Value

 
   

(In thousands)

 
                 

Due in one year or less

  $ 182,047     $ 182,289  

Due after one year through five years

    44,028       44,044  

Due after five years through ten years

    176,079       178,429  

Due after ten years

    658,821       675,778  

Total

  $ 1,060,975     $ 1,080,540  

 

Equity Securities - The Company recognized a net loss of $1.6 million for the three months ended September 30, 2020, due to the decrease in fair value of equity investments with readily determinable fair values compared to a net gain of $0.4 million for the three months ended September 30, 2019. The Company recognized a net loss of $1.9 million for the nine months ended September 30, 2020, due to the decrease in fair value of equity investments with readily determinable fair values compared to a net gain of $7.8 million for the nine months ended September 30, 2019. Equity securities were $23.0 million and $28.0 million as of September 30, 2020 and December 31, 2019, respectively.

 

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The following tables set forth the gross unrealized losses and related fair value of the Company’s investment portfolio, aggregated by investment category and the length of time that individual security has been in a continuous unrealized loss position, as of  September 30, 2020 and  December 31, 2019:

 

   

September 30, 2020

 
   

Less than 12 Months

   

12 Months or Longer

   

Total

 
           

Gross

           

Gross

           

Gross

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 
   

(In thousands)

 
                                                 

Securities Available-for-Sale

                                               

U.S. government agency entities

  $ 21,824     $ 94     $ 40,793     $ 436     $ 62,617     $ 530  

Mortgage-backed securities

    1,924       20       8,944       537       10,868       557  

Collateralized mortgage obligations

    —       —       211       11       211       11  

Corporate debt securities

    45,762       147       —       —       45,762       147  

Total

  $ 69,510     $ 261     $ 49,948     $ 984     $ 119,458     $ 1,245  

 

 

   

December 31, 2019

 
   

Less than 12 Months

   

12 Months or Longer

   

Total

 
           

Gross

           

Gross

           

Gross

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 
   

(In thousands)

 
                                                 

Securities Available-for-Sale

                                               

U.S. government agency entities

  $ 48,829     $ 172     $ 3,570     $ 147     $ 52,399     $ 319  

U.S. government sponsored entities

    —       —       224,443       557       224,443       557  

Mortgage-backed securities

    43,719       36       120,801       788       164,520       824  

Collateralized mortgage obligations

    —       —       552       17       552       17  

Corporate debt securities

    51,791       23       —       —       51,791       23  

Total

  $ 144,339     $ 231     $ 349,366     $ 1,509     $ 493,705     $ 1,740  

 

To the Company’s knowledge, the Company believes the unrealized losses were primarily attributed to yield curve movement, together with widened liquidity spreads and credit spreads. The issuers have not, to the Company’s knowledge, established any cause for default on these securities. Management believes the gross unrealized losses detailed in the table above are temporary. The Company expects to recover the amortized cost basis of its securities and has no present intent to sell and will not be required to sell available-for-sale securities that have declined below their cost before their anticipated recovery. Accordingly, no other than temporary impairment write-downs were recorded on the Company’s Condensed Consolidated Statement of Operations and Comprehensive Income in the three or nine months ended September 30, 2020 and 2019.

 

Securities available-for-sale having a carrying value of $18.6 million and $20.1 million as of September 30, 2020 and December 31, 2019, respectively, were pledged to secure public deposits, other borrowings and treasury tax and loan.

 

 

8.Loans

 

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; and Las Vegas, Nevada. The Company also has loan customers in Hong Kong. The Company has no specific industry concentration, and generally its loans, when secured, are secured by real property or other collateral of the borrowers. The Company generally expects loans to be paid off from the operating profits of the borrowers, from refinancing by other lenders, or through sale by the borrowers of the secured collateral.

 

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The types of loans in the Company’s Condensed Consolidated Balance Sheets as of September 30, 2020, and December 31, 2019, were as follows:

 

   

September 30, 2020

   

December 31, 2019

 
   

(In thousands)

 
                 

Commercial loans

  $ 2,848,000     $ 2,778,744  

Residential mortgage loans

    4,169,847       4,088,586  

Commercial mortgage loans

    7,459,316       7,275,262  

Real estate construction loans

    675,112       579,864  

Equity lines

    411,848       347,975  

Installment and other loans

    1,656       5,050  

Gross loans

  $ 15,565,779     $ 15,075,481  

Allowance for loan losses

    (179,130 )     (123,224 )

Unamortized deferred loan fees, net

    (4,210 )     (626 )

Total loans, net

  $ 15,382,439     $ 14,951,631  

 

 

As of September 30, 2020, recorded investment in impaired loans totaled $105.8 million and was comprised of non-accrual loans of $77.2 million and accruing troubled debt restructured loans (“TDRs”) of $28.6 million. As of December 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 6.1% and 2.1% of the contractual balances for impaired loans as of September 30, 2020 and December 31, 2019, respectively.

 

The following table presents the average recorded investment and interest income recognized on impaired loans for the periods indicated:

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
   

Average

Recorded

Investment

   

Interest

Income

Recognized

   

Average

Recorded

Investment

   

Interest

Income

Recognized

   

Average

Recorded

Investment

   

Interest

Income

Recognized

   

Average

Recorded

Investment

   

Interest

Income

Recognized

 
   

(In thousands)

 
                                                                 

Commercial loans

  $ 30,346     $ 148     $ 38,659     $ 208     $ 30,723     $ 242     $ 41,132     $ 705  

Real estate construction loans

    4,368       98       4,662       —       4,444       245       4,734       —  

Commercial mortgage loans

    40,708       268       40,699       332       37,730       966       51,323       1,034  

Residential mortgage loans and equity lines

    16,609       74       13,133       78       15,240       200       13,126       237  

Total impaired loans

  $ 92,031     $ 588     $ 97,153     $ 618     $ 88,137     $ 1,653     $ 110,315     $ 1,976  

 

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

 

   

September 30, 2020

   

December 31, 2019

 
   

Unpaid

Principal

Balance

   

Recorded

Investment

   

Allowance

   

Unpaid

Principal

Balance

   

Recorded

Investment

   

Allowance

 
   

(In thousands)

 
                                                 

With no allocated allowance

                                               

Commercial loans

  $ 16,210     $ 13,293     $ —     $ 20,134     $ 15,857     $ —  

Real estate construction loans

    5,776       4,335       —       5,776       4,580       —  

Commercial mortgage loans

    22,996       22,532       —       9,234       9,030       —  

Residential mortgage loans and equity lines

    7,921       7,814       —       6,171       6,073       —  

Subtotal

  $ 52,903     $ 47,974     $ —     $ 41,315     $ 35,540     $ —  
                                                 

With allocated allowance

                                               

Commercial loans

  $ 28,059     $ 20,871     $ 7,704     $ 8,769     $ 8,739     $ 2,543  

Commercial mortgage loans

    31,138       31,019       582       26,117       26,040       473  

Residential mortgage loans and equity lines

    6,632       5,914       209       6,740       5,540       220  

Subtotal

  $ 65,829     $ 57,804     $ 8,495     $ 41,626     $ 40,319     $ 3,236  

Total impaired loans

  $ 118,732     $ 105,778     $ 8,495     $ 82,941     $ 75,859     $ 3,236  

 

The following tables present the aging of the loan portfolio by type as of September 30, 2020, and as of December 31, 2019:

 

   

September 30, 2020

 
   

30-59 Days

Past Due

   

60-89 Days

Past Due

   

90 Days or

More Past

Due

   

Non-accrual

Loans

   

Total Past

Due

   

Loans Not

Past Due

   

Total

 
   

(In thousands)

 
                                                         

Commercial loans

  $ 4,956     $ 7,098     $ —     $ 29,757     $ 41,811     $ 2,806,189     $ 2,848,000  

Real estate construction loans

    19,000       2,657       —       4,335       25,992       649,120       675,112  

Commercial mortgage loans

    4,275       —       2,868       33,782       40,925       7,418,391       7,459,316  

Residential mortgage loans and equity lines

    212       —       —       9,317       9,529       4,572,166       4,581,695  

Installment and other loans

    —       —       —       —       —       1,656       1,656  

Total loans

  $ 28,443     $ 9,755     $ 2,868     $ 77,191     $ 118,257     $ 15,447,522     $ 15,565,779  

 

 

   

December 31, 2019

 
   

30-59 Days

Past Due

   

60-89 Days

Past Due

   

90 Days or

More Past

Due

   

Non-accrual

Loans

   

Total Past

Due

   

Loans Not

Past Due

   

Total

 
   

(In thousands)

 
                                                         

Commercial loans

  $ 24,681     $ 9,954     $ 6,409     $ 19,381     $ 60,425     $ 2,718,319     $ 2,778,744  

Real estate construction loans

    5,846       6,753       —       4,580       17,179       562,685       579,864  

Commercial mortgage loans

    7,694       2,609       —       9,928       20,231       7,255,031       7,275,262  

Residential mortgage loans and equity lines

    26,028       965       —       6,634       33,627       4,402,934       4,436,561  

Installment and other loans

    —       —       —       —       —       5,050       5,050  

Total loans

  $ 64,249     $ 20,281     $ 6,409     $ 40,523     $ 131,462     $ 14,944,019     $ 15,075,481  

 

The determination of the amount of the allowance for loan losses for impaired loans is based on management’s current judgment about the credit quality of the loan portfolio and takes into consideration known relevant internal and external factors that affect collectability when determining the appropriate level for the allowance for loan losses. The nature of the process by which the Bank determines the appropriate allowance for loan losses requires the exercise of considerable judgment. This allowance evaluation process is also applied to TDRs since they are considered to be impaired loans. The allowance for loan losses and the reserve for off-balance sheet credit commitments are significant estimates that can and do change based on management’s process in analyzing the loan portfolio and on management’s assumptions about specific borrowers, underlying collateral, and applicable economic, market and environmental conditions, among other factors. Although the Company took steps to incorporate the impact of the COVID-19 pandemic on the economic conditions and other factors (such as the severity and length of the COVID-19 pandemic and its impacts) utilized to determine the allowance for loan losses, if the economic conditions or other factors worsen relative to the assumptions the Company utilized, the allowance for loan losses will increase accordingly in future periods.

 

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A TDR is a formal modification of the terms of a loan when the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including a change in the stated interest rate, a reduction in the loan balance or accrued interest, or an extension of the maturity date that causes significant delay in payment.

 

TDRs on accrual status are comprised of the loans that have, pursuant to the Bank’s policy, performed under the restructured terms and have demonstrated sustained performance under the modified terms for six months before being returned to accrual status. The sustained performance considered by management pursuant to its policy includes the periods prior to the modification if the prior performance met or exceeded the modified terms. This would include cash paid by the borrower prior to the restructure to set up interest reserves.

 

As of September 30, 2020, accruing TDRs were $28.6 million and non-accrual TDRs were $9.9 million compared to accruing TDRs of $35.3 million and non-accrual TDRs of $18.0 million as of December 31, 2019. The Company allocated specific reserves of $395 thousand to accruing TDRs and $42 thousand to non-accrual TDRs as of September 30, 2020, and $822 thousand to accruing TDRs and $2.2 million to non-accrual TDRs as of December 31, 2019. The following tables set forth TDRs that were modified during the three and nine months ended September 30, 2020 and 2019, their specific reserves as of September 30, 2020 and 2019, and charge-offs for the three and nine months ended September 30, 2020 and 2019:

 

   

Three Months Ended September 30, 2020

   

September 30, 2020

 
   

No. of

Contracts

   

Pre-Modification

Outstanding

Recorded

Investment

   

Post-Modification

Outstanding

Recorded

Investment

   

Charge-offs

   

Specific Reserve

 
   

(In thousands)

 
                                         

Commercial loans

    2     $ 2,983     $ 2,983     $ —     $ 203  

Total

    2     $ 2,983     $ 2,983     $ —     $ 203  

 

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Three Months Ended September 30, 2019

   

September 30, 2019

 
   

No. of

Contracts

   

Pre-Modification

Outstanding

Recorded

Investment

   

Post-Modification

Outstanding

Recorded

Investment

   

Charge-offs

   

Specific Reserve

 
   

(In thousands)

 
                                         

Commercial loans

    3     $ 7,585     $ 6,165     $ —     $ 89  

Total

    3     $ 7,585     $ 6,165     $ —     $ 89  

 

 

 

   

Nine Months Ended September 30, 2020

   

September 30, 2020

 
   

No. of

Contracts

   

Pre-Modification

Outstanding

Recorded

Investment

   

Post-Modification

Outstanding

Recorded

Investment

   

Charge-offs

   

Specific Reserve

 
   

(In thousands)

 
                                         

Commercial loans

    5     $ 5,417     $ 5,417     $ —     $ 203  

Total

    5     $ 5,417     $ 5,417     $ —     $ 203  

 

 

 

   

Nine Months Ended September 30, 2019

   

September 30, 2019

 
   

No. of

Contracts

   

Pre-Modification

Outstanding

Recorded

Investment

   

Post-Modification

Outstanding

Recorded

Investment

   

Charge-offs

   

Specific Reserve

 
   

(In thousands)

 
                                         

Commercial loans

    23     $ 25,937     $ 10,814     $ —     $ 125  

Total

    23     $ 25,937     $ 10,814     $ —     $ 125  

 

Modifications of the loan terms in the nine months ended September 30, 2020 were in the form of extensions of maturity dates, which ranged generally from three to twelve months from the modification date. 

 

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We expect that the TDRs on accruing status as of September 30, 2020, which were all performing in accordance with their restructured terms, will continue to comply with the restructured terms because of the reduced principal or interest payments on these loans.  The ongoing impact of the COVID pandemic, however, could increase the risk of such TDRs becoming non-accrual due to the borrowers' inability to continue to comply with their restructured terms.  A summary of TDRs by type of concession and by type of loan, as of September 30, 2020, and December 31, 2019, is set forth in the table below:

 

   

September 30, 2020

 
   

Payment

Deferral

   

Rate

Reduction

   

Rate Reduction

and Payment

Deferral

   

Total

 
   

(In thousands)

 

Accruing TDRs

                               

Commercial loans

  $ 4,406     $ —     $ —     $ 4,406  

Commercial mortgage loans

    582       5,662       13,526       19,770  

Residential mortgage loans

    1,940       284       2,187       4,411  

Total accruing TDRs

  $ 6,928     $ 5,946     $ 15,713     $ 28,587  

 

   

September 30, 2020

 
   

Payment

Deferral

   

Rate

Reduction

   

Rate Reduction

and Payment

Deferral

   

Total

 
   

(In thousands)

 

Non-accrual TDRs

                               

Commercial loans

  $ 8,902     $ —     $ —     $ 8,902  

Residential mortgage loans

    1,017       —       —       1,017  

Total non-accrual TDRs

  $ 9,919     $ —     $ —     $ 9,919  

 

   

December 31, 2019

 
   

Payment

Deferral

   

Rate

Reduction

   

Rate Reduction

and Payment

Deferral

   

Total

 
   

(In thousands)

 

Accruing TDRs

                               

Commercial loans

  $ 5,215     $ —     $ —     $ 5,215  

Commercial mortgage loans

    615       5,748       18,779       25,142  

Residential mortgage loans

    2,525       311       2,143       4,979  

Total accruing TDRs

  $ 8,355     $ 6,059     $ 20,922     $ 35,336  

 

   

December 31, 2019

 
   

Payment

Deferral

   

Rate

Reduction

   

Rate Reduction

and Payment

Deferral

   

Total

 
   

(In thousands)

 

Non-accrual TDRs

                               

Commercial loans

  $ 16,692     $ —     $ —     $ 16,692  

Commercial mortgage loans

    1,220       —       136       1,356  

Total non-accrual TDRs

  $ 17,912     $ —     $ 136     $ 18,048  

 

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The activity within TDRs for the periods indicated is set forth below:

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
   

(In thousands)

 

Accruing TDRs

                               

Beginning balance

  $ 31,671     $ 64,898     $ 35,336     $ 65,071  

New restructurings

    2,983       240       5,417       15,432  

Restructured loans restored to accrual status

    263       —       263       —  

Charge-offs

    —       (1,341 )     —       (1,341 )

Payments

    (6,330 )     (22,150 )     (12,429 )     (36,219 )

Restructured loans placed on non-accrual status

    —       —       —       (1,296 )

Ending balance

  $ 28,587     $ 41,647     $ 28,587     $ 41,647  

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
   

(In thousands)

 

Non-accrual TDRs

                               

Beginning balance

  $ 12,670     $ 22,457     $ 18,048     $ 24,189  

New restructurings

    —       7,345       —       10,505  

Restructured loans placed on non-accrual status

    —       —       —       1,296  

Charge-offs

    —       (2,389 )     (4,970 )     (3,607 )

Payments

    (2,488 )     (7,626 )     (2,896 )     (12,596 )

Restructured loans restored to accrual status

    (263 )     —       (263 )     —  

Ending balance

  $ 9,919     $ 19,787     $ 9,919     $ 19,787  

 

The Company considers a loan to be in payment default once it is 60 to 90 days contractually past due under the modified terms.  The Company did not have any loans that were modified as a TDR during the previous twelve months and which had subsequently defaulted as of September 30, 2020.

 

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

 

As of September 30, 2020, there were no commitments to lend additional funds to those borrowers whose loans had been restructured, were considered impaired, or were on non-accrual status.

 

The CARES Act, signed into law on March 27, 2020, permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 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 of December 31, 2019. In addition, federal bank regulatory authorities have issued guidance to encourage financial institutions to make loan modifications for borrowers affected by COVID-19 and have assured financial institutions that they will neither receive supervisory criticism for such prudent loan modifications, nor be required by examiners to automatically categorize COVID-19-related loan modifications as TDRs. The Company is applying this guidance to qualifying loan modifications.

 

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

 

 

●

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

     
  ● Special Mention – Borrower is fundamentally sound, and loan is currently protected but adverse trends are apparent that, if not corrected, may affect ability to repay. Primary source of loan repayment remains viable but there is increasing reliance on collateral or guarantor support.
     
  ● Substandard – These loans are inadequately protected by current sound net worth, paying capacity, or collateral. Well-defined weaknesses exist that could jeopardize repayment of debt. Loss may not be imminent, but if weaknesses are not corrected, there is a good possibility of some loss.
     
  ● Doubtful – The possibility of loss is extremely high, but due to identifiable and important pending events (which may strengthen the loan), a loss classification is deferred until the situation is better defined.
     
  ● Loss – These loans are considered uncollectible and of such little value that to continue to carry the loan as an active asset is no longer warranted.

 

The following tables set forth the loan portfolio by risk rating as of September 30, 2020 and December 31, 2019:

 

   

September 30, 2020

 
   

Pass/Watch

   

Special

Mention

   

Substandard

   

Doubtful

   

Total

 
   

(In thousands)

 

Commercial loans

  $ 2,553,148     $ 156,869     $ 137,983     $ —     $ 2,848,000  

Real estate construction loans

    548,075       122,299       4,738       —       675,112  

Commercial mortgage loans

    7,215,288       114,653       129,375       —       7,459,316  

Residential mortgage loans and equity lines

    4,571,766       212       9,717       —       4,581,695  

Installment and other loans

    1,656       —       —       —       1,656  

Total gross loans

  $ 14,889,933     $ 394,033     $ 281,813     $ —     $ 15,565,779  

 

   

December 31, 2019

 
   

Pass/Watch

   

Special

Mention

   

Substandard

   

Doubtful

   

Total

 
   

(In thousands)

 

Commercial loans

  $ 2,528,944     $ 166,016     $ 83,784     $ —     $ 2,778,744  

Real estate construction loans

    461,597       113,687       4,580       —       579,864  

Commercial mortgage loans

    6,992,933       196,454       85,875       —       7,275,262  

Residential mortgage loans and equity lines

    4,427,205       914       8,442       —       4,436,561  

Installment and other loans

    5,050       —       —       —       5,050  

Total gross loans

  $ 14,415,729     $ 477,071     $ 182,681     $ —     $ 15,075,481  

 

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The following tables set forth the balance in the allowance for loan losses by portfolio segment and based on impairment method as of September 30, 2020 and December 31, 2019:

 

   

September 30, 2020

 
           

Real Estate

   

Commercial

   

Residential

   

Installment

         
   

Commercial

   

Construction

   

Mortgage

   

Mortgage Loans

   

and

         
   

Loans

   

Loans

   

Loans

   

and Equity Lines

   

Other Loans

   

Total

 
   

(In thousands)

 

Loans individually evaluated for impairment

                                               

Allowance

  $ 7,704     $ —     $ 582     $ 209     $ —     $ 8,495  

Balance

  $ 34,164     $ 4,335     $ 53,551     $ 13,728     $ —     $ 105,778  

Loans collectively evaluated for impairment

                                               

Allowance

  $ 71,690     $ 32,712     $ 46,083     $ 20,150     $ —     $ 170,635  

Balance

  $ 2,813,836     $ 670,777     $ 7,405,765     $ 4,567,967     $ 1,656     $ 15,460,001  

Total allowance

  $ 79,394     $ 32,712     $ 46,665     $ 20,359     $ —     $ 179,130  

Total balance

  $ 2,848,000     $ 675,112     $ 7,459,316     $ 4,581,695     $ 1,656     $ 15,565,779  

 

   

December 31, 2019

 
           

Real Estate

   

Commercial

   

Residential

   

Installment

         
   

Commercial

   

Construction

   

Mortgage

   

Mortgage Loans

   

and

         
   

Loans

   

Loans

   

Loans

   

and Equity Lines

   

Other Loans

   

Total

 
   

(In thousands)

 

Loans individually evaluated for impairment

                                               

Allowance

  $ 2,543     $ —     $ 473     $ 220     $ —     $ 3,236  

Balance

  $ 24,596     $ 4,580     $ 35,070     $ 11,613     $ —     $ 75,859  

Loans collectively evaluated for impairment

                                               

Allowance

  $ 54,478     $ 19,474     $ 33,129     $ 12,888     $ 19     $ 119,988  

Balance

  $ 2,754,148     $ 575,284     $ 7,240,192     $ 4,424,948     $ 5,050     $ 14,999,622  

Total allowance

  $ 57,021     $ 19,474     $ 33,602     $ 13,108     $ 19     $ 123,224  

Total balance

  $ 2,778,744     $ 579,864     $ 7,275,262     $ 4,436,561     $ 5,050     $ 15,075,481  

 

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The following tables set forth activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2020, and September 30, 2019. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

Three months ended September 30, 2020 and 2019

                                         
                           

Residential

                 
           

Real Estate

   

Commercial

   

Mortgage Loans

   

Installment

         
   

Commercial

   

Construction

   

Mortgage

   

and

   

and Other

         
   

Loans

   

Loans

   

Loans

   

Equity Lines

   

Loans

   

Total

 
   

(In thousands)

 
                                                 

June 30, 2020 Ending Balance

  $ 82,256     $ 26,700     $ 41,132     $ 19,592     $ —     $ 169,680  

Provision for possible credit losses

    298       6,012       5,438       752       —       12,500  

Charge-offs

    (6,956 )     —       —       —       —       (6,956 )

Recoveries

    3,796       —       95       15       —       3,906  

Net (charge-offs)/recoveries

    (3,160 )     —       95       15       —       (3,050 )

September 30, 2020 Ending Balance

  $ 79,394     $ 32,712     $ 46,665     $ 20,359     $ —     $ 179,130  

 

                           

Residential

                 
           

Real Estate

   

Commercial

   

Mortgage Loans

   

Installment

         
   

Commercial

   

Construction

   

Mortgage

   

and

   

and Other

         
   

Loans

   

Loans

   

Loans

   

Equity Lines

   

Loans

   

Total

 
   

(In thousands)

 
                                                 

June 30, 2019 Ending Balance

  $ 54,293     $ 21,010     $ 33,154     $ 14,164     $ 30     $ 122,651  

Provision/(reversal) for possible credit losses

    7,400       (2,690 )     (4,648 )     (2,057 )     (5 )     (2,000 )

Charge-offs

    (3,356 )     —       —       —       —       (3,356 )

Recoveries

    212       3,378       4,961       62       —       8,613  

Net (charge-offs)/recoveries

    (3,144 )     3,378       4,961       62       —       5,257  

September 30, 2019 Ending Balance

  $ 58,549     $ 21,698     $ 33,467     $ 12,169     $ 25     $ 125,908  

 

 

Nine months ended September 30, 2020 and 2019

                                         
                           

Residential

                 
           

Real Estate

   

Commercial

   

Mortgage Loans

   

Installment

         
   

Commercial

   

Construction

   

Mortgage

   

and

   

and Other

         
   

Loans

   

Loans

   

Loans

   

Equity Lines

   

Loans

   

Total

 
   

(In thousands)

 
                                                 

2020 Beginning Balance

  $ 57,021     $ 19,474     $ 33,602     $ 13,108     $ 19     $ 123,224  

Provision/(reversal) for possible credit losses

    29,402       13,238       12,718       7,161       (19 )     62,500  

Charge-offs

    (13,383 )     —       —       —       —       (13,383 )

Recoveries

    6,354       —       345       90       —       6,789  

Net (charge-offs)/recoveries

    (7,029 )     —       345       90       —       (6,594 )

September 30, 2020 Ending Balance

  $ 79,394     $ 32,712     $ 46,665     $ 20,359     $ —     $ 179,130  

Reserve for impaired loans

  $ 7,704     $ —     $ 582     $ 209     $ —     $ 8,495  

Reserve for non-impaired loans

  $ 71,690     $ 32,712     $ 46,083     $ 20,150     $ —     $ 170,635  

Reserve for off-balance sheet credit commitments

  $ 4,297     $ 896     $ 172     $ 294     $ 4     $ 5,663  

 

                           

Residential

                 
           

Real Estate

   

Commercial

   

Mortgage Loans

   

Installment

         
   

Commercial

   

Construction

   

Mortgage

   

and

   

and Other

         
   

Loans

   

Loans

   

Loans

   

Equity Lines

   

Loans

   

Total

 
   

(In thousands)

 
                                                 

2019 Beginning Balance

  $ 54,978     $ 19,626     $ 33,487     $ 14,282     $ 18     $ 122,391  

Provision/(reversal) for possible credit losses

    8,262       (2,540 )     (5,234 )     (2,495 )     7       (2,000 )

Charge-offs

    (6,300 )     —       —       —       —       (6,300 )

Recoveries

    1,609       4,612       5,214       382       —       11,817  

Net (charge-offs)/recoveries

    (4,691 )     4,612       5,214       382       —       5,517  

September 30, 2019 Ending Balance

  $ 58,549     $ 21,698     $ 33,467     $ 12,169     $ 25     $ 125,908  

Reserve for impaired loans

  $ 744     $ —     $ 536     $ 221     $ —     $ 1,501  

Reserve for non-impaired loans

  $ 57,805     $ 21,698     $ 32,931     $ 11,948     $ 25     $ 124,407  

Reserve for off-balance sheet credit commitments

  $ 2,505     $ 1,608     $ 121     $ 313     $ 3     $ 4,550  

 

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The ongoing COVID-19 pandemic has caused significant disruption in the United States and international economies and financial markets. Although banks have generally been permitted to continue operating, the COVID-19 pandemic has caused disruptions to our business and could cause material disruptions to our business and operations in the future. The Company has continued its efforts to support its customers affected by the pandemic and to maintain asset quality and balance sheet strength, including the following:

 

 

•

The Company has provided loans through the SBA's Paycheck Protection Program, or “PPP”. As of September 30, 2020, 1,437 PPP loans with a current balance of $265.7 million have been approved by the Small Business Administration.

 

 

•

The Company has outstanding modifications on approximately 95 commercial real estate loans totaling $428.1 million as of September 30, 2020, which represented 5.7% of the Bank’s commercial real estate loans and 24 commercial loans, totaling $64..6 million, which represented 2.3% of the total commercial loans.

 

 

•

As of September 30, 2020, COVID-19 modifications outstanding include 367, or $180.6 million, in residential mortgage loans, that represented 4.3% of the total residential mortgage portfolio, and 21 HELOC loans totaling $6.5 million, which represented 1.6% of total HELOC loans.

 

 

 

9. Commitments and Contingencies

 

From time to time, Bancorp and its subsidiaries are parties to litigation that arise in the ordinary course of business or otherwise are incidental to various aspects of its operations. Based upon information available to the Company and its review of any such litigation with counsel, management presently believes that the liability relating to such litigation, if any, would not be expected to have a material adverse impact on the Company’s consolidated financial condition, results of operations or liquidity taken as a whole. The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal matters currently pending or threatened against the Company could have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity taken as a whole.

 

Although the Company establishes accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, the Company does not have accruals for all legal proceedings where there is a risk of loss. In addition, amounts accrued may not represent the ultimate loss to the Company from the legal proceedings in question. Thus, ultimate losses may be higher or lower, and possibly significantly so, than the amounts accrued for legal loss contingencies.

 

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

 

The Company’s unfunded commitments related to investments in qualified affordable housing and alternative energy partnerships were $117.8 million and $114.5 million as of September 30, 2020 and December 31, 2019, respectively.

 

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10. Leases

 

The Company determines if a contract arrangement is a lease at inception and primarily enters into operating lease contracts for its branch locations, office space and certain equipment. As part of its property lease agreements, the Company may seek to include options to extend or terminate at lease when it is reasonably certain that the Company will exercise those options. The Right-of-Use (“ROU”) lease asset also includes any lease payments made and lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company does not possess any leases that have variable lease payments or residual value guarantees as of September 30, 2020.

 

Accounting Policy Elections - The Company has elected the package of practical expedients that permits the Company to not reassess its prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected all of the new standard’s available transition practical expedients, including the short-term lease recognition exemption that includes not recognizing ROU assets or lease liabilities for existing short-term leases, and the practical expedient to not separate lease and non-lease components for all of the Company’s leases.

 

The ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses its incremental borrowing rate to determine the present value of its lease liabilities.

 

The following table presents the operating lease related assets and liabilities recorded on the Condensed Consolidated Balance Sheet, and the weighted-average remaining lease terms and discount rates as of  September 30, 2020 and December 31, 2019:

 

   

September 30, 2020

   

December 31, 2019

 
   

($ In millions)

 
                 

Operating Leases:

               

ROU assets

  $ 32.6     $ 34.0  

Lease liabilities

  $ 35.1     $ 35.9  
                 

Weighted-average remaining lease term (in years)

    4.9       5.4  

Weighted-average discount rate

    2.79

%

    3.10

%

 

 

Operating lease expense was $3.1 million and $3.3 million for the three months ended September 30, 2020 and September 30, 2019, respectively, and includes short-term leases that were immaterial. Operating lease expense was $8.8 million and $10.1 million for the nine months ended September 30, 2020 and September 30, 2019, respectively, and includes short-term leases that were immaterial. Operating cash flows from operating leases were $2.2 million and $2.1 million for the three months ended September 30, 2020 and 2019, respectively. Operating cash flows from operating leases were $6.8 million and $6.2 million for the nine months ended September 30, 2020 and 2019, respectively.

 

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The following table presents a maturity analysis of the Company’s operating lease liabilities as of September 30, 2020 and December 31, 2019, respectively.

 

   

As of September 30, 2020

 
   

Operating Leases

 
   

(In thousands)

 

Remaining 2020

  $ 2,392  

2021

    9,235  

2022

    8,183  

2023

    6,758  

2024

    4,570  

Thereafter

    6,641  

Total lease payments

    37,779  

Less amount of payment representing interest

    (2,663 )

Total present value of lease payments

  $ 35,116  

 

   

As of December 31, 2019

 
   

Operating Leases

 
   

(In thousands)

 

2020

  $ 8,764  

2021

    7,923  

2022

    6,771  

2023

    5,714  

2024

    3,852  

Thereafter

    6,199  

Total lease payments

    39,223  

Less amount of payment representing interest

    (3,350 )

Total present value of lease payments

  $ 35,873  

 

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11. Borrowed Funds

 

Borrowings from the Federal Home Loan Bank (“FHLB”) – There were no over-night borrowings from the FHLB as of September 30, 2020, compared to $450 million at a weighted average rate of 1.66% as of December 31, 2019. Advances from the FHLB were $230 million at a weighted average rate of 2.16% as of September 30, 2020 and $220 million at a weighted average rate of 2.26% as of December 31, 2019. As of September 30, 2020, FHLB advances of $5 million will mature in November 2020, $80 million in May 2021, $50 million in June 2021, $75 million in July 2021, and $20 million in May 2023.

 

Junior Subordinated Notes – The Company established three special purpose trusts in 2003 and two in 2007 for the purpose of issuing Guaranteed Preferred Beneficial Interests in their Subordinated Debentures to outside investors (“Capital Securities”). The proceeds from the issuance of the Capital Securities as well as our purchase of the common stock of the special purpose trusts were invested in Junior Subordinated Notes of the Company (“Junior Subordinated Notes”). The trusts exist for the purpose of issuing the Capital Securities and investing in Junior Subordinated Notes. Subject to some limitations, payment of distributions out of the monies held by the trusts and payments on liquidation of the trusts, or the redemption of the Capital Securities, are guaranteed by the Company to the extent the trusts have funds on hand at such time. The obligations of the Company under the guarantees and the Junior Subordinated Notes are subordinate and junior in right of payment to all indebtedness of the Company and are structurally subordinated to all liabilities and obligations of the Company’s subsidiaries. The Company has the right to defer payments of interest on the Junior Subordinated Notes at any time or from time to time for a period of up to twenty consecutive quarterly periods with respect to each deferral period. Under the terms of the Junior Subordinated Notes, the Company may not, with certain exceptions, declare or pay any dividends or distributions on its capital stock or purchase or acquire any of its capital stock if it has deferred payment of interest on any Junior Subordinated Notes.

 

At September 30, 2020, Junior Subordinated Notes totaled $119.1 million with a weighted average interest rate of 2.41%, compared to $119.1 million with a weighted average rate of 4.09% at December 31, 2019. The Junior Subordinated Notes have a stated maturity term of 30 years.

 

 

12. Income Taxes

 

The effective tax rate for the first nine months of 2020 was 8.6% compared to 20.3% for the first nine months of 2019. The effective tax rate includes the impact of low-income housing and alternative energy investment tax credits. Income tax expense for the first nine months of 2020 was increased by $0.4 million related to a tax deficiency from the distribution of restricted stock units.

 

The Company’s tax returns are open for audit by the Internal Revenue Service back to 2016 and by the California Franchise Tax Board back to 2015. The audit by the Internal Revenue Service for 2017 was completed in July 2020 and did not have an impact on income tax expense.

 

It is reasonably possible that unrecognized tax benefits could change significantly over the next twelve months. The Company does not expect that any such changes would have a material impact on its annual effective tax rate.

 

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13. Fair Value Measurements

 

The Company determined the fair values of our financial instruments based on the following:

 

 

●

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

 

●

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

 

●

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

 

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

 

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

 

Equity Securities – The Company measures the fair value based on quoted market prices in active exchange markets at the reporting date, a level 1 measurement. Equity securities are comprised of mutual funds, preferred stock of government-sponsored entities and other equity securities.

 

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

 

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

 

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

 

Assets measured at estimated fair value on a non-recurring basis:

 

Certain assets or liabilities are required to be measured at estimated fair value on a nonrecurring basis subsequent to initial recognition. Generally, these adjustments are the result of lower-of-cost-or-fair value or other impairment write-downs of individual assets. In determining the estimated fair values during the period, the Company determined that substantially all the changes in estimated fair value were due to declines in market conditions versus instrument specific credit risk. For the periods ended September 30, 2020 and December 31, 2019, there were no material adjustments to fair value for the Company’s assets and liabilities measured at fair value on a nonrecurring basis in accordance with GAAP.

 

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The following tables present the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of September 30, 2020, and December 31, 2019:

 

   

September 30, 2020

         
   

Fair Value Measurements Using

   

Total Fair Value

 
   

Level 1

   

Level 2

   

Level 3

   

Measurements

 
   

(In thousands)

 

Assets

                               

Securities available-for-sale

                               

U.S. Treasury securities

  $ 99,980     $ —     $ —     $ 99,980  

U.S. government agency entities

    —       104,596       —       104,596  

Mortgage-backed securities

    —       729,244       —       729,244  

Collateralized mortgage obligations

    —       211       —       211  

Corporate debt securities

    —       146,509       —       146,509  

Total securities available-for-sale

  $ 99,980     $ 980,560     $ —     $ 1,080,540  
                                 

Equity securities

                               

Mutual funds

  $ 6,430     $ —     $ —     $ 6,430  

Preferred stock of government sponsored entities

    5,522       —       —       5,522  

Other equity securities

    11,012       —       —       11,012  

Total equity securities

  $ 22,964     $ —     $ —     $ 22,964  
                                 

Warrants

  $ —     $ —     $ 20     $ 20  

Interest rate swaps

    —       3,992       —       3,992  

Foreign exchange contracts

    —       3,236       —       3,236  

Total assets

  $ 122,944     $ 987,788     $ 20     $ 1,110,752  
                                 

Liabilities

                               

Option contracts

  $ —     $ 6     $ —     $ 6  

Interest rate swaps

    —       31,525       —       31,525  

Foreign exchange contracts

    —       1,592       —       1,592  

Total liabilities

  $ —     $ 33,123     $ —     $ 33,123  

 

 

   

December 31, 2019

         
   

Fair Value Measurements Using

   

Total Fair Value

 
   

Level 1

   

Level 2

   

Level 3

   

Measurements

 
   

(In thousands)

 

Assets

                               

Securities available-for-sale

                               

U.S. Treasury securities

  $ 74,936     $ —     $ —     $ 74,936  

U.S. government agency entities

    —       90,796       —       90,796  

U.S. government sponsored entities

    —       224,443       —       224,443  

Mortgage-backed securities

    —       887,790       —       887,790  

Collateralized mortgage obligations

    —       552       —       552  

Corporate debt securities

    —       173,325       —       173,325  

Total securities available-for-sale

  $ 74,936     $ 1,376,906     $ —     $ 1,451,842  
                                 

Equity securities

                               

Mutual funds

  $ 6,277     $ —     $ —     $ 6,277  

Preferred stock of government sponsored entities

    10,529       —       —       10,529  

Other equity securities

    11,199       —       —       11,199  

Total equity securities

  $ 28,005     $ —     $ —     $ 28,005  
                                 

Warrants

  $ —     $ —     $ 39     $ 39  

Interest rate swaps

    —       2,181       —       2,181  

Foreign exchange contracts

    —       2,411       —       2,411  

Total assets

  $ 102,941     $ 1,381,498     $ 39     $ 1,484,478  
                                 

Liabilities

                               

Option contracts

  $ —     $ 7     $ —     $ 7  

Interest rate swaps

    —       14,229       —       14,229  

Foreign exchange contracts

    —       1,415       —       1,415  

Total liabilities

  $ —     $ 15,651     $ —     $ 15,651  

 

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The Company measured the fair value of its warrants on a recurring basis using significant unobservable inputs. The fair value adjustment of warrants was included in other operating income in the first nine months of 2020. The significant unobservable inputs in the Black-Scholes option pricing model for the fair value of warrants are their expected life ranging from 1 to 6 years, risk-free interest rate from 0.23% to 0.66%, and stock volatility from 16.58% to 25.50%.

 

For financial assets measured at fair value on a nonrecurring basis that were still reflected in the Condensed Consolidated Balance Sheets as of September 30, 2020, the following tables set forth the level of valuation assumptions used to determine each adjustment, the carrying value of the related individual assets as of September 30, 2020, and December 31, 2019, and the total losses for the periods indicated:

 

   

As of September 30, 2020

   

Total Losses

 
   

Fair Value Measurements Using

   

Total Fair Value

   

For the Three Months Ended

   

For the Nine Months Ended

 
   

Level 1

   

Level 2

   

Level 3

   

Measurements

   

September 30, 2020

   

September 30, 2019

   

September 30, 2020

   

September 30, 2019

 
   

(In thousands)

 

Assets

                                                               

Impaired loans by type:

                                                               

Commercial loans

  $ —     $ —     $ 13,167     $ 13,167     $ 6,950     $ —     $ 6,950     $ —  

Commercial mortgage loans

    —       —       30,437       30,437       —       —       —       —  

Residential mortgage loans and equity lines

    —       —       5,705       5,705       —       —       —       —  

Total impaired loans

    —       —       49,309       49,309       6,950       —       6,950       —  

Loans held-for-sale

    —       —       —       —       —       120       —       120  

Other real estate owned (1)

    —       905       4,238       5,143       —       —       717       494  

Investments in venture capital and private company stock

    —       —       1,381       1,381       3       83       107       101  

Total assets

  $ —     $ 905     $ 54,928     $ 55,833     $ 6,953     $ 203     $ 7,774     $ 715  

 

(1) Other real estate owned balance of $4.9 million in the condensed consolidated balance sheet is net of estimated disposal costs.

 

 

   

As of December 31, 2019

   

Total Losses/(Gains)

 
   

Fair Value Measurements Using

   

Total Fair Value

   

For the Twelve Months Ended

 
   

Level 1

   

Level 2

   

Level 3

   

Measurements

   

December 31, 2019

   

December 31, 2018

 
   

(In thousands)

 

Assets

                                               

Impaired loans by type:

                                               

Commercial loans

  $ —     $ —     $ 6,196     $ 6,196     $ —     $ —  

Commercial mortgage loans

    —       —       25,566       25,566       —       —  

Residential mortgage loans and equity lines

    —       —       5,320       5,320       —       —  

Total impaired loans

    —       —       37,082       37,082       —       —  

Other real estate owned (1)

    —       6,490       4,343       10,833       681       (619 )

Investments in venture capital and private company stock

    —       —       1,604       1,604       167       330  

Total assets

  $ —     $ 6,490     $ 43,029     $ 49,519     $ 848     $ (289 )

 

(1) Other real estate owned balance of $10.2 million in the Consolidated Balance Sheets is net of estimated disposal costs.

 

The significant unobservable (Level 3) inputs used in the fair value measurement of collateral for collateral-dependent impaired loans are primarily based on the appraised value of collateral adjusted by estimated sales cost and commissions. The Company generally obtains new appraisal reports every twelve months as appropriate. As the Company’s primary objective in the event of default would be to monetize the collateral to settle the outstanding balance of the loan, less marketable collateral would receive a larger discount. In the current year, the Company used borrower specific collateral discounts with various discount levels.

 

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The significant unobservable inputs used in the fair value measurement of other real estate owned (“OREO”) are primarily based on the appraised value of OREO adjusted by estimated sales cost and commissions. The Company applies estimated sales cost and commissions ranging from 3% to 6% of the collateral value of impaired loans, quoted price, or loan sale price of loans held for sale, and appraised value of OREO.

 

 

14. Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

Equity Securities – The Company measures the fair value based on quoted market prices in active exchange markets at the reporting date, a level 1 measurement. Equity securities are comprised of mutual funds, preferred stock of government-sponsored entities and other equity securities.

 

Loans - Fair values are estimated for portfolios of loans with similar financial characteristics. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories. The fair values are based primarily on third-party vendor pricing to determine fair values based on the exit price notion.

 

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

 

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

 

Loans Held-for-Sale – The Company records loans held for sale at fair value based on quoted prices from third party sale analysis, existing sale agreements, or appraisal reports adjusted by sales commission assumption, a Level 3 measurement.

 

FHLB Stock - These securities can only be redeemed or sold at their par value and only to the respective issuing government-supported institution or to another member institution. Management considers these non-marketable equity securities to be long-term investments. Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value.     

 

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

 

Advances from FHLB - The fair value of the advances is based on quotes from the FHLB to settle the advances, a Level 2 measurement.

 

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

 

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

 

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

 

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

 

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

 

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

 

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The following table sets forth the carrying and notional amounts and estimated fair value of financial instruments as of September 30, 2020 and December 31, 2019:

 

   

September 30, 2020

   

December 31, 2019

 
   

Carrying

           

Carrying

         
   

Amount

   

Fair Value

   

Amount

   

Fair Value

 
   

(In thousands)

 

Financial Assets

                               

Cash and due from banks

  $ 128,896     $ 128,896     $ 177,240     $ 177,240  

Short-term investments

    1,305,170       1,305,170       416,538       416,538  

Securities available-for-sale

    1,080,540       1,080,540       1,451,842       1,451,842  

Loans, net

    15,382,439       16,030,529       14,951,631       15,444,752  

Equity securities

    22,964       22,964       28,005       28,005  

Investment in Federal Home Loan Bank stock

    17,250       17,250       18,090       18,090  

Warrants

    20       20       39       39  

 

     

Notional

           

Notional

         
     

Amount

   

Fair Value

   

Amount

   

Fair Value

 

Foreign exchange contracts

  $ 107,071     $ 3,236     $ 146,397     $ 2,411  

Interest rate swaps

    72,717       3,992       130,401       2,181  

 

   

Carrying

           

Carrying

         
   

Amount

   

Fair Value

   

Amount

   

Fair Value

 

Financial Liabilities

                               

Deposits

  $ 16,034,248     $ 16,061,257     $ 14,692,308     $ 14,719,452  

Short-term borrowings

    —       —       25,683       25,683  

Advances from Federal Home Loan Bank

    230,000       238,509       670,000       674,530  

Other borrowings

    23,788       19,550       36,666       30,764  

Long-term debt

    119,136       64,296       119,136       76,058  

 

     

Notional

           

Notional

         
     

Amount

   

Fair Value

   

Amount

   

Fair Value

 

Option contracts

  $ 850     $ 6     $ 908     $ 7  

Foreign exchange contracts

    160,489       1,592       127,003       1,415  

Interest rate swaps

    686,785       31,525       602,291       14,229  

 

   

Notional

           

Notional

         
   

Amount

   

Fair Value

   

Amount

   

Fair Value

 

Off-Balance Sheet Financial Instruments

                               

Commitments to extend credit

  $ 3,033,685     $ (8,847 )   $ 3,077,081     $ (9,826 )

Standby letters of credit

    255,173       (1,647 )     282,352       (2,431 )

Other letters of credit

    24,591       (21 )     22,209       (20 )

Bill of lading guarantees

    221       —       319       (1 )

 

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The following tables set forth the level in the fair value hierarchy for the estimated fair values of financial instruments as of September 30, 2020 and December 31, 2019.

 

   

As of September 30, 2020

 
   

Estimated

                         
   

Fair Value

                         
   

Measurements

   

Level 1

   

Level 2

   

Level 3

 
   

(In thousands)

 

Financial Assets

                               

Cash and due from banks

  $ 128,896     $ 128,896     $ —     $ —  

Short-term investments

    1,305,170       1,305,170       —       —  

Securities available-for-sale

    1,080,540       99,980       980,560       —  

Loans, net

    16,030,529       —       —       16,030,529  

Equity securities

    22,964       22,964       —       —  

Investment in Federal Home Loan Bank stock

    17,250       —       17,250       —  

Warrants

    20       —       —       20  

Financial Liabilities

                               

Deposits

    16,061,257       —       —       16,061,257  

Advances from Federal Home Loan Bank

    238,509       —       238,509       —  

Other borrowings

    19,550       —       —       19,550  

Long-term debt

    64,296       —       64,296       —  

 

   

As of December 31, 2019

 
   

Estimated

                         
   

Fair Value

                         
   

Measurements

   

Level 1

   

Level 2

   

Level 3

 
   

(In thousands)

 

Financial Assets

                               

Cash and due from banks

  $ 177,240     $ 177,240     $ —     $ —  

Short-term investments

    416,538       416,538       —       —  

Securities available-for-sale

    1,451,842       74,936       1,376,906       —  

Loans, net

    15,444,752       —       —       15,444,752  

Equity securities

    28,005       28,005       —       —  

Investment in Federal Home Loan Bank stock

    18,090       —       18,090       —  

Warrants

    39       —       —       39  

Financial Liabilities

                               

Deposits

    14,719,452       —       —       14,719,452  

Short-term borrowings

    25,683       —       —       25,683  

Advances from Federal Home Loan Bank

    674,530       —       674,530       —  

Other borrowings

    30,764       —       —       30,764  

Long-term debt

    76,058       —       76,058       —  

 

 

15. Goodwill and Goodwill Impairment

 

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

 

During the third quarter of 2020, the Company assessed its goodwill for impairment. The Company performed an assessment of the criteria included in ASC 350 and, based on such assessment, the Company concluded that the goodwill of the Company’s two reporting units is not impaired.

 

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16. 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.

 

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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. As of September 30, 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 of September 30, 2020, and December 31, 2019, were as follows:

 

   

September 30, 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

    0.51 %     2.26 %
                 

Unrealized loss, net of taxes (1)

  $ (7,393 )   $ (3,412 )

 

   

Three months ended

   

Nine months ended

 
   

September 30, 2020

   

September 30, 2019

   

September 30, 2020

   

September 30, 2019

 

Periodic net settlement of swaps (2)

  $ 702     $ 78     $ 1,471     $ 41  

 

(1)-Included in other comprehensive income.

(2)-the amount of periodic net settlement of interest rate swaps was included in interest expense.

 

As of September 30, 2020, the Bank’s outstanding interest rate swap contracts had a notional amount of $494.9 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 of September 30, 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 of September 30, 2020, and December 31, 2019, were as follows:

 

   

September 30, 2020

   

December 31, 2019

 

Fair value swap hedges:

 

($ in thousands)

 

Notional

  $ 494,932     $ 579,584  

Weighted average fixed rate-pay

    4.57 %     4.71 %

Weighted average variable rate spread

    1.90 %     2.62 %

Weighted average variable rate-receive

    3.27 %     4.87 %
                 

Net unrealized loss (1)

  $ (17,037 )   $ (7,205 )

 

   

Three months ended

 

Nine months ended

   

September 30, 2020

September 30, 2019

 

September 30, 2020

September 30, 2019

Periodic net settlement of SWAPs (2)

 

$ (2,510)

$ 205

 

$ (5,307)

$ 1,352

 

(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.

 

The Company has designated as a partial-term hedging election $25.0 million of a pool of loans with a notational value of $44.7 million as of September 30, 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 $44.7 million fixed rate loan tranche in order to reduce the Company’s exposure to higher interest rates for the last-of-layer tranche. As of September 30, 2020, the last-of-layer loan tranche had a fair value basis adjustment of $397 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.

 

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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 $13.2 million as of September 30, 2020 and $7.1 million as of December 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 of September 30, 2020, and December 31, 2019, were as follows:

 

 

 

September 30, 2020

   

December 31, 2019

 

Derivative financial instruments not designated as hedging instruments:

 

($ in thousands)

 

Notional amounts:

               

Option contracts

  $ 850     $ 908  

Spot, forward, and swap contracts with positive fair value

  $ 107,071     $ 146,397  

Spot, forward, and swap contracts with negative fair value

  $ 160,489     $ 127,003  

Fair value:

               

Option contracts

  $ (6 )   $ (7 )

Spot, forward, and swap contracts with positive fair value

  $ 3,236     $ 2,411  

Spot, forward, and swap contracts with negative fair value

  $ (1,592 )   $ (1,415 )

 

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17. Balance Sheet Offsetting

 

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

 

Financial instruments that are eligible for offset in the Condensed Consolidated Balance Sheets, as of September 30, 2020, and December 31, 2019, are set forth in the following table:

 

                           

Gross Amounts Not Offset in the
Balance Sheet

 
                                                 
   

Gross

Amounts

Recognized

   

Gross Amounts

Offset in the

Balance Sheet

   

Net Amounts

Presented in the

Balance Sheet

   

Financial

Instruments

   

Collateral

Posted

   

Net Amount

 

September 30, 2020

 

(In thousands)

 

Assets:

                                               

Derivatives

  $ 3,992     $ —     $ 3,992     $ —     $ —     $ 3,992  
                                                 

Liabilities:

                                               

Derivatives

  $ 31,525     $ (20,247 )   $ 11,278     $ —     $ —     $ 11,278  
                                                 

December 31, 2019

                                               

Assets:

                                               

Derivatives

  $ 2,181     $ —     $ 2,181     $ —     $ —     $ 2,181  
                                                 

Liabilities:

                                               

Derivatives

  $ 14,229     $ —     $ 14,229     $ —     $ (14,229 )   $ —  

 

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18. Revenue from Contracts with Customers

 

The following is a summary of revenue from contracts with customers that are in-scope and not in-scope under ASC 606, Revenue from Contracts with Customers:

 

   

Three months Ended September 30,

   

Nine months Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
   

(In thousands)

                 

Non-interest income, in-scope:

                               

Fees and service charges on deposit accounts

  $ 2,018     $ 1,892     $ 5,945     $ 5,940  

Wealth management fees

    2,628       2,049       7,974       6,258  

Other service fees(1)

    3,676       3,645       10,038       10,593  

Total noninterest income

    8,322       7,586       23,957       22,791  
                                 

Noninterest income, not in-scope(2)

    1,655       2,802       7,412       13,312  

Total noninterest income

  $ 9,977     $ 10,388     $ 31,369     $ 36,103  

 

 

(1) Other service fees comprise of fees related to letters of credit, wire fees, fees on foreign exchange transactions and other immaterial individual revenue streams.

 

(2) These amounts primarily represent revenue from contracts with customers that are out of the scope of ASC 606.

 

The major revenue streams by fee type that are within the scope of ASC 606 presented in the above tables are described in additional detail below:

 

Fees and Services Charges on Deposit Accounts

 

Fees and service charges on deposit accounts include charges for analysis, overdraft, cash checking, ATM, and safe deposit activities executed by our deposit clients, as well as interchange income earned through card payment networks for the acceptance of card based transactions. Fees earned from our deposit clients are governed by contracts that provide for overall custody and access to deposited funds and other related services and can be terminated at will by either party. Fees received from deposit clients for the various deposit activities are recognized as revenue by the Company once the performance obligations are met.

 

Wealth Management Fees

 

The Company employs financial consultants to provide investment planning services for customers including wealth management services, asset allocation strategies, portfolio analysis and monitoring, investment strategies, and risk management strategies. The fees the Company earns are variable and are generally received monthly by the Company. The Company recognizes revenue for the services performed at quarter end based on actual transaction details received from the broker dealer the Company engages.

 

Practical Expedients and Exemptions

 

The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose the value of unsatisfied performance obligations as the Company’s contracts with customers generally have a term that is less than one year, are open-ended with a cancellation period that is less than one year, or allow the Company to recognize revenue in the amount to which the Company has the right to invoice.

 

In addition, given the short term nature of the contracts, the Company also applies the practical expedient in ASC 606-10-32-18 and does not adjust the consideration from customers for the effects of a significant financing component, if at contract inception the period between when the entity transfers the goods or services and when the customer pays for that good or service is one year or less.

 

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19. Stockholders’ Equity

 

Total equity was $2.37 billion as of September 30, 2020, an increase of $80.4 million, from $2.29 billion as of December 31, 2019, primarily due to net income of $158.0 million, increases in other comprehensive income of $4.1 million, and proceeds from dividend reinvestment of $2.6 million, and partially offset by common stock cash dividends of $74.0 million and repurchases of the Company’s common stock of $12.9 million.

 

Activity in accumulated other comprehensive income, net of tax, and reclassification out of accumulated other comprehensive income for the three months and nine months ended September 30, 2020, and September 30, 2019, was as follows:

 

   

Three months ended September 30, 2020

   

Three months ended September 30, 2019

 
   

Pre-tax

   

Tax expense/ (benefit)

   

Net-of-tax

   

Pre-tax

   

Tax expense/ (benefit)

   

Net-of-tax

 

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

 

(In thousands)

 

Securities available-for-sale

            $ 16,278                     $ 2,209  

Cash flow hedge derivatives

              (7,925 )                     (3,567 )

Total

                  $ 8,353                     $ (1,358 )
                                                 

Net unrealized (losses)/gains arising during the period

                                               

Securities available-for-sale

  $ (3,543 )   $ (1,047 )   $ (2,496 )   $ 1,750     $ 517     $ 1,233  

Cash flow hedge derivatives

    755       223       532       (1,126 )     (333 )     (793 )

Total

  $ (2,788 )   $ (824 )   $ (1,964 )   $ 624     $ 184     $ 440  
                                                 

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

                                             

Securities available-for-sale

    —       —       —       121       36       85  

Cash flow hedge derivatives

    —       —       —       —       —       —  

Total

    —       —       —       121       36       85  
                                                 

Total other comprehensive (loss)/income

                                               

Securities available-for-sale 

  $ (3,543 )   $ (1,047 )   $ (2,496 )   $ 1,871     $ 553     $ 1,318  

Cash flow hedge derivatives 

    755       223       532       (1,126 )     (333 )     (793 )

Total

  $ (2,788 )   $ (824 )   $ (1,964 )   $ 745     $ 220     $ 525  
                                                 

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

                                               

Securities available-for-sale 

            $ 13,782                     $ 3,527  

Cash flow hedge derivatives 

              (7,393 )                     (4,360 )

Total

                  $ 6,389                     $ (833 )

 

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Nine months ended September 30, 2020

   

Nine months ended September 30, 2019

 
   

Pre-tax

   

Tax expense/ (benefit)

   

Net-of-tax

   

Pre-tax

   

Tax expense/ (benefit)

   

Net-of-tax

 

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

 

(In thousands)

 

Securities available-for-sale

            $ 5,714                     $ (17,765 )

Cash flow hedge derivatives

              (3,412 )                     (241 )

Total

                  $ 2,302                     $ (18,006 )
                                                 

Net unrealized gains/(losses) arising during the period

                                               

Securities available-for-sale

  $ 12,607     $ 3,727     $ 8,880     $ 30,119     $ 8,903     $ 21,216  

Cash flow hedge derivatives

    (5,652 )     (1,671 )     (3,981 )     (5,848 )     (1,729 )     (4,119 )

Total

  $ 6,955     $ 2,056     $ 4,899     $ 24,271     $ 7,174     $ 17,097  
                                                 

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

                                             

Securities available-for-sale

    (1,153 )     (341 )     (812 )     108       32       76  

Cash flow hedge derivatives

    —       —       —       —       —       —  

Total

    (1,153 )     (341 )     (812 )     108       32       76  
                                                 

Total other comprehensive income/(loss)

                                               

Securities available-for-sale

  $ 11,454     $ 3,386     $ 8,068     $ 30,227     $ 8,935     $ 21,292  

Cash flow hedge derivatives

    (5,652 )     (1,671 )     (3,981 )     (5,848 )     (1,729 )     (4,119 )

Total

  $ 5,802     $ 1,715     $ 4,087     $ 24,379     $ 7,206     $ 17,173  
                                                 

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

                                               

Securities available-for-sale

            $ 13,782                     $ 3,527  

Cash flow hedge derivatives

              (7,393 )                     (4,360 )

Total

                  $ 6,389                     $ (833 )

 

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20. Stock Repurchase Program

 

On May 7, 2019, the Board of Directors approved a stock repurchase program to buy back up to $50.0 million of the Company’s common stock. In 2019, the Company repurchased 741,934 shares for $26.4 million, at an average cost of $35.59 per share under the May 2019 repurchase program. The Company repurchased 400,000 shares for $12.9 million, at an average cost of $32.20 per share under the May 2019 repurchase program in the three months ended March 31, 2020. No shares were repurchased under the may 2019 repurchase program during the three months ended June 30, 2020 and September 30, 2020. As of September 30, 2020, the Company repurchased in the aggregate 1,141,934 shares for $39.3 million, at an average cost of $34.40 per share.

 

 

21. Subsequent Events

 

The Company has evaluated the effect of events that have occurred subsequent to September 30, 2020, through the date of issuance of the Condensed Consolidated Financial Statements, and, based on such evaluation, the Company believes that there have been no material events during such period that would require recognition in the Condensed Consolidated Financial Statements or disclosure in the Notes to the Condensed Consolidated Financial Statements.

 

Between October 30, 2020 and November 4, 2020, the Company repurchased 120,000 shares for $2.9 million at an average cost of $24.19 and $7.8 million remain under the May 2019 stock repurchase program.

 

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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, 2019.

 

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 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 ended December 31, 2019.

 

Recent Developments: Impact of and Response to COVID-19 Pandemic

 

The ongoing COVID-19 pandemic has caused significant disruption in the United States and international economies and financial markets. The spread of COVID-19 in the 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, including California, New York, Washington, Illinois, Texas, Massachusetts, Nevada and other states in which we have significant operations, have imposed restrictions on leisure, business, commercial and other activities and gatherings to seek to slow the spread of COVID-19.

 

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 due to job and other losses resulting from the pandemic could result in increased risk of delinquencies, defaults, foreclosures, and declining collateral values, resulting in losses to our Company.

 

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●

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).

 

Additional potential impacts arising from, and our anticipated responses to, the COVID-19 pandemic are set forth below. See also Item 1A Risk Factors.

 

Financial position and results of operations

 

Our financial position and results of operations as of and for the nine months ended September 30, 2020 have been significantly impacted by the COVID-19 pandemic. The economic environment and uncertainty related to the pandemic, higher specific reserves for impaired loans and net charge-offs of $3.1 million during the third quarter contributed to a $62.5 million provision for credit losses recognized during the nine months ended September 30, 2020. While we have not yet experienced significant write-offs related to the COVID-19 pandemic as of September 30, 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:

 

September 30, 2020

 

Industry (1)

 

Loan Balance

   

Percent of Total
Loan Portfolio

 
   

($ in millions)

 

Restaurants

  $ 166.1       1

%

Hotels/motels

    295.5       2  

Retail businesses/properties

    1,753.0       11  
    $ 2,214.6       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.

 

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While we have not experienced disproportionate impacts among our business segments as of September 30, 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.

 

Loan and lease modifications

 

We began receiving requests from our borrowers for loan and lease deferrals in March following the onset of the pandemic. 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 of September 30, 2020, COVID-19 modifications outstanding include 367, or $180.6 million, in residential mortgage loans, with a weighted average loan to value of 57.9% that represented 4.3% of the total residential mortgage portfolio and 24, or $64.6 million, in commercial loan balances that represented 2.3% 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 between March 1, 2020 and the earlier of December 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 of December 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 outstanding by property type as of September 30, 2020.

 

Property Type

 

# of Loan Deferrals Approved

   

Balance as of September 30, 2020

   

Total Category Balance

   

Weighted Avg LTV

 
   

($ in millions)

 

Hotel/Motel

    6     $ 39.1     $ 295.5       50 %

Retail

    23       161.0       1,753.0       52 %

Residential

    21       46.4       2,100.4       55 %

Warehouse

    3       18.0       900.0       48 %

Office & Comm'l Condo

    26       114.8       1,337.3       51 %

Theater

    —       —       25.0       —  

Special Use & HK Portfolio

    12       41.0       386.4       49 %

Industrial and Multi-Use

    3       5.0       391.8       48 %

Restaurant

    1       2.8       166.1       —  

Other

    —       —       103.8       —  

Total CRE

    95     $ 428.1     $ 7,459.3       52 %

 

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Paycheck Protection Program (PPP)

 

As part of the CARES Act, the Small Business Administration (SBA) has been authorized to guarantee loans under the PPP through September 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, among other conditions, maintain their staff and payroll and if loan amounts are used to cover payroll, mortgage interest, rents and utilities payments. These loans have a two to five year term and earn interest at a rate of 1%. We began accepting applications on April 3, 2020. As of September 30, 2020, we had processed 1,437 PPP loans with a current balance of $265.7 million. PPP loans are guaranteed by the SBA and therefore we believe PPP loans generally do not represent a material credit risk.

 

Capital and liquidity

 

While we believe we have sufficient capital and do not anticipate any need for additional liquidity as of September 30, 2020, in response to the uncertainty regarding the severity and duration of the COVID-19 pandemic, we are prepared to take additional actions, as needed, to maintain strong capital levels and ensure the strength of our liquidity position. Such actions may include pledging 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 as well as any stock repurchases, in light of our capital and liquidity needs.

 

Asset impairment

 

At this time, as of September 30, 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. The health and safety of our employees and customers is a major concern to our management. We are continuing to permit employees to work from home when feasible or, if working from one of our locations is required, to maintain appropriate social distancing and observe other health precautions. 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, and enhance our ability to continue providing our banking services.

 

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. While physical access to our bank offices remains restricted, customer business is still being transacted through drive-up facilities, online, telephone or by appointment.

 

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 and severity of the pandemic.

 

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Highlights

 

 

●

The net interest margin of 3.02% during the third quarter of 2020 is unchanged from the second quarter of 2020.

 

 

●

The provision for loan losses decreased to $12.5 million for the third quarter of 2020 compared to $25.0 million for the second quarter of 2020.

 

Quarterly Statement of Operations Review

 

Net Income

 

Net income for the quarter ended September 30, 2020, was $56.8 million, a decrease of $16.0 million, or 22.0%, compared to net income of $72.8 million for the same quarter a year ago. Diluted earnings per share for the quarter ended September 30, 2020 was $0.71 compared to $0.91 for the same quarter a year ago.

 

Return on average stockholders’ equity was 9.53% and return on average assets was 1.18% for the quarter ended September 30, 2020, compared to a return on average stockholders’ equity of 12.98% and a return on average assets of 1.65% for the same quarter a year ago.

 

Financial Performance

 

   

Three months ended

 
   

September 30, 2020

   

September 30, 2019

 

Net income (in millions)

  $ 56.8     $ 72.8  

Basic earnings per common share

  $ 0.71     $ 0.91  

Diluted earnings per common share

  $ 0.71     $ 0.91  

Return on average assets

    1.18 %     1.65 %

Return on average total stockholders' equity

    9.53 %     12.98 %

Efficiency ratio

    51.53 %     41.67 %

 

Net Interest Income Before Provision for Credit Losses

 

Net interest income before provision for credit losses decreased $9.5 million, or 6.5%, to $137.5 million during the third quarter of 2020, compared to $147.0 million during the same quarter a year ago. The decrease was due primarily to a decrease in interest income from loans and securities.

 

The net interest margin was 3.02% for the third quarter of 2020 compared to 3.56% for the third quarter of 2019 and 3.02% for the second quarter of 2020.

 

For the third quarter of 2020, the yield on average interest-earning assets was 3.78%, the cost of funds on average interest-bearing liabilities was 1.04%, and the cost of interest-bearing deposits was 0.99%. In comparison, for the third quarter of 2019, the yield on average interest-earning assets was 4.80%, the cost of funds on average interest-bearing liabilities was 1.65%, and the cost of interest-bearing deposits was 1.60%. 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 2.74% for the quarter ended September 30, 2020, compared to 3.15% for the same quarter a year ago.

 

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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 ended September 30, 2020, and 2019. Average outstanding amounts included in the table are daily averages.

 

   

Interest-Earning Assets and Interest-Bearing Liabilities

 
   

Three months ended September 30,

 
   

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)

  $ 15,592,536     $ 167,556       4.28 %   $ 14,662,847     $ 187,827       5.08 %

Investment securities

    1,145,092       4,115       1.43       1,498,569       8,687       2.30  

Federal Home Loan Bank stock

    17,250       216       4.99       17,250       301       6.92  

Interest-bearing deposits

    1,385,535       347       0.10       188,772       1,016       2.14  

Total interest-earning assets

    18,140,413       172,234       3.78       16,367,438       197,831       4.80  

Non-interest earning assets:

                                               

Cash and due from banks

    136,671                       204,974                  

Other non-earning assets

    1,064,371                       1,037,937                  

Total non-interest earning assets

    1,201,042                       1,242,911                  

Less: Allowance for loan losses

    (172,225 )                     (125,399 )                

Deferred loan fees

    (5,010 )                     (1,574 )                

Total assets

  $ 19,164,220                     $ 17,483,376                  
                                                 

Interest-bearing liabilities:

                                               

Interest-bearing demand accounts

  $ 1,695,882     $ 724       0.17 %   $ 1,281,629     $ 589       0.18 %

Money market accounts

    3,119,091       4,833       0.62       2,028,039       5,684       1.11  

Savings accounts

    766,521       204       0.11       726,763       354       0.19  

Time deposits

    7,281,403       26,247       1.43       7,623,238       40,378       2.10  

Total interest-bearing deposits

    12,862,897       32,008       0.99       11,659,669       47,005       1.60  
                                                 

Other borrowings

    263,306       1,266       1.91       362,698       1,878       2.05  

Long-term debt

    119,136       1,456       4.86       165,023       1,948       4.68  

Total interest-bearing liabilities

    13,245,339       34,730       1.04       12,187,390       50,831       1.65  
                                                 

Non-interest bearing liabilities:

                                               

Demand deposits

    3,301,253                       2,805,582                  

Other liabilities

    246,811                       263,813                  

Total equity

    2,370,817                       2,226,591                  

Total liabilities and equity

  $ 19,164,220                     $ 17,483,376                  
                                                 

Net interest spread

                    2.74 %                     3.15 %

Net interest income

          $ 137,504                     $ 147,000          

Net interest margin

                    3.02 %                     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.

 

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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 September 30, 2020 and 2019:

 

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

   

Three months ended September 30,

2020-2019

Increase/(Decrease) in

Net Interest Income Due to:

 
   

Changes in Volume

   

Changes in Rate

   

Total Change

 
   

(In thousands)

 

Interest-earning assets:

                       

Loans and leases

  $ 11,100     $ (31,371 )   $ (20,271 )

Investment securities

    (1,756 )     (2,816 )     (4,572 )

Federal Home Loan Bank stock

    —       (85 )     (85 )

Deposits with other banks

    1,089       (1,758 )     (669 )

Total changes in interest income

    10,433       (36,030 )     (25,597 )
                         

Interest-bearing liabilities:

                       

Interest-bearing demand accounts

    178       (42 )     136  

Money market accounts

    2,283       (3,134 )     (851 )

Savings accounts

    18       (168 )     (150 )

Time deposits

    (1,748 )     (12,383 )     (14,131 )

Other borrowed funds

    (489 )     (123 )     (612 )

Long-term debt

    (562 )     70       (492 )

Total changes in interest expense

    (320 )     (15,780 )     (16,100 )

Changes in net interest income

  $ 10,753     $ (20,250 )   $ (9,497 )

 

(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.

 

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Provision/(reversal) for credit losses

 

Based on a review of the appropriateness of the allowance for loan losses at September 30, 2020, the Company recorded a provision for credit losses of $12.5 million in third quarter of 2020 compared to a reversal for credit losses of $2.0 million in the third 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. The following table summarizes the charge-offs and recoveries for the periods indicated:

 

   

Three months ended September 30,

   

Nine months ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
   

(In thousands)

 

Charge-offs:

                               

Commercial loans

  $ 6,956     $ 3,356     $ 13,383     $ 6,300  

Total charge-offs

    6,956       3,356       13,383       6,300  

Recoveries:

                               

Commercial loans

    3,796       212       6,354       1,609  

Construction loans

    —       3,378       —       4,612  

Real estate loans (1)

    110       5,023       435       5,596  

Total recoveries

    3,906       8,613       6,789       11,817  

Net charge-offs/(recoveries)

  $ 3,050     $ (5,257 )   $ 6,594     $ (5,517 )

 

(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 $10.0 million for the third quarter of 2020, a decrease of $0.4 million, or 3.8%, compared to $10.4 million for the third quarter of 2019. The decrease was primarily due to a $2.0 million decrease in net gains from equity securities, and a decrease of $0.7 million from gain on sale of loans, offset in part by a $1.4 million increase in gain on low income housing investments, and a $0.6 million increase in wealth management fees, when compared to the same quarter a year ago.

 

Non-Interest Expense

 

Non-interest expense increased $10.4 million, or 15.9%, to $76.0 million in the third quarter of 2020, compared to $65.6 million in the same quarter a year ago. The increase was primarily due to an increase of $9.2 million in amortization expense of investments in low-income housing and alternative energy partnerships, an increase of $1.4 million in salaries and employee benefits and an increase of $1.0 million in provision for unfunded commitments offset, in part, by a decrease of $1.3 million in marketing expense, when compared to the same quarter a year ago. The efficiency ratio was 51.5% in the third quarter of 2020 compared to 41.7% for the same quarter a year ago.

 

Income Taxes

 

The effective tax rate for the third quarter of 2020 was 3.7% compared to 22.4% for the third quarter of 2019. The effective tax rate was lower in 2020 due to the impact of higher tax credits from low-income housing and alternative energy investment tax credits.

 

Year-to-Date Statement of Operations Review

 

Net income for the nine months ended September 30, 2020, was $158.0 million, a decrease of $53.8 million, or 25.4%, compared to net income of $211.8 million for the same period a year ago. Diluted earnings per share was $1.98 compared to $2.64 per share for the same period a year ago. The net interest margin for the nine months ended September 30, 2020, was 3.12% compared to 3.61% for the same period a year ago.

 

Return on average stockholders’ equity was 8.99% and return on average assets was 1.13% for the nine months ended September 30, 2020, compared to a return on average stockholders’ equity of 12.94% and a return on average assets of 1.65% for the same period a year ago. The efficiency ratio for the nine months ended September 30, 2020, was 46.98% compared to 43.87% for the same period a year ago.

 

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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 nine months ended September 30, 2020, and 2019. Average outstanding amounts included in the table are daily averages.

 

   

Interest-Earning Assets and Interest-Bearing Liabilities

 
   

Nine months ended September 30,

 
   

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)

  $ 15,477,883     $ 513,575       4.43 %   $ 14,374,397     $ 548,395       5.10 %

Investment securities

    1,263,937       17,130       1.81       1,404,046       24,454       2.33  

Federal Home Loan Bank stock

    17,317       735       5.67       17,268       903       6.99  

Interest-bearing deposits

    894,302       1,538       0.23       245,971       4,289       2.33  

Total interest-earning assets

    17,653,439       532,978       4.03       16,041,682       578,041       4.82  

Non-interest earning assets:

                                               

Cash and due from banks

    149,777                       198,835                  

Other non-earning assets

    1,048,008                       1,038,009                  

Total non-interest earning assets

    1,197,785                       1,236,844                  

Less: Allowance for loan losses

    (148,437 )                     (123,854 )                

Deferred loan fees

    (1,787 )                     (1,476 )                

Total assets

  $ 18,701,000                     $ 17,153,196                  
                                                 

Interest-bearing liabilities:

                                               

Interest-bearing demand accounts

  $ 1,557,371     $ 2,176       0.19 %   $ 1,285,180     $ 1,773       0.18 %

Money market accounts

    2,772,463       16,712       0.81       1,933,898       14,754       1.02  

Savings accounts

    746,870       783       0.14       725,257       1,064       0.20  

Time deposits

    7,463,821       92,213       1.65       7,421,255       113,992       2.05  

Total interest-bearing deposits

    12,540,525       111,884       1.19       11,365,590       131,583       1.55  
                                                 

Other borrowings

    355,758       4,468       1.68       392,483       6,676       2.27  

Long-term debt

    119,136       4,336       4.86       172,567       6,087       4.72  

Total interest-bearing liabilities

    13,015,419       120,688       1.24       11,930,640       144,346       1.62  
                                                 

Non-interest bearing liabilities:

                                               

Demand deposits

    3,089,578                       2,790,367                  

Other liabilities

    249,954                       244,568                  

Total equity

    2,346,049                       2,187,621                  

Total liabilities and equity

  $ 18,701,000                     $ 17,153,196                  
                                                 

Net interest spread

                    2.79 %                     3.20 %

Net interest income

          $ 412,290                     $ 433,695          

Net interest margin

                    3.12 %                     3.61 %

 

(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:

 

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

   

Nine months ended September 30,

2020-2019

Increase/(Decrease) in

Net Interest Income Due to:

 
   

Changes in Volume

   

Changes in Rate

   

Total Change

 
   

(In thousands)

 

Interest-earning assets:

                       

Loans and leases

  $ 40,381     $ (75,201 )   $ (34,820 )

Investment securities

    (2,267 )     (5,057 )     (7,324 )

Federal Home Loan Bank stock

    3       (170 )     (167 )

Deposits with other banks

    3,728       (6,479 )     (2,751 )

Total changes in interest income

    41,845       (86,907 )     (45,062 )
                         

Interest-bearing liabilities:

                       

Interest-bearing demand accounts

    382       22       404  

Money market accounts

    5,512       (3,555 )     1,957  

Savings accounts

    31       (312 )     (281 )

Time deposits

    656       (22,435 )     (21,779 )

Other borrowed funds

    (581 )     (1,627 )     (2,208 )

Long-term debt

    (1,935 )     183       (1,752 )

Total changes in interest expense

    4,065       (27,724 )     (23,659 )

Changes in net interest income

  $ 37,780     $ (59,183 )   $ (21,403 )

 

(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.

 

 

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 $31.4 million for the nine months ended September 30, 2020, a decrease of $4.7 million, or 13.0%, compared to $36.1 million for the nine months ended September 30, 2019. The decrease was primarily due to a $9.7 million decrease in net gains from equity securities, offset, in part, by an increase of $2.4 million in gain on low income housing investments, and increase of $1.1 million from the gain on sale of mortgage backed securities and an increase of $1.7 million from wealth management fees when compared to the same period a year ago.

 

Non-Interest Expense

 

Non-interest expense increased $2.3 million, or 1.1%, to $208.4 million for the nine months ended September 30, 2020, compared to $206.1 million for the same period a year ago. The increase was primarily due to an increase of $16.1 million in amortization expense of investments in low-income housing and alternative energy partnerships, offset, in part, by a $4.7 million decrease in salaries and employee benefits resulting from lower bonus accruals and an increase in salaries capitalized for loan originations, a decrease of $4.1 million in other real estate owned expense, a decrease of $1.7 million in marketing expense, a decrease of $1.6 million in professional services expense, and a decrease of $1.2 million in occupancy expense, when compared to the same period a year ago.

 

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Income Taxes

 

The effective tax rate for the nine months ended September 30, 2020 was 8.6% compared to 20.3% for the nine months ended September 30, 2019. The effective tax rate was lower in 2020 due to the impact of higher tax credits from low-income housing and alternative energy investment tax credits.

 

Balance Sheet Review

 

Assets

 

Total assets were $19.0 billion as of September 30, 2020, an increase of $0.9 billion, or 5.0%, from $18.1 billion as of December 31, 2019, primarily due to an increase in short-term investments and loan growth offset in part by a decrease in investment securities.

 

Securities Available for Sale

 

Securities available-for-sale represented 5.7% of total assets as of September 30, 2020, compared to 8.0% of total assets as of December 31, 2019. Securities available-for-sale were $1.1 billion as of September 30, 2020, compared to $1.5 billion as of December 31, 2019.

 

The following tables set forth the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of securities available-for-sale as of September 30, 2020, and December 31, 2019:

 

   

September 30, 2020

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

         
   

Cost

   

Gains

   

Losses

   

Fair Value

 
   

(In thousands)

 

Securities Available-for-Sale

                               

U.S. treasury securities

  $ 99,968     $ 12     $ —     $ 99,980  

U.S. government agency entities

    104,661       465       530       104,596  

Mortgage-backed securities

    709,756       20,045       557       729,244  

Collateralized mortgage obligations

    222       —       11       211  

Corporate debt securities

    146,368       288       147       146,509  

Total

  $ 1,060,975     $ 20,810     $ 1,245     $ 1,080,540  

 

 

   

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.

 

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Securities available-for-sale having a carrying value of $18.6 million as of September 30, 2020, and $20.1 million as of December 31, 2019, were pledged to secure public deposits, other borrowings and treasury tax and loan.

 

Equity Securities

 

The Company recognized a net loss of $1.6 million for the three months ended September 30, 2020, due to the decrease in fair value of equity investments with readily determinable fair values compared to a net gain of $0.4 million for the three months ended September 30, 2019. The Company recognized a net loss of $1.9 million for the nine months ended September 30, 2020, due to the decrease in fair value of equity investments with readily determinable fair values compared to a net gain of $7.8 million for the nine months ended September 30, 2019. Equity securities were $23.0 million and $28.0 million as of September 30, 2020 and December 31, 2019, respectively.

 

Loans

 

Gross loans were $15.6 billion at September 30, 2020, an increase of $490.3 million, or 3.3%, from $15.1 billion at December 31, 2019. The increase was primarily due to $265.7 million in Paycheck Protection Program Loans and increases of $184.1 million, or 2.5%, in commercial mortgage loans, $81.3 million, or 2.0%, in residential mortgage loans, $63.9 million, or 18.4%, in equity lines and $95.2 million, or 16.4%, in real estate construction loans offset, in part, by a decrease of $196.5 million, or 7.1%, in commercial loans not including Paycheck Protection Program Loans. The loan balances and composition at September 30, 2020, compared to December 31, 2019 are set forth below:

 

   

September 30, 2020

   

% of Gross Loans

   

December 31, 2019

   

% of Gross Loans

   

% Change

 
   

(Dollars in thousands)

 
                                         

Commercial loans

  $ 2,582,272       16.6 %   $ 2,778,744       18.4 %     (7.1 %)

Paycheck protection program loans

    265,728       1.7       —       —       100.0  

Residential mortgage loans

    4,169,847       26.8       4,088,586       27.1       2.0  

Commercial mortgage loans

    7,459,316       47.9       7,275,262       48.3       2.5  

Real estate construction loans

    675,112       4.3       579,864       3.9       16.4  

Equity lines

    411,848       2.7       347,975       2.3       18.4  

Installment and other loans

    1,656       0.0       5,050       0.0       (67.2 )

Gross loans

  $ 15,565,779       100 %   $ 15,075,481       100 %     3.3 %

Allowance for loan losses

    (179,130 )             (123,224 )             45.4  

Unamortized deferred loan fees

    (4,210 )             (626 )             572.5  

Total loans, net

  $ 15,382,439             $ 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.

 

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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.

 

The ratio of non-performing assets to total assets was 0.4% at September 30, 2020, compared to 0.3% at December 31, 2019. Total non-performing assets increased $27.8 million, or 48.6%, to $85.0 million at September 30, 2020, compared to $57.2 million at December 31, 2019, primarily due to an increase of $36.7 million, or 90.6%, in nonaccrual loans, offset, in part, by a decrease of $5.3 million, or 52.0%, in other real estate owned and a decrease of $3.5 million, or 55.2%, in accruing loans past due 90 days or more.

 

As a percentage of gross loans plus OREO, our non-performing assets was 0.55% as of September 30, 2020, compared to 0.38% as of December 31, 2019. The non-performing loan portfolio coverage ratio, defined as the allowance for credit losses to non-performing loans, decreased to 230.8% as of September 30, 2020, from 270.8% as of December 31, 2019.

 

The following table sets forth the changes in non-performing assets and troubled debt restructurings (“TDRs”) as of September 30, 2020, compared to December 31, 2019, and to September 30, 2019:

 

   

September 30, 2020

   

December 31, 2019

   

% Change

   

September 30, 2019

   

% Change

 
   

(Dollars in thousands)

 

Non-performing assets

                                       

Accruing loans past due 90 days or more

  $ 2,868     $ 6,409       (55 )   $ 683       320  

Non-accrual loans:

                                       

Construction loans

    4,335       4,580       (5 )     4,629       (6 )

Commercial mortgage loans

    33,782       9,928       240       12,330       174  

Commercial loans

    29,757       19,381       54       22,970       30  

Residential mortgage loans

    9,317       6,634       40       7,271       28  

Total non-accrual loans

  $ 77,191     $ 40,523       90     $ 47,200       64  

Total non-performing loans

    80,059       46,932       71       47,883       67  

Other real estate owned

    4,918       10,244       (52 )     11,329       (57 )

Total non-performing assets

  $ 84,977     $ 57,176       49     $ 59,212       44  

Accruing troubled debt restructurings

  $ 28,587     $ 35,336       (19 )   $ 41,647       (31 )
                                         

Allowance for loan losses

  $ 179,130     $ 123,224       45     $ 125,908       42  
                                         

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

  $ 15,565,779     $ 15,075,481       3     $ 14,728,554       6  
                                         

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

    223.75 %     262.56 %             262.95 %        

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

    1.15 %     0.82 %             0.85 %        

 

(1)

Excludes loans held for sale at period-end.

(2)

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

 

Non-accrual Loans

 

At September 30, 2020, total non-accrual loans were $77.2 million, an increase of $36.7 million, or 90.6%, from $40.5 million at December 31, 2019, and an increase of $30.0 million, or 63.6%, from $47.2 million at September 30, 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.

 

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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:

 

   

September 30, 2020

   

December 31, 2019

 
   

Real

           

Real

         
   

Estate (1)

   

Commercial

   

Estate (1)

   

Commercial

 
   

(In thousands)

 

Type of Collateral

                               

Single/multi-family residence

  $ 9,851     $ 9,290     $ 6,874     $ 9,475  

Commercial real estate

    37,583       338       14,268       1,603  

Personal property (UCC)

    —       20,129       —       8,303  

Total

  $ 47,434     $ 29,757     $ 21,142     $ 19,381  

 

(1)

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

 

   

September 30, 2020

   

December 31, 2019

 
   

Real

           

Real

         
   

Estate (1)

   

Commercial

   

Estate (1)

   

Commercial

 
   

(In thousands)

 

Type of Business

                               

Real estate development

  $ 13,153     $ —     $ 14,305     $ —  

Wholesale/Retail

    25,134       8,516       637       9,684  

Import/Export

    —       7,306       —       4,697  

Other

    9,147       13,935       6,200       5,000  

Total

  $ 47,434     $ 29,757     $ 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.

 

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As of September 30, 2020, recorded investment in impaired loans totaled $105.8 million and was comprised of non-accrual loans of $77.2 million and accruing TDRs of $28.6 million. As of December 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 6.1% as of September 30, 2020, and 2.1% as of December 31, 2019, of the contractual balances for impaired loans. As of September 30, 2020, $47.4 million, or 61.5%, of the $77.2 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 of December 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 of September 30, 2020, $8.5 million of the $179.1 million allowance for loan losses was allocated for impaired loans and $170.6 million was allocated to the general allowance. As of December 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 223.8% as of September 30, 2020, compared to 262.6% as of December 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:

 

   

September 30, 2020

   

December 31, 2019

 
   

Unpaid Principal Balance

   

Recorded Investment

   

Allowance

   

Unpaid Principal Balance

   

Recorded Investment

   

Allowance

 
   

(In thousands)

 
                                                 

With no allocated allowance

                                               

Commercial loans

  $ 16,210     $ 13,293     $ —     $ 20,134     $ 15,857     $ —  

Real estate construction loans

    5,776       4,335       —       5,776       4,580       —  

Commercial mortgage loans

    22,996       22,532       —       9,234       9,030       —  

Residential mortgage loans and equity lines

    7,921       7,814       —       6,171       6,073       —  

Subtotal

  $ 52,903     $ 47,974     $ —     $ 41,315     $ 35,540     $ —  
                                                 

With allocated allowance

                                               

Commercial loans

  $ 28,059     $ 20,871     $ 7,704     $ 8,769     $ 8,739     $ 2,543  

Commercial mortgage loans

    31,138       31,019       582       26,117       26,040       473  

Residential mortgage loans and equity lines

    6,632       5,914       209       6,740       5,540       220  

Subtotal

  $ 65,829     $ 57,804     $ 8,495     $ 41,626     $ 40,319     $ 3,236  

Total impaired loans

  $ 118,732     $ 105,778     $ 8,495     $ 82,941     $ 75,859     $ 3,236  

 

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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 of September 30, 2020, construction loans of $635.1 million were disbursed with pre-established interest reserves of $74.4 million, compared to $550.0 million with pre-established interest reserves of $73.4 million at December 31, 2019.  The balance for construction loans with interest reserves that have been extended was $148.6 million with pre-established interest reserves of $5.2 million at September 30, 2020, compared to $129.2 million with pre-established interest reserves of $4.7 million at December 31, 2019.  Land loans of $25.8 million were disbursed with pre-established interest reserves of $364 thousand at September 30, 2020, compared to $45.5 million of land loans disbursed with pre-established interest reserves of $1.9 million at December 31, 2019.  The balance for land loans with interest reserves that have been extended was $942 thousand at September 30, 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 at December 31, 2019. 

 

At September 30, 2020 and December 31, 2019, the Bank had no loans on non-accrual status with available interest reserves.  At September 30, 2020 and December 31, 2019, $4.3 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 and Northern California; New York City, New York; Dallas and Houston, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Edison, New Jersey; Rockville, Maryland; and Las Vegas, Nevada. The Company also has loan customers in 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 September 30, 2020, or as of December 31, 2019.

 

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 35% of the Bank’s total risk-based capital as of September 30, 2020, and 34% as of December 31, 2019. Total CRE loans represented 273% of total risk-based capital as of September 30, 2020, and 277% as of December 31, 2019 and were below the Bank’s internal limit for CRE loans of 400% of total capital at both dates.

 

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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 $179.1 million and the allowance for off-balance sheet unfunded credit commitments was $5.7 million at September 30, 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 $179.1 million allowance for loan losses at September 30, 2020, increased $55.9 million, or 45.4%, from $123.2 million at December 31, 2019. This increase includes additional provisions for credit losses and reflects the deterioration in economic conditions related to COVID-19 and an increase in specific reserves of $5.3 million. This deterioration is reflected in unprecedented increases in new unemployment claims in the 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 (such as the severity and length of the COVID-19 pandemic and its impacts) worsen relative to the assumptions we utilized, our allowance for loan losses will increase accordingly in future periods. The allowance for loan losses represented 1.15% of period-end gross loans and 223.8% of non-performing loans at September 30, 2020. The comparable ratios were 0.82% of period-end gross loans and 262.6% of non-performing loans at December 31, 2019.

 

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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 September 30,

   

Nine months ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
   

(In thousands)

 

Allowance for loan losses

                               

Balance at beginning of period

  $ 169,680     $ 122,651     $ 123,224     $ 122,391  

Provision/(reversal) for credit losses

    12,500       (2,000 )     62,500       (2,000 )

Charge-offs:

                               

Commercial loans

    (6,956 )     (3,356 )     (13,383 )     (6,300 )

Total charge-offs

    (6,956 )     (3,356 )     (13,383 )     (6,300 )

Recoveries:

                               

Commercial loans

    3,796       212       6,354       1,609  

Construction loans

    —       3,378       —       4,612  

Real estate loans

    110       5,023       435       5,596  

Total recoveries

    3,906       8,613       6,789       11,817  

Balance at end of period

  $ 179,130     $ 125,908     $ 179,130     $ 125,908  
                                 

Reserve for off-balance sheet credit commitments

                               

Balance at beginning of period

  $ 4,663     $ 4,550     $ 3,855     $ 2,250  

Provision for credit losses

    1,000       —       1,808       2,300  

Balance at end of period

  $ 5,663     $ 4,550     $ 5,663     $ 4,550  
                                 

Average loans outstanding during the period (1)

  $ 15,592,536     $ 14,654,644     $ 15,477,883     $ 14,371,633  

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

  $ 15,565,779     $ 14,728,554     $ 15,565,779     $ 14,728,554  

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

  $ 80,059     $ 47,883     $ 80,059     $ 47,883  

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

    (0.08% )     0.14 %     (0.06% )     0.05 %

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

    0.34 %     (0.05% )     0.55 %     0.00 %

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

    230.82 %     272.45 %     230.82 %     272.45 %

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

    1.19 %     0.89 %     1.19 %     0.89 %

 

(1)

Excludes loans held for sale.

(2)

Excludes non-accrual loans held for sale.

 

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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:

 

   

September 30, 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

  $ 79,394       19.0 %   $ 57,021       18.9 %

Real estate construction loans

    32,712       3.9       19,474       4.0  

Commercial mortgage loans

    46,665       47.7       33,602       48.0  

Residential mortgage loans and equity lines

    20,359       29.4       13,108       29.1  

Installment and other loans

    —       —       19       —  

Total loans

  $ 179,130       100 %   $ 123,224       100 %

 

The allowance allocated to commercial loans increased $22.4 million, or 39.2%, to $79.4 million at September 30, 2020, from $57.0 million at December 31, 2019. The increase is due primarily to an increase in the allowance due to the continued deterioration in economic conditions related to COVID-19, the impact on loss rates from charge-offs of commercial loans and increases in specific reserves on impaired loans, year to date.

 

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The allowance allocated to real estate construction loans increased $13.2 million, or 68.0%, to $32.7 million at September 30, 2020 from $19.5 million at December 31, 2019. The increase is due primarily to continued deterioration in economic conditions, year to date, related to COVID-19 and increases in real estate construction loans.

 

The allowance allocated to commercial mortgage loans increased $13.1 million, or 38.9%, to $46.7 million at September 30, 2020, from $33.6 million at December 31, 2019. The increase is due primarily to continued deterioration in economic conditions, year to date, related to COVID-19.

 

The allowance allocated for residential mortgage loans increased by $7.3 million, or 55.3%, to $20.4 million as of September 30, 2020, from $13.1 million at December 31, 2019. The increase is due primarily to continued deterioration in economic conditions, year to date, related to COVID-19.

 

Deposits

 

Total deposits were $16.0 billion at September 30, 2020, an increase of $1.3 billion, or 8.8%, from $14.7 billion at December 31, 2019. The increases in non-interest bearing demand deposits, NOW deposits, and money market deposits resulted from higher liquidity maintained by our depositors during these uncertain times, and improved money market deposit generation from corporate accounts. The decreases in time deposits resulted primarily from the runoff of wholesale time deposits. The following table sets forth the deposit mix as of the dates indicated:

 

   

September 30, 2020

   

December 31, 2019

 
   

Amount

   

Percentage

   

Amount

   

Percentage

 

Deposits

 

(Dollars in thousands)

 

Non-interest-bearing demand deposits

  $ 3,306,421       20.6 %   $ 2,871,444       19.5 %

Interest bearing demand deposits

    1,767,227       11.0       1,358,152       9.2  

Money market deposits

    3,227,359       20.1       2,260,764       15.4  

Savings deposits

    784,076       4.9       758,903       5.2  

Time deposits

    6,949,165       43.4       7,443,045       50.7  

Total deposits

  $ 16,034,248       100.0 %   $ 14,692,308       100.0 %

 

The following table sets forth the maturity distribution of time deposits at September 30, 2020:

 

   

At September 30, 2020

 
   

Time Deposits -under $100,000

   

Time Deposits -$100,000 and over

   

Total Time Deposits

 
   

(Dollars in thousands)

 

Less than three months

  $ 352,732     $ 1,322,805     $ 1,675,537  

Three to six months

    749,486       1,889,171       2,638,657  

Six to twelve months

    490,537       1,825,301       2,315,838  

Over one year

    90,796       228,337       319,133  

Total

  $ 1,683,551     $ 5,265,614     $ 6,949,165  
                         

Percent of total deposits

    10.5 %     32.8 %     43.3 %

 

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Borrowings

 

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

 

Borrowings from the FHLB – There were no over-night borrowings from the FHLB as of September 30, 2020, compared to $450 million at a weighted average rate of 1.66% as of December 31, 2019. Advances from the FHLB were $230 million at a weighted average rate of 2.16% as of September 30, 2020 and $220 million at a weighted average rate of 2.26% as of December 31, 2019. As of September 30, 2020, FHLB advances of $5 million will mature in November 2020, $80 million in May 2021, $50 million in June 2021, $75 million in July 2021, and $20 million in May 2023.

 

Junior Subordinated Notes – At September 30, 2020, Junior Subordinated Notes totaled $119.1 million with a weighted average interest rate of 2.41%, compared to $119.1 million with a weighted average rate of 4.09% at December 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 in December 2003.

 

For additional information, see Note 11 to the Company’s unaudited Condensed Consolidated Financial Statements.

 

Off-Balance-Sheet Arrangements and Contractual Obligations

 

The following table summarizes the Company’s contractual obligations to make future payments as of September 30, 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

  $ 6,630,032     $ 318,959     $ 162     $ 12     $ 6,949,165  

Advances from the Federal Home Loan Bank

    210,000       20,000       —       —       230,000  

Other borrowings

    —       —       —       23,788       23,788  

Long-term debt

    —       —       —       119,136       119,136  

Operating leases

    9,469       15,629       8,022       4,704       37,824  

Total contractual obligations and other commitments

  $ 6,849,501     $ 354,588     $ 8,184     $ 147,640     $ 7,359,913  

 

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 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.

 

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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 $2.37 billion as of September 30, 2020, an increase of $80.4 million, from $2.29 billion as of December 31, 2019, primarily due to net income of $158.0 million, increases in other comprehensive income of $4.1 million, and amortization of share-based compensation of $3.8 million, which were partially offset by common stock cash dividends of $74.0 million and repurchases of the Company’s common stock of $12.9 million.

 

The following table summarizes changes in total equity for the nine months ended September 30, 2020:

 

   

Nine months ended

 
   

September 30, 2020

 
   

(In thousands)

 

Net income

  $ 157,967  

Proceeds from shares issued through the Dividend Reinvestment Plan

    2,573  

RSUs distributed

    2  

Shares withheld related to net share settlement of RSUs

    (1,903 )

Stock issued to directors

    800  

Purchase of treasury stock

    (12,880 )

Share-based compensation

    3,808  

Cash dividends paid to common stockholders

    (74,014 )

Other comprehensive income

    4,087  

Net increase in total equity

  $ 80,440  

 

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.

 

The following tables set forth actual and required capital ratios as of September 30, 2020 and December 31, 2019 for Bancorp and the Bank under the Basel III Capital Rules. The Basel III Capital Rules became fully phased-in on January 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.

 

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Actual

   

Minimum Capital Required - Basel III

   

Required to be Considered Well Capitalized

 
   

Capital Amount

   

Ratio

   

Capital Amount

   

Ratio

   

Capital Amount

   

Ratio

 

September 30, 2020

 

(Dollars in thousands)

 
                                                 

Common Equity Tier 1 to Risk-Weighted Assets

                                         

Cathay General Bancorp

  $ 1,970,778       13.22     $ 1,043,776       7.00     $ 969,221       6.50  

Cathay Bank

  $ 2,034,242       13.65     $ 1,042,861       7.00     $ 968,371       6.50  
                                                 

Tier 1 Capital to Risk-Weighted Assets

                                               

Cathay General Bancorp

  $ 1,970,778       13.22     $ 1,267,443       8.50     $ 1,192,887       8.00  

Cathay Bank

  $ 2,034,242       13.65     $ 1,266,331       8.50     $ 1,191,841       8.00  
                                                 

Total Capital to Risk-Weighted Assets

                                               

Cathay General Bancorp

  $ 2,271,071       15.23     $ 1,565,664       10.50     $ 1,491,109       10.00  

Cathay Bank

  $ 2,219,035       14.89     $ 1,564,291       10.50     $ 1,489,801       10.00  
                                                 

Leverage Ratio

                                               

Cathay General Bancorp

  $ 1,970,778       10.51     $ 750,036       4.00     $ 937,545       5.00  

Cathay Bank

  $ 2,034,242       10.87     $ 748,839       4.00     $ 936,048       5.00  

 

 

   

Actual

   

Minimum Capital Required - Basel III

   

Required to be Considered Well Capitalized

 
   

Capital Amount

   

Ratio

   

Capital Amount

   

Ratio

   

Capital 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 of September 30, 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 of September 30, 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.

 

The Company declared a cash dividend of $0.31 per share on 79,620,510 shares outstanding on September 1, 2020, for distribution to holders of our common stock on September 11, 2020, $0.31 per share on 79,587,596 shares outstanding on June 2, 2020, for distribution to holders of our common stock on June 12, 2020, and $0.31 per share on 79,546,735 shares outstanding on March 2, 2020, for distribution to holders of our common stock on March 12, 2020. The Company paid total cash dividends of $74.0 million in the first nine months of 2020.

 

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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.

 

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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. As of September 30, 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 of September 30, 2020, and December 31, 2019, were as follows:

 

   

September 30, 2020

   

December 31, 2019

 

 

 

($ in thousands)

 
Cash flow swap hedges:                

Notional

  $ 119,136     $ 119,136  

Weighted average fixed rate-pay

    2.61 %     2.61 %

Weighted average variable rate-receive

    0.51 %     2.26 %
                 

Unrealized loss, net of taxes (1)

  $ (7,393 )   $ (3,412 )

 

 

   

Three months ended

   

Nine months ended

 
   

September 30, 2020

   

September 30, 2019

   

September 30, 2020

   

September 30, 2019

 

Periodic net settlement of swaps (2)

  $ 702     $ 78     $ 1,471     $ 41  

 

 

(1)-

Included in other comprehensive income.

 

(2)-

the amount of periodic net settlement of interest rate swaps was included in interest expense.

 

As of September 30, 2020, the Bank’s outstanding interest rate swap contracts had a notional amount of $494.9 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 of September 30, 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 of September 30, 2020, and December 31, 2019, were as follows:

 

   

September 30, 2020

   

December 31, 2019

 

 

 

($ in thousands)

 
Fair value swap hedges:                

Notional

  $ 494,932     $ 579,584  

Weighted average fixed rate-pay

    4.57 %     4.71 %

Weighted average variable rate spread

    1.90 %     2.62 %

Weighted average variable rate-receive

    3.27 %     4.87 %
                 

Net unrealized loss (1)

  $ (17,037 )   $ (7,205 )

 

 

   

Three months ended

   

Nine months ended

 
   

September 30, 2020

   

September 30, 2019

   

September 30, 2020

   

September 30, 2019

 

Periodic net settlement of SWAPs (2)

  $ (2,510 )   $ 205     $ (5,307 )   $ 1,352  

 

 

(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 $44.7 million as of September 30, 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 $44.7 million fixed rate loan tranche in order to reduce the Company’s exposure to higher interest rates for the last-of-layer tranche. As of September 30, 2020, the last-of-layer loan tranche had a fair value basis adjustment of $397 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 $13.2 million as of September 30, 2020 and $7.1 million as of December 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 of September 30, 2020, and December 31, 2019, were as follows:

 

 

 

September 30, 2020

   

December 31, 2019

 

 

 

($ in thousands)

 
Derivative financial instruments not designated as hedging instruments:      

Notional amounts:

               

Option contracts

  $ 850     $ 908  

Spot, forward, and swap contracts with positive fair value

  $ 107,071     $ 146,397  

Spot, forward, and swap contracts with negative fair value

  $ 160,489     $ 127,003  

Fair value:

               

Option contracts

  $ (6 )   $ (7 )

Spot, forward, and swap contracts with positive fair value

  $ 3,236     $ 2,411  

Spot, forward, and swap contracts with negative fair value

  $ (1,592 )   $ (1,415 )

 

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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 September 30, 2020, our average monthly liquidity ratio (defined as net cash plus short-term and marketable securities to net deposits and short-term liabilities) was 16.0% compared to 12.9% as of December 31, 2019.

 

The Bank is a shareholder of the FHLB, which enables the Bank to have access to lower-cost FHLB financing when necessary. At September 30, 2020, the Bank had an approved credit line with the FHLB of San Francisco totaling $4.8 billion. Total advances from the FHLB of San Francisco were $230.0 million and standby letter of credits issued by the FHLB on the Company’s behalf were $529.1 million as of September 30, 2020. These borrowings bear fixed rates and are secured by the Bank’s loans. See Note 11 to the Condensed Consolidated Financial Statements. At September 30, 2020, the Bank pledged $7.5 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 $7.8 million from the Federal Reserve Bank Discount Window at September 30, 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. At September 30, 2020, investment securities totaled $1.1 billion, with $18.6 million pledged as collateral for borrowings and other commitments. The remaining $1.1 billion was available as additional liquidity or to be pledged as collateral for additional borrowings.

 

Approximately 95% of our time deposits mature within one year or less as of September 30, 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 of September 30, 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 the 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 $96.0 million and $176.5 million during the first nine months of 2020 and 2019, respectively.

 

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We use a net interest income simulation model to measure the extent of the differences in the behavior of the lending and funding rates to changing interest rates, so as to project future earnings or market values under alternative interest rate scenarios. Interest rate risk arises primarily through the Company’s traditional business activities of extending loans and accepting deposits. Many factors, including but not limited to economic, market and financial conditions, movements in interest rates, and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. The net interest income simulation model is designed to measure the volatility of net interest income and net portfolio value, defined as net present value of assets and liabilities, under immediate rising or falling interest rate scenarios in 100 basis point increments.

 

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

 

We have established a tolerance level in our policy to define and limit net interest income volatility to a change of plus or minus 5% when the hypothetical rate change is plus or minus 200 basis points. When the net interest rate simulation projects that our tolerance level will be met, or exceeded, we seek corrective action after considering, among other things, market conditions, customer reaction, and the estimated impact on profitability. The Company’s simulation model also projects the net economic value of our portfolio of assets and liabilities. We have established a tolerance level in our policy to limit the loss in the net economic value of our portfolio of assets and liabilities to zero when the hypothetical rate change is plus or minus 200 basis points.

 

The table below shows the estimated impact of changes in interest rates on net interest income and market value of equity as of September 30, 2020:

 

     

Net Interest

   

Market Value

 
     

Income

   

of Equity

 

Change in Interest Rate (Basis Points)

   

Volatility (1)

   

Volatility (2)

 

+200

      8.8       7.1  

+100

      4.0       3.9  
-100       -0.2       -3.0  
-200       -0.1       -2.9  

 

 

(1)

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

 

(2)

The percentage change in this column represents the net portfolio value of the Company in a stable interest rate environment versus the net portfolio value in the various rate scenarios.

 

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Item 4. CONTROLS AND PROCEDURES.

 

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

 

There has not been any change in our internal control over financial reporting that occurred during the third quarter of 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

Item 1.     LEGAL PROCEEDINGS.

 

From time to time, Bancorp and its subsidiaries are parties to litigation that arise in the ordinary course of business or otherwise are incidental to various aspects of its operations. Based upon information available to the Company and its review of any such litigation with counsel, management presently believes that the liability relating to such litigation, if any, would not be expected to have a material adverse impact on the Company’s consolidated financial condition, results of operations or liquidity taken as a whole. The outcome of litigation and other legal and regulatory matters is inherently uncertain, however, and it is possible that one or more of the legal matters currently pending or threatened against the Company could have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity taken as a whole.

 

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Item 1A.     RISK FACTORS.

 

Other than the supplemental risk factor set forth below, the Company is not aware of any material change to the risk factors as previously disclosed in Part I, Item 1A, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors disclosed in Part I, Item 1A, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which could materially and adversely affect the Company’s business, financial condition, results of operations and stock price. The risk factors disclosed in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties, including those not presently known to the Company or that the Company presently believes not to be material, could also materially and adversely affect the Company’s business, financial condition, and results of operations and stock price.

 

The outbreak of the COVID-19 pandemic has caused a significant global economic downturn, which has adversely affected, and is expected to continue to adversely affect, our business and results of operations, and the future impacts of the COVID-19 pandemic on the global economy and our business, results of operations and financial condition remain uncertain.

 

Global health and economic concerns relating to the COVID-19 outbreak and government actions taken to reduce the spread of the virus have had a material adverse impact on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty. The pandemic has resulted in federal, state and local authorities, including those who govern the markets in which we operate, implementing numerous measures to try to contain the virus. Such measures have included travel bans and restrictions, curfews, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The United States government has taken steps to attempt to mitigate some of the more severe anticipated economic effects of the virus, including the passage of the CARES Act, but there can be no assurance that such steps will be effective or achieve their desired results in the near future.

 

The outbreak has adversely impacted and is likely to continue to adversely impact our workforce and operations and the operations of our customers and business partners. In particular, we may experience financial losses due to a number of operational factors impacting us or our customers or business partners, including but not limited to the following:

 

 

●

Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. The spread of COVID-19 could disrupt the business, activities, and operations of our customers, cause a decline in demand for our products and services, including loans and deposits which may result in a significant decrease in business and would negatively impact our liquidity position, and our growth strategy.

 

 

●

Our financial results could also be impacted due to an inability of our customers to meet their loan commitments due to job losses or other losses associated with impacts of the disease, and could also result in increased risk of delinquencies, defaults, foreclosures, declining collateral values and the ability of our borrowers to repay their loans resulting in losses to our Bank.

 

 

●

Based on a review of the appropriateness of the allowance for loan losses at September 30, 2020, we recorded a provision for credit losses of $12.5 million in third quarter of 2020, 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 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.

 

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●

Market interest rates have declined significantly. We expect that these reductions in interest rates, especially if prolonged, could adversely affect our net interest income, margins and our profitability. Our assets and liabilities may be significantly impacted by changes in interest rates.

 

 

●

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).

 

 

●

We are required to comply with minimum capital and leverage requirements. Our capital strategy is primarily to maintain capital levels through the COVID-19 pandemic, and our Board of Directors could determine, as appropriate, to reduce or forego dividends in order to maintain and/or strengthen our capital and liquidity position.

 

 

●

Current and future governmental action may temporarily require us to conduct business related to foreclosures, repossessions, payments, deferrals and other customer-related transactions differently.

 

 

●

The pandemic creates heightened risks of cyber and payment fraud, as cyber criminals try to take advantage of the disruption and increased online activity brought about by the pandemic.

 

 

●

Although we have established a pandemic response plan and procedures, our workforce has been, is, and may continue to be impacted by COVID-19. We are taking precautions to protect the safety and well-being of our employees and customers, including temporary branch and office closures, but no assurance can be given that our actions will be adequate or appropriate, nor can we predict the level of disruption which will occur to our employees’ ability to provide customer support and service. The spread could also negatively impact availability of key personnel and employee productivity, as well as the business and operations of third-party service providers who perform critical services for us, which could adversely impact our ability to deliver products and services to our customers.

 

These and other factors may exist for an extended period of time and may continue to adversely affect our business, financial condition and operations even after the COVID-19 outbreak has subsided. The extent to which the pandemic impacts our business, financial condition and operations will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the pandemic’s duration and severity, the actions to contain it or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of its economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future. Additionally, future outbreaks of COVID-19, or other viruses, may occur.

 

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. Therefore, the risk factors discussed in our Annual Report on Form 10-K and in this Form 10-Q could be heightened, changed or be added to in the future.

 

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

 

Issuer Purchases of Equity Securities

Period

(a) Total Number of Shares (or Units) Purchased

(b) Average Price Paid per Share (or Unit)

(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs

(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs

(July 1, 2020 - July 31, 2020)

0

$0.00

0

$10,713,881

(August 1, 2020 - August 31, 2020)

0

$0.00

0

$10,713,881

(September 1, 2020 - September 30, 2020)

0

$0.00

0

$10,713,881

Total

0

$0.00

0

$10,713,881

 

 

For additional information, see Note 20 to the Company’s unaudited Condensed Consolidated Financial Statements.

 

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

 

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Item 3.     DEFAULTS UPON SENIOR SECURITIES.

 

Not applicable.

 

Item 4.     MINE SAFETY DISCLOSURES.

 

Not applicable.

 

Item 5.     OTHER INFORMATION.

 

None.

 

Item 6.     EXHIBITS.

 

Exhibit 10.1 Employment Agreement, dated as of July 16, 2020, among Cathay General Bancorp, Cathay Bank and Chang M. Liu. **+
   
Exhibit 10.2 Change in Control Employment Agreement, dated as of July 16, 2020, among Cathay General Bancorp, Cathay Bank and Chang M. Liu. **+
   

Exhibit 31.1

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

   

Exhibit 31.2

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

   

Exhibit 32.1

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

   

Exhibit 32.2

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

   
Exhibit 99.1 Press Release of Cathay General Bancorp dated July 16, 2020, announcing CEO succession.
   

Exhibit 101.INS

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document*

   

Exhibit 101.SCH

Inline XBRL Taxonomy Extension Schema Document*

   

Exhibit 101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document*

   

Exhibit 101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document*

   

Exhibit 101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document*

   

Exhibit 101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document*

   

Exhibit 104

Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL document*

 

____________________

+

Filed herewith.

 

++

Furnished herewith.

 

*

Filed electronically herewith.

 

**

Indicates a management contract or compensation plan.

 

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SIGNATURES

 

 

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

 

 

 

Cathay General Bancorp

(Registrant)

   
   

Date: November 6, 2020

/s/ Chang M. Liu 

 
 

Chang M. Liu

President and Chief Executive Officer

   
   

Date: November 6, 2020

/s/ Heng W. Chen 

 
 

Heng W. Chen

Executive Vice President and

Chief Financial Officer

 

78

 Exhibit 10.1

 

 

EMPLOYMENT AGREEMENT

 

This EMPLOYMENT AGREEMENT (this “Employment Agreement”), dated as of July 16, 2020, is entered into by and between CATHAY GENERAL BANCORP, a Delaware corporation (the “Company”), CATHAY BANK, a California corporation and a wholly-owned subsidiary of the Company (the “Bank”), on the one hand, and CHANG M. LIU (“Executive”), on the other hand. The Executive, the Company, and the Bank referred to collectively herein as the “Parties” or each individually as a “Party.”

 

WHEREAS, the Executive has been employed by the Bank as its President and Chief Operating Officer;

 

WHEREAS, the Company and the Bank desire to memorialize the employment relationship with the Executive in his new position as Chief Executive Officer (“CEO”) and President of the Company and as CEO of the Bank, effective as of the later of: (i) the date this Employment Agreement is signed by all of the Parties or (ii) October 1, 2020 (the “Effective Date”), pursuant to the terms and conditions set forth in this Employment Agreement and pursuant to the Company’s and the Bank’s otherwise applicable employment policies and practices;

 

NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein and for good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto, each intending to be legally bound hereby, agree as follows:

 

1.     Employment and Duties.

 

(a)     General. The Executive shall serve as the CEO and President of the Company and as the CEO and President of the Bank during the course of the Employment Period (as defined herein). During the Employment Period, the Executive shall report to the Board of Directors of the Company (the “Company Board”) and the Board of Directors of the Bank (the “Bank Board”) (the “Company Board” and the “Bank Board” referred to collectively herein as the “Boards”), as applicable between the Company and the Bank, and the Executive Chairman of the Company and Executive Chairman of the Bank. The Executive shall perform such duties and responsibilities as are customarily attendant to and commensurate with such positions with respect to the businesses of the Company and the Bank and such other duties and responsibilities as may from time to time be assigned to the Executive by the Company Board and/or the Company’s Executive Chairman, and/or by the Bank Board and/or the Bank’s Executive Chairman. During the Employment Period, the Executive shall also continue to serve, to the extent requested by any or all of the Boards, as a member of the Boards without additional compensation for such service.

 

1
 

 

(b)     Exclusive Services. For so long as the Executive is employed by the Company and/or the Bank, the Executive shall faithfully and efficiently devote his full time, attention, energy, experience, and talents to his duties hereunder and to serving the business and affairs of the Company and the Bank and their respective subsidiaries; shall in all respects conform to and comply with the lawful and good faith directions and instructions given by the any or all of the Boards and/or the Executive Chairman of the Company or Bank; and shall use his best efforts to promote and serve the interests of the Company and the Bank and their respective subsidiaries and affiliates. Further, unless the Boards and Executive Chairman of the Company and of the Bank each consent in writing, the Executive shall not, directly or indirectly, render services to any other person or organization or otherwise engage in activities that will or may interfere with the Executive’s faithful performance of his duties hereunder. During the Employment Period, it shall not be a violation of this Employment Agreement for the Executive to (i) serve on corporate, civic, or charitable boards or committees, for organizations or enterprises that do not compete with the Company or its affiliates, provided the Executive receives prior written permission from the Boards; (ii) deliver lectures, fulfill speaking engagements or teach at educational institutions; or (iii) manage his and his family's personal investments, so long as such activities do not materially interfere with the performance of the Executive's responsibilities as an employee and fiduciary of the Company and the Bank in accordance with this Employment Agreement, as determined in the sole judgment of the Boards. The Executive shall perform all such services in accordance with the policies, procedures and rules established by the Company, the Bank, and the Boards. In addition, the Executive shall comply with all laws, rules and regulations that are applicable to the Company and/or the Bank or their respective subsidiaries or affiliates and their respective employees, directors and officers. Notwithstanding the foregoing, the Executive shall immediately resign from any extracurricular activities that impair or otherwise conflict with Executive’s performance under this Employment Agreement unless permission is granted in writing by the Boards, to be determined at sole discretion of the Boards.

 

2.     Term of Employment.

 

(a)     Term. The Executive’s employment with the Company and Bank under this Employment Agreement shall begin on October 1, 2020, and shall continue for a period of three (3) calendar years (i.e., until and including September 30, 2023) (the “Initial Term”) (unless this Employment Agreement and the Executive’s employment hereunder is otherwise terminated as set forth in this Employment Agreement). Thereafter, this Employment Agreement shall automatically renew for subsequent one-year periods (each such period, an “Additional Term”) unless either the Bank and Company or the Executive provides written notice to the other side at least ninety (90) calendar days prior to the end of the Initial Term or Additional Term, as applicable (the “Employment Period”), or unless this Employment Agreement (and the Executive’s employment hereunder) is otherwise terminated as set forth in this Employment Agreement.

 

(b)     Change of Control. Notwithstanding the foregoing, the employment of the Executive hereunder shall cease and this Employment Agreement shall terminate, if and when during the Employment Period, a Change of Control occurs and the “effective date” shall have commenced for that Change of Control (as such terms are defined in the most recent version of any Change of Control Employment Agreement entered into between the Parties, including in any successor, modified, amended, or revised versions of such agreement, hereinafter referred to as the “Change of Control Agreement”), following which the terms of the Executive’s employment shall be governed exclusively by the Change of Control Agreement. The Parties expressly acknowledge that this Section 2(b) and any provisions of this Employment Agreement referring to the Change of Control Agreement are subject to change to reference any Change of Control Agreement that is entered into between the Parties, whether prior to or after the Effective Date of this Employment Agreement. This Employment Agreement expressly does not supersede the terms of any Change of Control Agreement.

 

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3.     Principal Location. The Executive’s principal place of employment shall be the Company’s administrative offices located in El Monte, California, or such other location(s) as the Company Board may from time to time designate. The Executive acknowledges that he may be required to travel on Company or Bank business in the course of performing his duties during the Employment Period.

 

4.     Compensation and Benefits. Subject to the provisions of this Employment Agreement, the Company shall pay and provide the following compensation and other benefits to the Executive during the Employment Period as compensation for services rendered, and such other agreements and covenants by the Executive, pursuant to this Employment Agreement:

 

(a)     Base Salary. The Company shall pay to the Executive an annual base salary (the “Base Salary”) at the gross rate of $700,000.00 (Seven Hundred Thousand Dollars and No Cents), payable in substantially equal installments at such intervals as may be determined by the Company in accordance with the Company’s then-current ordinary payroll practices for salaried employees. The Base Salary shall be subject to review from time to time by the Company Board as may be deemed appropriate by the Company Board. Any increases to the Executive’s Base Salary communicated to the Executive in writing by the Boards shall be incorporated into this Employment Agreement and become the Executive’s Base Salary for all purposes hereunder.

 

(b)     Bonus. For each full calendar year of the Employment Period, the Executive may be eligible to receive an annual bonus (the “Annual Bonus”). The decision to provide any Annual Bonus and the amount and terms of any Annual Bonus shall be in the sole and absolute discretion of the Bancorp’s Compensation Committee as delegated by the Company’s Board (the “Compensation Committee”). Unless provided otherwise by the Compensation Committee, to be eligible for an Annual Bonus, the Executive must be employed by the Company and Bank on the date that the Boards determine that the Executive shall receive the Annual Bonus.

 

(c)     Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family or other covered individuals, as the case may be, shall be eligible to participate in all welfare benefit plans, practices, policies and programs provided by the Company and the Bank (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other executive officers of the Company and the Bank and consistent with applicable law. The Company and the Bank reserve the right to amend or terminate any welfare benefit plans at any time in their sole discretion, subject to the terms of the plan and applicable law.

 

(d)      Expense Reimbursement. The Executive shall be entitled to monthly reimbursement of reasonable and necessary business expenses incurred by the Executive in the course of performance of his duties, in accordance with the plans, practices, programs, and policies of the Company and the Bank for their executive officers or as otherwise instituted by the Boards. The Executive shall submit to the Boards any requests for reimbursement, in writing, with sufficient documentation supporting such request, within thirty (30) days of having incurred such expense.

 

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(e)     Vacation. During the Employment Period, the Executive shall be entitled to accrue up to four (4) weeks of paid vacation per calendar year, in accordance with the Company’s standard vacation policy and payroll practices for employees. All such time off shall be subject to approval by the Boards. Executive may accumulate unused vacation up to 1.5 times his annual vacation entitlement. Once Executive’s unused vacation balance reaches this maximum, he will stop earning vacation. When Executive has taken vacation time and his unused vacation balance drops below the maximum, he will begin earning vacation again in accordance with the accrual schedule.

 

(f)     Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits and perquisites consistent with the practices of the Company and governing benefit plan requirements (including plan eligibility provisions), and to the extent the Company provides similar benefits or perquisites (or both) to similarly-situated executives of the Company, to be used in accordance with the plans, practices, programs, and policies of the Company.

 

(g)    Clawback Provisions. Notwithstanding any other provisions in this Employment Agreement to the contrary, any incentive-based or other compensation paid to the Executive under this Employment Agreement or any other agreement or arrangement with the Company or Bank which is subject to recovery under any law, government regulation, or stock exchange listing requirement will be subject to such deductions and clawbacks as may be required to be made pursuant to such law, government regulation, or stock exchange listing requirement, or any clawback policy adopted by the Company or Bank pursuant to, or in addition to, any such law, government regulation, or stock exchange listing requirement.

 

(h)     Severance. Subject to the terms of Section 6 of this Employment Agreement and, as applicable, the Executive signing and not revoking a general release agreement in a form substantially similar to Exhibit A (the “Release Agreement”), Executive may be eligible for a one-time payment equivalent to eighteen (18) months of Executive’s Base Salary at the time of separation, as well as the equivalent of eighteen (18) months of Company-paid COBRA benefits (“Severance Benefits”), each of which shall be paid in accordance with the terms of that Release Agreement, as applicable.

 

5.     Covenants of Executive. In return for the consideration in this Employment Agreement, the Executive acknowledges his agreement to comply with the terms of this Employment Agreement, including without limitation the following obligations and any similar obligations set forth in any other agreement between the parties hereto:

 

(a)     Non-Solicitation. During the Employment Period and for a period of one (1) year following termination of such employment under any circumstances, the Executive shall not willfully, directly or indirectly, (i) recruit, solicit for employment or otherwise contract for the services of, or establish a business relationship with (or assist any other person in engaging in any such activities), any person who is, or within twelve (12) months before any date of determination was (and, following the termination of the Executive's employment with the Company, within twelve (12) months before or after such termination, was) an officer of the Company or Bank or any of their subsidiaries or affiliates; (ii) induce or attempt to induce (or assist any other person in engaging in any such activities) any officer of the Company or Bank or any of their subsidiaries or affiliates to terminate such person's employment or other relationship with the Company or Bank or any of their subsidiaries or affiliates, or in any way interfere with the relationship between the Company or Bank any of their subsidiaries or affiliates and any such officer; or (iii) induce, solicit, or attempt to induce or solicit, any Bank customer to stop or reduce its business with the Bank. These obligations are in addition to any ongoing obligations owed by the Executive to the Company and/or Bank pursuant to any Confidential Information Agreement. This Employment Agreement is intended to supplement and not supersede any Agreement Regarding Confidentiality, Non-Solicitation, and Protection of Proprietary Information entered into between Executive and the Bank and/or Company. In the event of any conflict of terms between that document and this Employment Agreement, the terms that afford the greatest enforceable right to the Bank and Company in protecting confidential information shall survive.

 

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(b)     Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company and the Bank all proprietary or confidential information, knowledge or data relating to the Company and Bank and their subsidiaries and affiliates, and their respective businesses and operations, which information, knowledge or data shall have been obtained by the Executive during the Executive's employment by the Company or the Bank and which information, knowledge or data shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Employment Agreement) (the "Confidential Information"). The Executive shall not, without the prior written consent of the Boards or as may otherwise be required by law or legal process, communicate or divulge any such Confidential Information to anyone other than the Company or the Bank and those persons designated by the Company or the Bank. These obligations are in addition to any ongoing obligations owed by the Executive to the Company and/or Bank pursuant to any Confidential Information Agreement. This Employment Agreement is intended to supplement and not supersede any Agreement Regarding Confidentiality, Non-Solicitation, and Protection of Proprietary Information entered into between Executive and the Bank and/or Company. In the event of any conflict of terms between that document and this Employment Agreement, the terms that afford the greatest enforceable right to the Bank and Company in protecting confidential information shall survive.

 

(c)     Non-Disparagement. The Executive shall refrain, both during the Employment Period and thereafter, from making or publishing any communications about the Company or Bank or any subsidiary or affiliate, or any of their known respective officers, employees, stockholders, investors, directors, agents or representatives, that are malicious, obscene, threatening, harassing, intimidating or discriminatory and which are designed to, or would reasonably be expected, materially harm or damage any of the foregoing. The foregoing restriction shall include, without limitation, statements made, whether directly or indirectly, to or on social media, internet websites, blogs and electronic bulletin boards, as well as statements to the media, including writers, researchers, reporters, magazines, newspapers, book publishers, television stations, radio stations, the motion picture industry, public interest groups, and the publishing industry generally. In the event such a communication is made, it will be considered a material breach of the terms of this Employment Agreement.

 

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(d)     Company Property. All Confidential Information, files, records, correspondence, memoranda, notes or other documents (including, without limitation, those in computer-readable form) or property relating or belonging to the Company or Bank or their subsidiaries and affiliates, whether prepared by the Executive or otherwise coming into his possession or control in the course of the performance of his services for the Company or Bank and/or their subsidiaries and affiliates, shall be the exclusive property of the Company/Bank, as applicable, and shall be delivered to the Executive Chairman of the Company/Bank, as applicable, and not be retained by the Executive (including, without limitation, any copies thereof), promptly upon request by the Company or Bank and, in any event, promptly upon termination of the Employment Period. The Executive acknowledges and agrees that he has no expectation of privacy with respect to the Company's or Bank’s or their subsidiaries' or affiliates' telecommunications, networking or information processing systems (including, without limitation, stored computer files, email messages and voice messages), and that the Executive's activity and any files or messages on or using any of those systems may be accessed and monitored at any time without notice. Nothing contained herein is intended to constitute a waiver of Executive's privacy rights with respect to any personal e-mail, home network or home computer systems, except to the extent of any communications pertaining to the business of the Company or the Bank. Additionally, the Executive shall adhere to all Company policies, practices, and procedures as relate to Confidential Information or other trade secrets, telecommunications, computing devices, mobile devices, or privacy, as may be instituted from time to time by the Company or the Bank.

 

(e)     No Infringement on Rights. Nothing in this Employment Agreement, including this Section 5, is intended to limit the Executive's right to give non-malicious and truthful testimony should he be subpoenaed to give such testimony, and the foregoing restrictions shall not apply with respect to the Executive's communication with federal, state or local governmental agencies as may be legally required or otherwise protected by law. Moreover, nothing in this Employment Agreement is intended to impede on the rights afforded the Executive under the National Labor Relations Act, California Civil Code section 1670.11, California Code of Civil Procedure section 1001, or any provisions of and rules promulgated under Section 21F of the Securities Exchange Act of 1934 or Section 806 of the Sarbanes Oxley Act of 2002, or of any other whistleblower protection provisions of state or federal law or regulation, or other applicable law. Moreover, nothing in this Employment Agreement shall prohibit the Executive from reporting possible violations of law to, filing charges with, or making disclosures protected under the whistleblower provisions of U.S. federal law or regulation, or participating in investigations of possible violations U.S. federal law or regulations by the U.S. Securities and Exchange Commission, National Labor Relations Board, Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, the U.S. Department of Justice, the U.S. Department of Labor, the U.S. Congress, any U.S. agency Inspector General, or any self-regulatory agencies or federal, state, or local government agencies (collectively, the “Government Agencies”). The Executive does not need prior authorization from the Company or the Bank to make any such reports or disclosures or otherwise communicate with the Government Agencies, and is not required to notify the Bank or the Company that he has engaged in any such communications or made any such reports or disclosures.

 

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(f)     Enforcement. The Executive acknowledges that a breach of his covenants and agreements contained in this Section 5 would cause irreparable damage to the Company and Bank and their subsidiaries and affiliates, the exact amount of which would be difficult to ascertain, and that the remedies at law for any such breach or threatened breach would be inadequate. Accordingly, the Executive agrees that if he breaches or threatens to breach any of the covenants or agreements contained in this Section 5, then in addition to any other remedy which may be available at law or in equity, the Company and Bank and their subsidiaries and affiliates shall be entitled to institute and prosecute proceedings in any court of competent jurisdiction for specific performance and injunctive and other equitable relief to prevent the breach or any threatened breach thereof without bond or other security or a showing of irreparable harm or lack of an adequate remedy at law. Whenever the Executive is proven to have breached any of the covenants or agreements contained in this Agreement, or upon the initiation of an arbitration or judicial proceeding between the Parties, the Company or the Bank (as applicable) may cease or withhold payment to the Executive of any severance payments described in Section 4(h), for which he otherwise qualifies under such Section 6.

 

6.     Termination of Employment.

 

(a)     Termination of Employment by the Company or Bank for Cause or by the Executive Without Good Reason. If the Executive’s employment is terminated by the Company for Cause (as defined herein), or the Executive voluntarily terminates his employment without Good Reason (as defined herein), then the Executive shall receive only the following from the Company: (1) any unpaid Base Salary accrued through the date of termination, payable on the date of termination or, if Executive gives less than 72-hours’ notice of his termination of his employment, within 72-hours of such notice; (2) a lump sum payment for any accrued but unused vacation pay, payable on the date of termination or, if Executive gives less than 72-hours’ notice of his termination of his employment, within 72-hours of such notice; (3) rights to elect continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”); (4) a lump sum payment for any previously unreimbursed business expenses incurred by the Executive on behalf of the Company or Bank during the Employment Period, payable on the date of termination for any expenses for which a documented request has been submitted or, if Executive gives less than 72-hours’ notice of his termination of his employment, within 72-hours of such notice, and payable on the Company’s next regular pay period for any documented reimbursement requests that the Executive submits within thirty (30) days of the date of termination; (5) any earned bonus for which the Executive has been deemed eligible and for which all prerequisites have been met, including without limitation the Annual Bonus, payable in accordance with the terms of those bonus programs but, if Executive gives less than 72-hours’ notice of his termination of his employment and the bonus program(s) require(s) payment at the time of separation, then such payment shall instead be due within 72-hours of Executive’s notice (collectively, provisions of this Section 6(a)(1) through (5) are the “Accrued Rights”).

 

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(i)     For purposes of this Employment Agreement, the term “Cause” shall mean a termination by the Company and Bank of the Executive’s employment because of: (A) the Executive’s conviction of, or plea of nolo contendere to (1) any felony or (2) another crime involving dishonesty or moral turpitude or which could reflect negatively upon the Company or Bank or their subsidiaries or affiliates or otherwise impair or impede their operations or goodwill; (B) the Executive’s engaging in any gross misconduct, willful misconduct, or gross negligence in the performance of his duties, or intentional act of dishonesty, violence or threat of violence; (C) the Executive’s willful and/or repeated refusal or failure to fulfill his duties assigned to him or otherwise follow the lawful directions of the Executive Chairman of the Company or Bank, or the Boards; (D) the Executive commits any act of moral turpitude or commits an act of public disrepute or becomes the subject of a scandal such that the Company or Bank reasonably believes that their or their subsidiaries’ or affiliates’ operations or public image or goodwill has been or may be negatively affected; (E) the Executive commits or, following an investigation conducted by an independent third-party investigator selected by the Company and/or Bank and/or Boards into allegations of misconduct by the Executive, is determined in good faith by the Boards to have committed an act that constitutes an unlawful employment practice, including without limitation harassment or discrimination or retaliation prohibited under applicable law, rule or governmental regulation; (F) the Executive’s death during the Employment Period; or (G) the Company Board or the Bank Board determines in good faith that Executive has been absent from his duties with the Company or Bank (as applicable) on a full-time basis for ninety (90) consecutive days as a result of incapacity due to mental or physical illness that is determined to be total and permanent by a physician selected in good faith by the Company or Bank or their insurer(s) (a “Disability”). Notwithstanding anything in this Section 6(a)(i), no event or condition described in Sections 6(a)(i)(B) or (C) shall constitute Cause unless (x) within ninety (90) days from the date the Boards first acquire actual knowledge of the existence of the Cause condition, the Boards or the Executive Chairman of the Company provide the Executive written notice of their intention to terminate the Executive’s employment for Cause and the grounds for such termination; (y) such grounds for termination (if susceptible to correction) are not corrected by the Executive within thirty (30) days of the Executive’s receipt of such notice (or, in the event that such grounds cannot be corrected within such thirty-day (30) period but can be corrected after such 30-day period, the Executive has not taken all reasonable steps within such thirty-day (30) period to correct such grounds as promptly as practicable thereafter); and (z) the Boards terminate the Executive’s employment with the Company immediately following expiration of such thirty-day (30) period, or, in situations where the grounds set forth in the notice cannot be corrected within such thirty-day (30) period, immediately following the extended correction period provided to the Executive by the Boards. For purposes of this Section 6(a)(i), any attempt by the Executive to correct a stated Cause condition shall not be deemed an admission by the Executive that the Boards’ assertion of Cause is valid. Executive may be suspended, with pay, by the Boards or the Executive Chairman of the Company or Bank during any period that Executive is attempting to correct a stated Cause under Sections 6(a)(i)(B) or (C). Notwithstanding anything in this Section 6(a)(i), no event or condition described in Section 6(a)(i)(G) shall constitute Cause unless the Company or Board (as applicable) give to the Executive written notice of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company and Bank shall terminate effective on the thirtieth (30th) day thereafter (the “Disability Effective Date”), provided that, within thirty (30) days after such receipt, the Executive shall have not returned to full-time performance of his duties.

 

(ii)     For purposes of this Employment Agreement, the term “Good Reason” shall mean a voluntary termination by the Executive of his employment because of: (A) a material diminution in the Executive’s Base Salary during the active Employment Period without the agreement of the Executive; (B) a material and substantial diminution in the nature or scope of the Executive’s authority, duties, title, or responsibilities from those applicable to the Executive as of the Effective Date of this Employment Agreement; (C) the Company’s requiring of the Executive to be based at any office or location, other than the Executive’s home, more than one hundred (100) miles from the current location of the Company’s administrative offices, currently located in El Monte, California; (D) a material breach by the Company or Bank of any term or provision of this Employment Agreement; or (E) a failure by the Company or Bank to maintain a directors’ and officers’ liability insurance policy (or policies), or an error and omissions liability insurance policy (or policies), covering the Executive, to the extent such policies are maintained by the Company or Bank as determined at their sole discretion. No event or condition described in this Section 6(a)(ii) shall constitute Good Reason unless, (x) within one hundred eighty (180) days from the Executive first acquiring actual knowledge of the existence of the Good Reason condition described in this Section 6(a)(ii), the Executive provides the Boards written notice of the Executive’s intention to terminate his employment for Good Reason and the grounds for such termination; (y) such grounds for termination (if susceptible to correction) are not corrected by the Boards or the Executive Chairman of the Company or Bank within thirty (30) days following the Boards’ receipt of such notice; and (z) the Executive terminates his employment with the Company and Bank immediately following expiration of such thirty-day (30) period.

 

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(b)     Termination of Employment by the Company or Bank without Cause or by the Executive for Good Reason. If the Executive’s employment is terminated (A) by the Company and Bank without Cause or (B) by the Executive for Good Reason, but only as to Clause (B) if Executive is then in material compliance with the terms of this Employment Agreement and the Company and Bank have not given notice of a termination for Cause, then as to a termination under Clauses (A) or (B) of this Section 6(b) the Executive shall receive the Accrued Rights and, upon the Executive’s return of a signed and non-revoked Release Agreement and compliance with the terms of that Release Agreement, severance pay in accordance with Section 4(h) of this Employment Agreement and the terms of the Release Agreement.

 

(c)     No Continued Benefits Following Termination. Unless otherwise specifically provided for within this Employment Agreement or contemplated by another agreement between the Executive and the Company and Bank, or as otherwise required by law, all compensation, equity plans, and benefits payable to the Executive under this Employment Agreement shall terminate on the date of termination of the Executive’s employment with the Company and Bank pursuant to the terms of this Employment Agreement.

 

(d)     Resignation from Directorships, Officerships and Fiduciary Titles. The termination of the Executive’s employment for any reason shall constitute the Executive’s immediate resignation from (i) any officer or employee position the Executive has with the Company or Bank and each of their subsidiaries and affiliates, unless mutually agreed upon by the Executive and the Boards; (ii) any position on the Boards; and (iii) all fiduciary positions (including as a trustee) the Executive holds with respect to any employee benefit plans or trusts established by the Company or Bank. The Executive agrees that this Employment Agreement shall serve as written notice of resignation in this circumstance.

 

(e)     Nonexclusivity. Nothing in this Employment Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or Bank or any of their subsidiaries or affiliates and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any other contract or agreement with the Company or Bank or any of their subsidiaries or affiliates. Amounts that are vested benefits or that the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any other contract or agreement with the Company or Bank or any of their subsidiaries or affiliates at the date of Executive’s termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement and in accordance with applicable law. Without limiting the generality of the foregoing, the Executive's resignation under this Employment Agreement with or without Good Reason, shall in no way affect the Executive's ability to terminate employment by reason of the Executive's "retirement" under, or to be eligible to receive benefits under, any compensation and benefits plans, programs or arrangements of the Company or Bank any of their subsidiaries or affiliates, including, without limitation, any retirement or pension plans or arrangements or substitute plans adopted by the Company or Bank any of their subsidiaries or affiliates, and any termination which otherwise qualifies as Good Reason shall be treated as such even if it is also a "retirement" for purposes of any such plan, program or arrangement.

 

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(f)     Waiver and Release. Notwithstanding any other provisions of this Employment Agreement to the contrary, including Section 6(b), Executive shall not be entitled to, and the Company shall not make or provide, the severance pay described in Section 4(h) unless the Executive timely executes and delivers to the Company and Bank, without revocation, the Release Agreement (which shall be provided to the Executive by the Company and Bank not later than five (5) business days from the date on which the Executive’s employment is terminated and be substantially in the form attached hereto as Exhibit A, the Release Agreement, and such Release Agreement remains in full force and effect, has not been revoked and is no longer subject to revocation, within ten (10) calendar days from the date the Executive timely executed and delivered to the Company and Bank the signed Release Agreement. If the requirements of this Section 6(f) are not satisfied by the Executive (or the Executive’s estate or legally-appointed personal representative), then no severance pay shall be due to the Executive (or the Executive’s estate) pursuant to this Employment Agreement or the Release Agreement.

 

7.     Compliance with Section 409A of the Internal Revenue Code. The provisions of this Section 7 shall apply solely to the extent that a payment under this Employment Agreement or the Release Agreement is deemed subject to Section 409A of the Internal Revenue Code of 1986, as amended (the "Code").

 

(a)     General Suspension of Payments. If the Executive is a "specified employee," as such term is defined within the meaning of Section 409A of the Code, any payments or benefits payable or provided as a result of the Executive's termination of employment that would otherwise be paid or provided prior to the first day of the seventh month following such termination (other than due to death) shall instead be paid or provided on the earlier of (i) the six months and one day following the Executive's termination, (ii) the date of the Executive's death, or (iii) any date that otherwise complies with Section 409A of the Code. In the event that the Executive is entitled to receive payments during the suspension period provided under this Section 7(a), the Executive shall receive the accumulated benefits that would have been paid or provided under this Employment Agreement within the suspension period on the earliest day that would be permitted under Section 409A of the Code. In the event of any delay in payment under this provision, the deferred amount shall bear interest at the prime rate (as stated in the Wall Street Journal) in effect on his termination date until paid. Such timing shall not be deemed a breach or violation of this Employment Agreement.

 

(b)     Release Payments. In the event that the Executive is required to execute a release to receive any payments from the Company and Bank that constitute nonqualified deferred compensation under Section 409A of the Code, payment of such amounts shall not be made or commence until the sixtieth (60th) day following such termination of employment. Any payments that are suspended during the sixty (60) day period shall be paid on the date the first regular payroll is made immediately following the end of such period. Such timing shall not be deemed a breach or violation of the Release Agreement nor this Employment Agreement.

 

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(c)     Reimbursement Payments. The following rules shall apply to payments of any amounts under this Employment Agreement that are treated as "reimbursement payments" under Section 409A of the Code: (i) the amount of expenses eligible for reimbursement in one calendar year shall not limit the available reimbursements for any other calendar year (other than an arrangement providing for the reimbursement of medical expenses referred to in Section 105(b) of the Code); (ii) the Executive shall file a claim for all reimbursement payments not later than thirty (30) days following the end of the calendar year during which the expenses were incurred, (iii) the Company shall make such reimbursement payments within thirty (30) days following the date the Executive delivers written notice of the expenses to the Company and Bank; and (iv) the Executive's right to such reimbursement payments shall not be subject to liquidation or exchange for any other payment or benefit. Such timing shall not be deemed a breach or violation of this Employment Agreement.

 

(d)     Separation from Service. For purposes of this Employment Agreement, any reference to "termination" of the Executive's employment shall be interpreted consistent with the meaning of the term "separation from service" in Section 409A(a)(2)(A)(i) of the Code and no portion of any severance payments shall be paid to the Executive prior to the date he incurs a separation from service under Section 409A(a)(2)(A)(i) of the Code.

 

(e)     Installment Payments. For purposes of Section 409A of the Code and the regulations and other guidance thereunder and any state law of similar effect (including without limitation Treasury Regulations Section 1.409A-2(b)(2)(iii)), all payments made under this Employment Agreement (whether severance payments or otherwise) will be treated as a right to receive a series of separate payments and, accordingly, each installment payment under this Employment Agreement will at all times be considered a separate and distinct payment.

 

(f)     General. Notwithstanding anything to the contrary in this Employment Agreement, it is intended that the severance benefits and other payments payable under this Employment Agreement satisfy, to the greatest extent possible, the exemptions from the application of Section 409A of the Code provided under Treasury Regulations Sections 1.409A-1(b)(4), 1.409A-1(b)(5), and 1.409A-(b)(9) and this Employment Agreement will be construed to the greatest extent possible as consistent with those provisions. The commencement of payment or provision of any payment or benefit under this Employment Agreement shall be deferred to the minimum extent necessary to prevent the imposition of any excise taxes or penalties on the Company or Bank or the Executive.

 

8.     Notices. All notices, requests, demands, claims, consents and other communications which are required or otherwise permitted hereunder shall in every case be in writing and shall be (i) delivered personally, (ii) sent by registered or certified mail, in all such cases with first class postage prepaid, return receipt requested, or (iii) delivered by a recognized overnight courier service, to the parties at the addresses as set forth below:

 

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If to the Company or the Bank:

Cathay General Bancorp
9650 Flair Drive

El Monte, California 91731
Attention: General Counsel

   
If to the Executive: At the Executive's residence address as maintained by the Company and the Bank in the regular course of their business for payroll purposes, with a copy to:
   
 

Hirschfeld Kraemer LLP

456 Montgomery Street, Suite 2200

San Francisco, CA 94104

Attention: Steve Hirschfeld

 

or to such other address as shall be furnished in writing by any party to the other parties. Any such notices or other communications shall be deemed to have been given: (A) the date such notice is personally delivered, (B) three days after the date of mailing if sent by certified or registered mail, or (C) one business day after date of delivery to the overnight courier if sent by overnight courier.

 

9.     Miscellaneous.

 

(a)     Governing Law. This Employment Agreement shall be governed by, and construed in accordance with, the laws of the State of California, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of California or any other jurisdiction).

 

(b)     Severability. Whenever possible, each provision of this Employment Agreement shall be construed and interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Employment Agreement is held to be prohibited by, or invalid, illegal or unenforceable in any respect under, any applicable law or rule in any jurisdiction, such prohibition, invalidity, illegality or unenforceability shall not affect any other provision of this Employment Agreement or any other jurisdiction, and the parties undertake to implement all efforts which are necessary, desirable and sufficient to amend, supplement or substitute all and any such prohibited, invalid, illegal or unenforceable provisions with enforceable and valid provisions in such jurisdiction which would produce as nearly as may be possible the result previously intended by the parties without renegotiation of any material terms and conditions stipulated herein.

 

(c)     Cooperation. During the Employment Period and thereafter, the Executive shall cooperate with the Company and the Bank and be reasonably available to the Company and the Bank with respect to continuing and/or future matters related to period of the Executive's employment with the Company and/or any of its subsidiaries or affiliates or any matter of which he otherwise has knowledge, whether such matters are business-related, legal, regulatory or otherwise (including, without limitation, the Executive appearing at the Company's or the Bank's request to give testimony without requiring service of a subpoena or other legal process, volunteering to the Company and the Bank all pertinent information and turning over to the Company and the Bank all relevant documents which are or may come into the Executive's possession). The Company and the Bank shall reimburse the Executive for all reasonable out-of-pocket expenses incurred by the Executive in rendering such services after the Employment Period that are approved by the Company or the Bank.

 

12
 

 

(d)     Successors and Assigns. This Employment Agreement shall be binding upon, inure to the benefit of and be enforceable by, the Company and the Bank and their successors and assigns and the Executive and the Executive's heirs, executors, administrators and personal representatives; provided that the services provided by the Executive under this Employment Agreement are of a personal nature, and the rights and obligations of the Executive under this Employment Agreement shall not be assignable or delegable, except for any payments upon death of the Executive.

 

(e)     Executive’s Representation by Counsel. THE EXECUTIVE HEREBY ACKNOWLEDGES AND REPRESENTS THAT THE EXECUTIVE HAS CONSULTED WITH INDEPENDENT LEGAL COUNSEL REGARDING THE EXECUTIVE'S RIGHTS AND OBLIGATIONS UNDER THIS EMPLOYMENT AGREEMENT, TO THE EXTENT DETERMINED NECESSARY OR APPROPRIATE BY THE EXECUTIVE, AND THAT THE EXECUTIVE FULLY UNDERSTANDS THE TERMS AND CONDITIONS CONTAINED HEREIN.

 

(f)     Withholding. All amounts payable hereunder shall be subject to withholding for all taxes and deductions and other withholdings required by any federal, state, local or other applicable law.

 

(g)     Entire Agreement. This Employment Agreement, together with any Change of Control Agreement, Agreement Regarding Confidentiality, Non-Solicitation, and Protection of Proprietary Information, and Comprehensive Agreement Employment At-Will and Arbitration entered into between Executive and the Bank and/or Company, constitutes the entire agreement and understanding between the parties hereto with respect to the subject matter detailed herein, and terminates and supersedes any and all prior agreements, understandings and representations, whether written or oral, by or between the parties hereto or their affiliates. Where this Employment Agreement contains terms covering the same subject matter as any of the aforementioned agreements and there are conflicts between them, the terms affording the greatest enforceable rights to the Company and Bank shall survive. Moreover, the Parties expressly acknowledge that this Employment Agreement also does not supersede any successor, modified, amended, or revised versions of any agreements that are signed or referenced herein.

 

(h)     Survival. The covenants set forth in Sections 5 and 9(c) shall survive and shall continue to be binding upon the Executive notwithstanding the termination of his employment or this Employment Agreement for any reason whatsoever.

 

13
 

 

(i)     Amendment and Waiver. Except as provided otherwise herein, the provisions of this Employment Agreement may be amended or waived only with the prior written consent of the Company, the Bank and the Executive, and no course of conduct or course of dealing or failure or delay by any party hereto in enforcing or exercising any of the provisions of this Employment Agreement shall affect the validity, binding effect or enforceability of this Employment Agreement or be deemed to be an implied waiver of any similar or dissimilar requirement, provision or condition of this Employment Agreement at the same or any prior or subsequent time. Pursuit by any party of any available remedy, either in law or equity, or any action of any kind, shall not constitute waiver of any other remedy or action. Such remedies and actions are cumulative and not exclusive.

 

(j)     Execution and Counterparts. This Employment Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which taken together shall constitute one agreement. A facsimile or electronic signature to this Employment Agreement shall be deemed an original and binding upon the party(ies) against whom enforcement is sought.

 

(k)     Headings and References. Section and subsection headings in this Employment Agreement are included herein for convenience of reference only and shall not constitute a part of this Employment Agreement for any other purpose. References to Sections and subsections herein shall refer to the Sections and subsections in this Employment Agreement unless expressly indicated otherwise.

 

(l)     Construction. The parties hereto have participated jointly in the negotiation and drafting of this Employment Agreement. In the event an ambiguity or question of intent or interpretation arises, this Employment Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party hereto by virtue of the authorship of any of the provisions of this Employment Agreement.

 

[Remainder of Page Intentionally Left Blank]

 

14
 

 

(m)     Jurisdiction and Venue for Non-Arbitrable Claims. Notwithstanding any agreement to arbitrate between Executive and the Company and/or Bank, in connection with enforcement of equitable remedies under Section 5 and such other claims that are not arbitrable as a matter of law, each of the parties hereto hereby irrevocably submits to the exclusive jurisdiction of any federal or state court located in the State of California, County of Los Angeles, and each of the parties agrees that any action to enforce equitable remedies must be commenced only in the a federal or state court located in the State of California, County of Los Angeles. All of the parties hereto hereby irrevocably waive any objection which he or it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in such a court and any claim that any such suit, action or proceeding brought in such a court has been brought in an inconvenient forum. Each of the parties hereto hereby irrevocably consents to the service of process in any such suit, action or proceeding by sending the same by certified mail, return receipt requested, or by recognized overnight courier service, to the address of such party set forth in Section 8.

 

 

IN WITNESS WHEREOF, the parties hereto have entered into this Employment Agreement as of the day and year first written above.

 

 

CATHAY GENERAL BANCORP.

 
       
       
       
 

By:

/s/ Dunson K. Cheng  
 

 

Name:  Dunson K. Cheng

 
 

 

Title:    Executive Chairman

 
       
       
       
 

CATHAY BANK

 
       
       
 

By:

/s/ Dunson K. Cheng  
 

 

Name:  Dunson K. Cheng

 
 

 

Title:    Executive Chairman

 
       
       
       
 

EXECUTIVE

 
       
       
 

/s/ Chang M. Liu

 
 

 

CHANG M. LIU  

 

15
 

 

EXHIBIT A

 

 

SEPARATION AGREEMENT AND GENERAL RELEASE

 

This Separation and Release Agreement (this “Release Agreement”) is made and entered into by and between CATHAY GENERAL BANCORP, a Delaware corporation (the “Company”), CATHAY BANK, a California corporation and a wholly-owned subsidiary of the Company (the “Bank”), on the one hand, and CHANG M. LIU (“Executive”), on the other hand. The Executive, the Company, and the Bank referred to collectively herein as the “Parties” or each individually as a “Party.”

 

RECITALS

 

WHEREAS, the Company, Bank, and Executive are Parties to a certain Employment Agreement dated [DATE], 2020 (the “Employment Agreement”);

 

WHEREAS, pursuant to the Employment Agreement, in consideration of the right to receive severance payments, the Executive must sign, return, and not revoke this Release Agreement;

 

WHEREAS, the Company and Bank have executed and delivered this Release Agreement to the Executive for the Executive’s review and consideration as of [DATE] (the “Delivery Date”); and

 

WHEREAS, the Executive, on the one hand, and the Company and the Bank, on the other hand, each desire to settle all matters related to the Executive’s employment with the Company and Bank.

 

TERMS OF RELEASE AGREEMENT

 

1.     Termination of Employment. The Parties agree that Executive’s employment relationship(s) with the Company and the Bank, including all other offices and positions the Executive has with the Company and Bank and all of their subsidiaries, affiliates, joint ventures, partnerships or any other business enterprises, as well as any office or position as a fiduciary or with any trade group or other industry organization which he holds on behalf of the Company or Bank or their subsidiaries or affiliates, shall be automatically terminated effective at ______________ [TIME] on the ___________ [DAY] day of ___________ [MONTH], ________[YEAR] (the “Termination Date”).      

 

2.     Release. In consideration for the right to receive the Severance Payment (as defined herein) in accordance with the terms of the Employment Agreement and the mutual promises contained in the Employment Agreement and in this Release Agreement, the Executive (on behalf of the Executive, the Executive’s heirs, administrators, representatives, executors, successors and assigns) hereby releases, waives, acquits and forever discharges the Company and Bank and and/or any or all of their current or former officers, employees, shareholders, directors, managers, attorneys, insurers, agents, joint employers, successors, contractors, affiliated or related entities, subdivisions, partners, members, owners, and employee benefits programs and their respective trustees and administrators and fiduciaries, and all other individuals and/or entities acting in concert with any of them (collectively, the “Released Parties”), from any and all demands, rights, disputes, debts, liabilities, obligations, liens, promises, acts, agreements, charges, complaints, claims, controversies, and causes of action of any nature whatsoever, whether statutory, civil, or administrative, in law or in equity, that the Executive now has or may have against any of the Released Parties, arising in whole or in part at any time on or prior to the Effective Date of this Release Agreement, in connection with, arising out of, or in any way related to the Executive’s employment or other relationship(s) with any of the Released Parties.

 

16
 

 

EXHIBIT A

 

(a)     General Release. Executive expressly waives all benefits and protections afforded under Section 1542 of the Civil Code of California, as well as under any other statutes, legal decisions, or common law principles of similar effect to the extent such benefits or protections may contravene the provisions of this Release Agreement. Section 1542 of the Civil Code of California states:

 

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS THAT THE CREDITOR OR RELEASING PARTY DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, AND THAT IF KNOWN BY HIM OR HER WOULD HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR OR RELEASED PARTY.

 

Executive knowingly and voluntarily waives all rights under Section 1542. Accordingly, Executive bears the risk that he may later discover additional or different facts. Nonetheless, it is Executive’s intention to fully, finally, and forever settle and release all of his claims that now exist, may exist, or hereto have existed, against the Released Parties, except as otherwise expressly provided or excepted under applicable law.

 

(b)     Claims Not Waived; Offset. Notwithstanding the general release above, the Parties understand and agree that the following claims, if any, are not released: (a) claims for unemployment compensation; (b) claims for workers’ compensation benefits; (c) claims for continuing health insurance coverage under COBRA; (d) claims pertaining to vested benefits under any retirement plan governed by the Employee Retirement Income Security Act (ERISA); and (e) claims that cannot be released or waived as a matter of law. Additionally, the Parties understand and agree that this Release Agreement does not prohibit Executive from offering truthful testimony in any legal proceeding or from pursuing an administrative charge with any Federal or State agency, including the U.S. Equal Employment Opportunity Commission. Should Executive pursue an administrative charge, however, by accepting the terms of this Release Agreement he is waiving any right to any relief of any kind should an agency choose to pursue an action on his behalf. Moreover, for any claims not released by this Release Agreement, Executive agrees that the Severance Payment shall constitute an offset or reduction of any amount(s) that may allegedly be owed by any of the Released Parties.

 

(c)     Affirmation That All Compensation Paid. By entering into this Release Agreement, Executive affirms that he has been paid all compensation owed for work performed for the Company and Bank and that he has been reimbursed for all business expenses incurred during his employment. To the extent that Executive, however, contends otherwise, the Parties agree that there exists a bona fide and genuine dispute regarding the underlying facts giving rise to a question of whether Executive is owed any wages, overtime, double-time, reimbursements, penalties, liquidated damages, and/or interest. The Parties further agree that if Executive were owed any such amounts, that there is a bona fide and genuine dispute regarding the amounts owed.

 

17
 

 

EXHIBIT A

 

 

(d)     Further Action Necessary. The Parties agree to take all further action, if necessary, that may be required as of the Effective Date or in the future in order to comply with and approve the terms of this Release Agreement. This may include, without limitation, filing materials with a court or tribunal confirming and/or seeking approval of the terms of this Release Agreement, or dismissing proceedings for claims that have been released by this Release Agreement.

 

(e)     Indemnification of Released Parties for Tax Assessments. Executive further agrees that should any taxing authority assess any taxes, penalties, or interest against either Executive and/or the Company or Bank as a result of the payments in this Release Agreement, the Executive will be solely responsible for the taxes, penalties, or interest, if any, which may be owed to any governmental agency as a result of the Severance Payments, and Executive agrees that he will indemnify, defend, and hold the Company and Bank and the Released Parties harmless for any such taxes, penalties, or interest.

 

(f)     Return of Company Property. Executive agrees that, to the extent he has not already done so, he will immediately return to the Company and Bank any and all physical, intellectual, and other property of the Company, Bank, and/or the Released Parties in his possession, custody, or control.

 

(g)     Age Discrimination in Employment Act and Older Workers Benefits Protection Act Acknowledgment. Executive further acknowledges that as of the date set forth in the recitals of this Release Agreement, he was given at least twenty-one (21) days to consider and accept the terms of this Release Agreement and that he was advised to consult with an attorney about this Release Agreement before signing it. To accept the Release Agreement, Executive should date and sign the signature block at the end and return it to the Company and Bank. Once Executive does so, he will still have seven (7) additional calendar days from the date the Release Agreement is signed to revoke his acceptance ("Revocation Period"). If Executive decides to revoke this Release Agreement after signing and returning it, Executive must provide a written statement of revocation or send it by fax, electronic mail, or registered mail to the Company and Bank pursuant to the Notice provisions in the Employment Agreement. If Executive does not revoke during the seven-day Revocation Period, this Release Agreement will take effect on the eighth (8th) day after the date Executive executes the Agreement (the “Effective Date”).

 

3.     Severance Payment. The Company and Bank agree to make a total gross payment equivalent to eighteen (18) months of Executive’s Base Salary at the time of separation (the “Severance Payment”), as well as the equivalent of eighteen (18) months of Company-paid COBRA benefits, to Executive in exchange for Executive’s agreement to the terms, conditions, covenants, promises, and undertakings set forth in this Release Agreement. The Severance Payment shall be remitted within ten (10) business days following the Effective Date of this Agreement.

 

18
 

 

EXHIBIT A

 

 

4.     Acknowledgments and Obligations of the Executive.

 

(a)     No Reliance. The Executive represents and acknowledges that in executing this Release Agreement, the Executive does not rely and has not relied upon any representation or statement made by the Company, or its agents, representatives, or attorneys regarding to the subject matter, basis or effect of this Release Agreement or otherwise, and that the Executive has engaged or had the opportunity to engage an attorney of the Executive’s choosing in the negotiation and execution of this Release Agreement. The Executive acknowledges that he has the right to consult with counsel of his choosing with regard to the review of this Release Agreement.

 

(b)     Age Discrimination in Employment Act and Older Workers Benefits Protection Act Disclosure.  THE EXECUTIVE UNDERSTANDS THAT BY SIGNING AND NOT REVOKING THIS WAIVER AND RELEASE, THE EXECUTIVE IS WAIVING ANY AND ALL RIGHTS OR CLAIMS WHICH THE EXECUTIVE MAY HAVE UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT AND/OR THE OLDER WORKERS BENEFIT PROTECTION ACT FOR AGE DISCRIMINATION ARISING FROM EMPLOYMENT WITH THE COMPANY AND BANK, INCLUDING, WITHOUT LIMITATION, THE RIGHT TO SUE THE COMPANY IN FEDERAL OR STATE COURT FOR AGE DISCRIMINATION. THE EXECUTIVE FURTHER ACKNOWLEDGES THAT THE EXECUTIVE (i) DOES NOT WAIVE ANY CLAIMS OR RIGHTS THAT MAY ARISE AFTER THE DATE THIS RELEASE AGREEMENT IS EXECUTED; (ii) WAIVES CLAIMS OR RIGHTS ONLY IN EXCHANGE FOR CONSIDERATION IN ADDITION TO ANYTHING OF VALUE TO WHICH THE EXECUTIVE IS ALREADY ENTITLED; AND (iii) AGREES THAT THIS RELEASE AGREEMENT IS WRITTEN IN A MANNER CALCULATED TO BE UNDERSTOOD BY THE EXECUTIVE AND THE EXECUTIVE, IN FACT, UNDERSTANDS THE TERMS, CONTENTS, CONDITIONS AND EFFECTS OF THIS WAIVER AND RELEASE AND HAS ENTERED INTO THIS WAIVER AND RELEASE KNOWINGLY AND VOLUNTARILY.

 

(c)     Ongoing Obligations Under Employment Agreement. The Executive acknowledges and agrees that the Employment Agreement sets forth certain obligations of the Executive which remain in effect following the Termination Date, and except as expressly set forth herein, nothing in this Release Agreement shall modify such ongoing obligations, the continued performance of which by the Executive are a condition of the Company’s and Bank’s obligations hereunder.

 

5.     Confidentiality. The Executive agrees to keep this Release Agreement, its terms, and the amount of the severance payment completely confidential; provided, however, that the Executive may reveal such information to the Executive’s attorney, accountants, financial advisor, spouse, or as required by a court of competent jurisdiction, or as otherwise required by law, including without limitation, prohibitions codified in California Civil Code Section 1670.11 and California Code of Civil Procedure Section 1001. Nothing in this Release Agreement prohibits the Executive from reporting possible violations of federal law or regulation to any government agency or entity or making other disclosures that are protected under whistleblower provisions of law. The Executive does not need prior authorization to make such reports or disclosures and is not required to notify the Company that the Executive has made any such report or disclosure.

 

19
 

 

EXHIBIT A

 

 

6.     Defend Trade Secrets Act. The Executive is hereby notified that under the Defend Trade Secrets Act: (a) no individual will be held criminally or civilly liable under federal or state trade secret law for disclosure of a trade secret (as defined in the Economic Espionage Act) that is made in: (i) confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney, and made solely for the purpose of reporting or investigating a suspected violation of law; or (ii) a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal so that it is not made public; and (b) an individual who pursues a lawsuit for retaliation by an employer for reporting a suspected violation of the law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual files any document containing the trade secret under seal, and does not disclose the trade secret, except as permitted by court order.

 

7.     Governing Law. This Release Agreement and any and all interactions between the Parties arising under or resulting from this Release Agreement shall be governed by and construed in accordance with the laws of the State of California, exclusive of its choice of law principles.

 

8.     Withholding. All amounts payable hereunder shall be subject to withholding for all taxes and deductions and other withholdings required by any federal, state, local or other applicable law.

 

9.     Entire Agreement. This Release Agreement constitutes the entire agreement and understanding between the parties hereto with respect to the subject matter detailed herein, and terminates and supersedes any and all prior agreements, understandings and representations, whether written or oral, by or between the parties hereto or their affiliates.

 

10.    Amendment and Waiver. Except as provided otherwise herein, the provisions of this Release Agreement may be amended or waived only with the prior written consent of the Company, the Bank and the Executive, and no course of conduct or course of dealing or failure or delay by any party hereto in enforcing or exercising any of the provisions of this Release Agreement shall affect the validity, binding effect or enforceability of this Release Agreement or be deemed to be an implied waiver of any similar or dissimilar requirement, provision or condition of this Release Agreement at the same or any prior or subsequent time. Pursuit by any party of any available remedy, either in law or equity, or any action of any kind, shall not constitute waiver of any other remedy or action. Such remedies and actions are cumulative and not exclusive.

 

11.    Execution and Counterparts. This Release Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which taken together shall constitute one agreement. A facsimile or electronic signature to this Release Agreement shall be deemed an original and binding upon the party(ies) against whom enforcement is sought.

 

12.    Headings and References. Section and subsection headings in this Release Agreement are included herein for convenience of reference only and shall not constitute a part of this Release Agreement for any other purpose. References to Sections and subsections herein shall refer to the Sections and subsections in this Release Agreement unless expressly indicated otherwise.

 

20
 

 

EXHIBIT A

 

 

13.    Construction. The parties hereto have participated jointly in the negotiation and drafting of this Release Agreement. In the event an ambiguity or question of intent or interpretation arises, this Release Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party hereto by virtue of the authorship of any of the provisions of this Release Agreement.

 

 

 

THE EXECUTIVE’S SIGNATURE BELOW MEANS THAT THE EXECUTIVE HAS READ THIS RELEASE AGREEMENT AND AGREES AND CONSENTS TO ALL THE TERMS AND CONDITIONS CONTAINED HEREIN.

 

 

 

IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of the day and year first written above.

 

 

CATHAY GENERAL BANCORP.

 
       
       
       
 

By:

   
 

 

Name: 

 
 

 

Title:   

 
       
       
       
 

CATHAY BANK

 
       
       
 

By:

   
 

 

Name: 

 
 

 

Title:   

 
       
       
       
 

EXECUTIVE

 
       
       
     
  CHANG M. LIU  

 

 

21

Exhibit 10.2

 

 

CHANGE OF CONTROL
EMPLOYMENT AGREEMENT

 

This Change of Control Employment Agreement is made as of the 16th day of July, 2020 (this “Agreement”), by and between Cathay General Bancorp, a Delaware corporation (the “Company”), Cathay Bank, a California state chartered commercial bank and a wholly owned subsidiary of the Company (the “Bank”), and Chang M. Liu (the “Executive”).

 

WHEREAS, the Board of Directors of the Company (the “Board”) and the Board of Directors of the Bank (the “Bank Board”), have determined that it is in the best interests of the Bank and the Company and its stockholders to assure that the Company and/or the Bank (as applicable) will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein). The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive’s full attention and dedication to the Company in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control that ensure that the compensation and benefits expectations of the Executive will be satisfied and that provide the Executive with compensation and benefits arrangements that are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement.

 

NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:

 

Section 1.     Certain Definitions. (a) “Effective Date” means the first date during the Change of Control Period (as defined herein) on which a Change of Control occurs. Notwithstanding anything in this Agreement to the contrary, if (i) the Executive’s employment with the Company is terminated by the Company, (ii) the Date of Termination is prior to the date on which a Change of Control occurs, and (iii) it is reasonably demonstrated by the Executive that such termination of employment (A) was at the request of a third party that has taken steps reasonably calculated to effect a Change of Control or (B) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the “Effective Date” means the date immediately prior to such Date of Termination.

 

(b)     “Change of Control Period” means the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that, commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof, the “Renewal Date”), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless, at least 60 days prior to the Renewal Date, the Company shall give notice to the Executive that the Change of Control Period shall not be so extended.

 

 
 

 

(c)     “Affiliated Company” means any company controlled by, controlling or under common control with the Company.

   

(d)     “Change of Control” means:

 

(1)     Any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then-outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that, for purposes of this Section 1(d), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Affiliated Company or (iv) any acquisition pursuant to a transaction that complies with Sections 1(d)(3)(A), 1(d)(3)(B) and 1(d)(3)(C);

 

(2)     Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board;

 

(3)     Consummation of a reorganization, merger, statutory share exchange or consolidation or similar transaction involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or securities of another entity by the Company or any of its subsidiaries (each, a “Business Combination”), in each case unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock (or, for a non-corporate entity, equivalent securities) and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors (or, for a non-corporate entity, equivalent governing body), as the case may be, of the entity resulting from such Business Combination (including, without limitation, an entity that, as a result of such transaction, owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such entity resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock (or, for a non-corporate entity, equivalent securities) of the entity resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such entity, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors (or, for a non-corporate entity, equivalent governing body) of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or

  

2
 

 

(4)     Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

 

Section 2.     Employment Period. The Company and/or the Bank (as applicable) hereby agrees to continue the Executive in its employ, subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary of the Effective Date (the “Employment Period”). The Employment Period shall terminate upon the Executive’s termination of employment for any reason.

 

Section 3.     Terms of Employment. (a) Position and Duties. (1) During the Employment Period, (A) the Executive’s position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive’s services shall be performed at the office where the Executive is employed immediately preceding the Effective Date or at any other location less than 35 miles from such office.

 

(2)     During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive’s reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period, it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive’s responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that, to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive’s responsibilities to the Company.

 

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(b)     Compensation. (1) Base Salary. During the Employment Period, the Executive shall receive an annual base salary (the “Annual Base Salary”) at an annual rate at least equal to 12 times the highest monthly base salary paid or payable, including any base salary that has been earned but deferred, to the Executive by the Company and the Affiliated Companies in respect of the 12-month period immediately preceding the month in which the Effective Date occurs. The Annual Base Salary shall be paid at such intervals as the Company or the Bank (as applicable) pays executive salaries generally. During the Employment Period, the Annual Base Salary shall be reviewed at least annually, beginning on the one year anniversary of the Effective Date, provided that if the Executive’s base salary has been reviewed within the twelve months prior to the Effective Date , it shall be reviewed beginning on the one year anniversary of such prior review, or if the Executive’s base salary has not been reviewed during such 12-month period, it shall be reviewed beginning within 30 days following the Effective Date. Any increase in the Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. The Annual Base Salary shall not be reduced during the Employment Period after any such increase or otherwise and the term “Annual Base Salary” shall refer to the Annual Base Salary as so increased.

  

(2)     Annual Bonus. In addition to the Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the “Annual Bonus”) in cash at least equal to (A) the average of the bonuses earned by Executive under the Company’s or the Bank’s (as applicable) annual incentive plan or program, or any comparable bonus under any predecessor or successor plan, for the last three full fiscal years prior to the Effective Date (or for such lesser number of full fiscal years prior to the Effective Date for which the Executive was eligible to earn such a bonus, and annualized in the case of any pro rata bonus earned for a partial fiscal year) (the “Average Annual Bonus”), or (B) if the Executive has not been eligible to earn such a bonus for any period prior to the Effective Date, the Executive’s target annual bonus for the year in which the Effective Date occurs (the “Target Annual Bonus”). Each such Annual Bonus shall be paid no later than two and a half months after the end of the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus pursuant to an arrangement that meets the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”).

 

(3)     Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all cash incentive, equity incentive, savings and retirement plans, practices, policies, and programs applicable generally to other peer executives of the Company and the Affiliated Companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and the Affiliated Companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and the Affiliated Companies.

 

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(4)     Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive’s family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and the Affiliated Companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and the Affiliated Companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits that are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and the Affiliated Companies.

  

(5)     Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and the Affiliated Companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies.

 

(6)     Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and the Affiliated Companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies.

 

(7)     Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and the Affiliated Companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies.

 

(8)     Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and the Affiliated Companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies.

 

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Section 4.     Termination of Employment. (a) Death or Disability. The Executive’s employment shall terminate automatically if the Executive dies during the Employment Period. If the Company determines in good faith that the Disability (as defined herein) of the Executive has occurred during the Employment Period (pursuant to the definition of “Disability”), it may give to the Executive written notice in accordance with Section 11(b) of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties. “Disability” means the absence of the Executive from the Executive’s duties with the Company or the Bank (as applicable) on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness that is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive’s legal representative.

  

(b)     Cause. The Company may terminate the Executive’s employment during the Employment Period with or without Cause. “Cause” means:

 

(1)     the willful and continued failure of the Executive to perform substantially the Executive’s duties (as contemplated by Section 3(a)(1)(A)) with the Company or any Affiliated Company (other than any such failure resulting from incapacity due to physical or mental illness or following the Executive’s delivery of a Notice of Termination for Good Reason), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company that specifically identifies the manner in which the Board or the Chief Executive Officer of the Company believes that the Executive has not substantially performed the Executive’s duties, or

 

(2)     the willful engaging by the Executive in illegal conduct or gross misconduct that is materially injurious to the Company.

 

For purposes of this Section 4(b), no act, or failure to act, on the part of the Executive shall be considered “willful” unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive’s action or omission was in the best interests of the Company. Any act, or failure to act (A) based upon authority given pursuant to a resolution duly adopted by the Board, or if the Company is not the ultimate parent corporation of the Affiliated Companies and is not publicly-traded, the board of directors of the ultimate parent of the Company (the “Applicable Board”), (B) based upon authority given by the Chief Executive Officer of the Company or an executive officer of the Company that is senior to Executive or (C) based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Applicable Board (excluding the Executive, if the Executive is a member of the Applicable Board) at a meeting of the Applicable Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel for the Executive, to be heard before the Applicable Board), finding that, in the good faith opinion of the Applicable Board, the Executive is guilty of the conduct described in Section 4(b)(1) or 4(b)(2), and specifying the particulars thereof in detail.

 

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(c)     Good Reason. The Executive’s employment may be terminated during the Employment Period by the Executive for Good Reason or by the Executive voluntarily without Good Reason. “Good Reason” means:

 

(1)     the assignment to the Executive of any duties inconsistent in any respect with the Executive’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a) unless the totality of the new duties is at least as significant as the prior duties, or any other diminution in such position, authority, duties or responsibilities (whether or not occurring solely as a result of the Company’s ceasing to be a publicly traded entity), excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by the Executive;

   

(2)     any failure by the Company to comply with any of the provisions of Section 3(b), other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by the Executive;

 

(3)     the Company’s requiring the Executive (i) to be based at any office or location other than as provided in Section 3(a)(1)(B) of this Agreement, (ii) to be based at a location other than the principal executive offices of the Company if the Executive was employed at such location immediately preceding the Effective Date, or (iii) to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date;

 

(4)     any purported termination by the Company of the Executive’s employment otherwise than as expressly permitted by this Agreement; or

 

(5)     any action or inaction that constitutes a material breach by the Company or the Bank (as applicable) of this Agreement, including any failure by the Company to comply with and satisfy Section 10(c).

 

For purposes of this Section 4(c), any good faith determination of Good Reason made by the Executive shall be conclusive. The Executive’s mental or physical incapacity following the occurrence of an event described above in clauses (1) through (5) shall not affect the Executive’s ability to terminate employment for Good Reason and the Executive’s death following delivery of a Notice of Termination for Good Reason shall not affect the Executive’s estate’s entitlement to severance payments or benefits provided hereunder upon a termination of employment for Good Reason.

 

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(d)     Notice of Termination. Any termination of employment by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(b). “Notice of Termination” means a written notice that (1) indicates the specific termination provision in this Agreement relied upon, (2) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated, and (3) if the Date of Termination (as defined herein) is other than the date of receipt of such notice, specifies the Date of Termination (which Date of Termination shall be not more than 30 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance that contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s respective rights hereunder.

   

(e)     Date of Termination. “Date of Termination” means (1) if the Executive’s employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified in the Notice of Termination, as the case may be, (2) if the Executive’s employment is terminated by the Company other than for Cause or Disability, the date on which the Company notifies the Executive of such termination, (3) if the Executive resigns without Good Reason, the date on which the Executive notifies the Company of such termination, and (4) if the Executive’s employment is terminated by reason of death or Disability, the date of death of the Executive or the Disability Effective Date, as the case may be. Notwithstanding the foregoing, in no event shall the Date of Termination occur until the Executive experiences a “separation from service” within the meaning of Section 409A of the Code, and the date on which such separation from service takes place shall be the “Date of Termination.”

 

Section 5.     Obligations of the Company upon Termination. (a) By the Executive for Good Reason; By the Company Other Than for Cause, Death or Disability. If, during the Employment Period, the Company terminates the Executive’s employment other than for Cause, Death or Disability or the Executive terminates employment for Good Reason:

 

(1)     the Company or the Bank (as applicable) shall pay to the Executive, in a lump sum in cash on the 30th day following the Date of Termination, the aggregate of the following amounts:

 

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(A)     the sum of (i) the Executive’s Annual Base Salary through the Date of Termination to the extent not theretofore paid, (ii) the Executive’s business expenses that are reimbursable pursuant to Section 3(b)(5) but have not been reimbursed by the Company or the Bank (as applicable) as of the Date of Termination; (iii) the Executive’s Annual Bonus for the fiscal year immediately preceding the fiscal year in which the Date of Termination occurs, if such bonus has been determined but not paid as of the Date of Termination; (iv) any accrued vacation pay to the extent not theretofore paid (the sum of the amounts described in subclauses (i), (ii), (iii) and (iv), the “Accrued Obligations”) and (v) an amount equal to the product of (x) the higher of (I) the Average Annual Bonus and (II) the Target Annual Bonus (such higher amount, the “Applicable Annual Bonus”) and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination and the denominator of which is 365 (the “Pro Rata Bonus”); provided, that notwithstanding the foregoing, if the Executive has made an irrevocable election under any deferred compensation arrangement subject to Section 409A of the Code to defer any portion of the Annual Base Salary or Annual Bonus described in clause (i) or clause (iii) above, then for all purposes of this Section 5 (including, without limitation, Sections 5(b) through 5(d)), such deferral election, and the terms of the applicable arrangement shall apply to the same portion of the amount described in such clause (i) or clause (iii), and such portion shall not be considered as part of the “Accrued Obligations” but shall instead be an “Other Benefit” (as defined below);

 

(B)     the amount equal to the product of (i) one and one half and (ii) the sum of (x) the Executive’s Annual Base Salary and (y) the Applicable Annual Bonus; and

   

(C)     an amount equal to the sum of the Company or the Bank (as applicable) matching or other employer contributions under the Company’s or the Bank’s qualified defined contribution plans and any excess or supplemental defined contribution plans in which the Executive participates that the Company or the Bank (as applicable) would have made on behalf of the Executive during the eighteen months after the Date of Termination if the Executive’s employment continued for eighteen months after the Date of Termination (and without regard to any vesting requirement), assuming for this purpose that (i) the Executive’s compensation during the eighteen-month period is that required by Sections 3(b)(1) and 3(b)(2) and (ii) to the extent that the employer contributions are determined based on the contributions or deferrals of the Executive, that the Executive’s contribution or deferral elections, as appropriate, are those in effect immediately prior to the Date of Termination; and

 

(2)     for eighteen months following the Date of Termination or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy (the applicable period hereinafter referred to as the “Benefit Continuation Period”), the Company or the Affiliated Companies shall provide health care and life insurance benefits to the Executive and/or the Executive’s family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies providing health care and life insurance benefits and at the benefit level described in Section 3(b)(4) of this Agreement if the Executive’s employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies and their families; provided, however, that, the health care benefits provided during the Benefit Continuation Period shall be provided in such a manner that such benefits (and the costs and premiums thereof) are excluded from the Executive’s income for federal income tax purposes and, if the Company reasonably determines that providing continued coverage under one or more of its health care benefit plans contemplated herein could be taxable to the Executive, the Company shall provide such benefits at the level required hereby through the purchase of individual insurance coverage; provided, further, however, that if the Executive becomes reemployed with another employer and is eligible to receive health care and life insurance benefits under another employer provided plan, the health care and life insurance benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility;

   

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(3)     the Company or the Bank (as applicable) shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in the Executive’s sole discretion, provided that the cost of such outplacement shall not exceed $50,000; and provided, further, that, such outplacement benefits shall end not later than the last day of the second calendar year that begins after the Date of Termination; and

 

(4)     except as otherwise set forth in the last sentence of Section 6, to the extent not theretofore paid or provided, the Company or the Bank (as applicable) shall timely pay or provide to the Executive any Other Benefits (as defined in Section 6) in accordance with the terms of the underlying plans or agreements.

 

Notwithstanding the foregoing provisions of Sections 5(a)(1) and 5(a)(2), in the event that the Executive is a “specified employee” within the meaning of Section 409A of the Code (as determined in accordance with the methodology established by the Company as in effect on the Date of Termination) (a “Specified Employee”), amounts that constitute “nonqualified deferred compensation” within the meaning of Section 409A of the Code that would otherwise be payable and benefits that would otherwise be provided under Section 5(a)(1) and 5(a)(2) during the six-month period immediately following the Date of Termination (other than the Accrued Obligations) shall instead be paid, with interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code (“Interest”) determined as of the Date of Termination, or provided on the first business day after the date that is six months following the Date of Termination (the “Delayed Payment Date”).

 

(b)     Death. If the Executive’s employment is terminated by reason of the Executive’s death during the Employment Period, the Company or the Bank (as applicable) shall provide the Executive’s estate or beneficiaries with the Accrued Obligations and the Pro Rata Bonus and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. The Accrued Obligations (subject to the proviso set forth in Section 5(a)(1)(A) to the extent applicable) and the Pro Rata Bonus shall be paid to the Executive’s estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of the Other Benefits, the term “Other Benefits” as utilized in this Section 5(b) shall include, without limitation, and the Executive’s estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and the Affiliated Companies to the estates and beneficiaries of peer executives of the Company and the Affiliated Companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive’s estate and/or the Executive’s beneficiaries, as in effect on the date of the Executive’s death with respect to other peer executives of the Company and the Affiliated Companies and their beneficiaries.

 

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(c)     Disability. If the Executive’s employment is terminated by reason of the Executive’s Disability during the Employment Period, the Company or the Bank (as applicable) shall provide the Executive with the Accrued Obligations and Pro Rata Bonus and the timely payment or delivery of the Other Benefits in accordance with the terms of the underlying plans or agreements, and shall have no other severance obligations under this Agreement. The Accrued Obligations (subject to the proviso set forth in Section 5(a)(1)(A) to the extent applicable) and the Pro Rata Bonus shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination, provided, that in the event that the Executive is a Specified Employee, the Pro Rata Bonus shall be paid, with Interest, to the Executive on the Delayed Payment Date. With respect to the provision of the Other Benefits, the term “Other Benefits” as utilized in this Section 5(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and the Affiliated Companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive’s family, as in effect at any time thereafter generally with respect to other peer executives of the Company and the Affiliated Companies and their families.

  

(d)     Cause; Other Than for Good Reason. If, during the Employment Period, the Executive’s employment is terminated by the Company for Cause or the Executive voluntarily terminates employment (excluding a termination for Good Reason), the Company or the Bank (as applicable) shall provide the Executive with the Accrued Obligations, and the timely payment or delivery of the Other Benefits and shall have no other severance obligations under this Agreement. In such case, the Accrued Obligations (subject to the proviso set forth in Section 5(a)(1)(A) to the extent applicable) shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination.

 

Section 6.     Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive’s continuing or future participation in any plan, program, policy or practice provided by the Company or the Affiliated Companies and for which the Executive may qualify, nor, subject to Section 11(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any other contract or agreement with the Company or the Affiliated Companies. Amounts that are vested benefits or that the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any other contract or agreement with the Company or the Affiliated Companies at or subsequent to the Date of Termination (“Other Benefits”) shall be payable in accordance with such plan, policy, practice or program or contract or agreement, except as explicitly modified by this Agreement. Without limiting the generality of the foregoing, the Executive’s resignation under this Agreement with or without Good Reason, shall in no way affect the Executive’s ability to terminate employment by reason of the Executive’s “retirement” under, or to be eligible to receive benefits under, any compensation and benefits plans, programs or arrangements of the Company or the Affiliated Companies, including without limitation any retirement or pension plans or arrangements or substitute plans adopted by the Company, the Affiliated Companies or their respective successors, and any termination which otherwise qualifies as Good Reason shall be treated as such even if it is also a “retirement” for purposes of any such plan. Notwithstanding the foregoing, if the Executive receives payments and benefits pursuant to Section 5(a) of this Agreement, the Executive shall not be entitled to any severance pay or benefits under any severance plan, program or policy of the Company and the Affiliated Companies, unless otherwise specifically provided therein in a specific reference to this Agreement.

 

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Section 7.     Full Settlement; Legal Fees. (a) The Company’s and/or the Bank’s obligation to make the payments provided for in this Agreement and otherwise to perform their obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense, or other claim, right or action that the Company or the Bank may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and, except as specifically provided in Section 5(a)(2), such amounts shall not be reduced whether or not the Executive obtains other employment.

 

(b) This Section 7(b) shall only apply following a Change of Control. The Company or the Bank (as applicable) agrees to pay as incurred (within 10 days following the Company’s or the Bank’s receipt of an invoice from the Executive), at any time from the date of the Change of Control through the Executive’s remaining lifetime (or, if longer, through the 20th anniversary of the date of the Change of Control) to the full extent permitted by law, all legal fees and expenses that the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company or the Bank, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus, in each case, Interest determined as of the date such legal fees and expenses were incurred. In order to comply with Section 409A of the Code, in no event shall the payments by the Company or the Bank under this Section 7(b) be made later than the end of the calendar year next following the calendar year in which such fees and expenses were incurred; provided, that the Executive shall have submitted an invoice for such fees and expenses at least 10 days before the end of the calendar year next following the calendar year in which such fees and expenses were incurred. The amount of such legal fees and expenses that the Company or the Bank is obligated to pay in any given calendar year shall not affect the legal fees and expenses that the Company or the Bank is obligated to pay in any other calendar year, and the Executive’s right to have the Company or the Bank pay such legal fees and expenses may not be liquidated or exchanged for any other benefit.

   

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Section 8.     Certain Reduction of Payments by the Company or the Bank. (a) Anything in this Agreement or any other agreement between the Executive and the Company or the Bank (as applicable) to the contrary notwithstanding, in the event that a nationally-recognized accounting firm selected in the discretion of the Compensation Committee of the Board as in effect immediately prior to the Change of Control (the “Accounting Firm”) shall determine that receipt of all payments or distributions by the Company or its Affiliated Companies in the nature of compensation to or for the Executive’s benefit, whether paid or payable pursuant to this Agreement or otherwise (a “Payment”) would subject the Executive to the excise tax under Section 4999 of the Code, the Accounting Firm shall determine whether to reduce any of the Payments paid or payable pursuant to this Agreement (the “Agreement Payments”) to the Reduced Amount (as defined below). The Agreement Payments shall be reduced to the Reduced Amount only if the Accounting Firm determines that the Executive would have a greater Net After-Tax Receipt (as defined below) of aggregate Payments if the Executive’s Agreement Payments were reduced to the Reduced Amount. If such a determination is not made by the Accounting Firm, the Executive shall receive all Agreement Payments to which the Executive is entitled under this Agreement. All determinations made by the Accounting Firm under this Section shall be binding upon the Company, the Bank and Executive and shall be made within 15 days following a termination of employment of the Executive. The reduction of the amounts payable hereunder, if applicable, shall be made by reducing the payments and benefits under the following sections in the following order: (1) Section 5(a)(1)(B), (2) Section 5(a)(1)(C), (3) Section 5(a)(1)(A)(v) and (4) Section 5(a)(2).

 

(b)     As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that amounts will have been paid or distributed by the Company or the Bank (as applicable) to or for the benefit of the Executive pursuant to this Agreement which should not have been so paid or distributed (“Overpayment”) or that additional amounts which will have not been paid or distributed by the Company or the Bank (as applicable) to or for the benefit of the Executive pursuant to this Agreement could have been so paid or distributed (“Underpayment”), in each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against either the Company or the Bank (as applicable) or the Executive which the Accounting Firm believes has a high probability of success determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company or the Bank (as applicable) to or for the benefit of the Executive shall be repaid to the Company or the Bank (as applicable) together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such amount shall be payable by the Executive to the Company or the Bank (as applicable) if and to the extent such payment would not either reduce the amount on which the Executive is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company or the Bank (as applicable) to or for the benefit of the Executive together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code.

 

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(c)     All fees and expenses of the Accounting Firm in implementing the provisions of this Section 8 shall be borne by the Company or the Bank (as applicable).

 

(d)     For purposes of this Section 8, the following terms have the meanings set forth below:

 

(i)     “Net After-Tax Receipt” shall mean the present value (as determined in accordance with Sections 280G(b)(2)(A)(ii) and 280G(d)(4) of the Code) of a Payment net of all taxes imposed on the Executive with respect thereto under Sections 1 and 4999 of the Code and under applicable state and local laws, determined by applying the highest marginal rate under Section 1 of the Code and under state and local laws which applied to the Executive’s taxable income for the immediately preceding taxable year, or such other rate(s) as the Executive certifies, in the Executive’s sole discretion, as likely to apply to him in the relevant tax year(s).

 

(ii)     “Reduced Amount” shall mean the greatest amount of Agreement Payments that can be paid that would not result in the imposition of the excise tax under Section 4999 of the Code if the Accounting Firm determines to reduce Agreement Payments pursuant to Section 8(a).

 

Section 9.     Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company and the Bank all secret or confidential information, knowledge or data relating to the Company or the Affiliated Companies, and their respective businesses, which information, knowledge or data shall have been obtained by the Executive during the Executive’s employment by the Company or the Affiliated Companies and which information, knowledge or data shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive’s employment with the Company and/or the Bank, the Executive shall not, without the prior written consent of the Company or the Bank or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company or the Bank and those persons designated by the Company or the Bank. In no event shall an asserted violation of the provisions of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement.

 

Section 10.     Successors. (a) This Agreement is personal to the Executive, and, without the prior written consent of the Company and the Bank, shall not be assignable by the Executive other than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives.

 

(b)     This Agreement shall inure to the benefit of and be binding upon the Company and the Bank and their respective successors and assigns. Except as provided in Section 10(c), without the prior written consent of the Executive, this Agreement shall not be assignable by the Company or the Bank.

 

(c)     The Company and the Bank will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company or the Bank to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company and the Bank would be required to perform it if no such succession had taken place. “Company” and “Bank” mean the Company and the Bank as hereinbefore defined and any successor to their business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law or otherwise.

 

14
 

 

Section 11.     Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. Subject to the last sentence of Section 11(g), this Agreement may not be amended or modified other than by a written agreement executed by the parties hereto or their respective successors and legal representatives.

 

(b)     All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

 

if to the Executive:

 

At the most recent address on file at the Company.

 

if to the Company or the Bank:

 

9650 Flair Drive, 8th Floor
El Monte, CA 91731
Attention: Chief Executive Officer

  

 

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.

 

(c)     The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

 

(d)     The Company or the Bank (as applicable) may withhold from any amounts payable under this Agreement such United States federal, state or local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.

 

(e)     The Executive’s, the Company’s or the Bank’s (as applicable) failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive, the Company or the Bank (as applicable) may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Sections 4(c)(1) through 4(c)(5), shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.

 

15
 

 

(f)     The Executive, the Company and the Bank acknowledge that, except as may otherwise be provided under any other written agreement between the Executive, the Company and/or the Bank, the employment of the Executive by the Company or the Bank (as applicable) is “at will” and, subject to Section 1(a), the Executive’s employment may be terminated by the Executive, the Company or the Bank (as applicable) at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date, except as specifically provided herein, this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof. 

 

(g)     The Agreement is intended to comply with the requirements of Section 409A of the Code or an exemption or exclusion therefrom and, with respect to amounts that are subject to Section 409A of the Code, shall in all respects be administered in accordance with Section 409A of the Code. Each payment under this Agreement shall be treated as a separate payment for purposes of Section 409A of the Code. In no event may the Executive, directly or indirectly, designate the calendar year of any payment to be made under this Agreement. If the Executive dies following the Date of Termination and prior to the payment of the any amounts delayed on account of Section 409A of the Code, such amounts shall be paid to the personal representative of the Executive’s estate within 30 days after the date of the Executive’s death. All reimbursements and in-kind benefits provided under this Agreement that constitute deferred compensation within the meaning of Section 409A of the Code shall be made or provided in accordance with the requirements of Section 409A of the Code, including, without limitation, that (i) in no event shall reimbursements by the Company or the Bank under this Agreement be made later than the end of the calendar year next following the calendar year in which the applicable fees and expenses were incurred, provided, that the Executive shall have submitted an invoice for such fees and expenses at least 10 days before the end of the calendar year next following the calendar year in which such fees and expenses were incurred; (ii) the amount of in-kind benefits that the Company or the Bank is obligated to pay or provide in any given calendar year shall not affect the in-kind benefits that the Company or the Bank is obligated to pay or provide in any other calendar year; (iii) the Executive’s right to have the Company or the Bank pay or provide such reimbursements and in-kind benefits may not be liquidated or exchanged for any other benefit; and (iv) in no event shall the Company’s or the Bank’s obligations to make such reimbursements or to provide such in-kind benefits apply later than the Executive’s remaining lifetime (or if longer, through the 20th anniversary of the Effective Date). Prior to the Effective Date but within the time period permitted by the applicable Treasury Regulations, the Company may, in consultation with the Executive, modify the Agreement, in the least restrictive manner necessary and without any diminution in the value of the payments to the Executive, in order to cause the provisions of the Agreement to comply with the requirements of Section 409A of the Code, so as to avoid the imposition of taxes and penalties on the Executive pursuant to Section 409A of the Code.

 

16
 

 

(h)     This Agreement comprises the entire agreement among the Executive, the Company and the Bank with respect to the subject matter hereof and shall supersede all prior agreements and undertakings by or among them with respect to such subject matter.

 

Section 12.     Survivorship. Upon the expiration or other termination of this Agreement or the Executive’s employment, the respective rights and obligations of the parties hereto shall survive to the extent necessary to carry out the intentions of the parties under this Agreement.

 

17
 

 

IN WITNESS WHEREOF, the Executive has hereunto set the Executive’s hand and, pursuant to the authorizations from the Board and the Bank Board, the Company and the Bank have each caused these presents to be executed in its name on its behalf, all as of the day and year first above written.

 

CATHAY GENERAL BANCORP

 

CHANG M. LIU

     
     
By:  /s/ Dunson K. Cheng    /s/ Chang M. Liu
Name:  Dunson K. Cheng    
Title:     Executive Chairman    

 

 

 

 

Exhibit 31.1

 

I, Chang M. Liu, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Cathay General Bancorp;

 

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

 

 

a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

By:

/s/ Chang M. Liu

 

 

 

Chang M. Liu

 

 

 

President and Chief Executive Officer

 

       
Date: November 6, 2020      

 

 

Exhibit 31.2

 

I, Heng W. Chen, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Cathay General Bancorp;

 

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors (or persons performing the equivalent functions):

 

 

a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

     

 

 

/s/ Heng W. Chen

 

 

 

Heng W. Chen

 

 

 

Executive Vice President and

 

    Chief Financial Officer  
       
Date: November 6, 2020      

 

 

Exhibit 32.1

 

CEO CERTIFICATION PURSUANT TO

 

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Cathay General Bancorp (the “Company”) on Form 10-Q for the period ended September 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Chang M. Liu, chief executive officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

 

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

By:

/s/ Chang M. Liu

 

 

 

Chang M. Liu

 

 

 

President and Chief Executive Officer

 

       

Date: November 6, 2020

     

 

 

Exhibit 32.2

 

CFO CERTIFICATION PURSUANT TO

 

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Cathay General Bancorp (the “Company”) on Form 10-Q for the period ended September 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Heng W. Chen, chief financial officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

  (1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

       

 

 

/s/ Heng W. Chen

 

 

 

Heng W. Chen

 

 

 

Executive Vice President and

 

    Chief Financial Officer  
       
Date: November 6, 2020      

 

 

Exhibit 99.1

 

EX_211983IMG001.JPG

 

 

FOR IMMEDIATE RELEASE

 

For:

Cathay General Bancorp

Contact: Heng W. Chen

 

777 N. Broadway

(626) 279-3652

 

Los Angeles, CA 90012

 

 

 

 

Cathay General Bancorp Announces Retirement of Pin Tai and

Appointment of Chang M. Liu as CEO and President

 

Los Angeles, Calif., July 16, 2020: Cathay General Bancorp (the “Company”, Nasdaq: CATY), the holding company for Cathay Bank (the “Bank”), announced that Pin Tai, in accordance with his previously disclosed employment agreement, will retire from his position as Chief Executive Officer (“CEO”) of the Company and Cathay Bank and resign as a member of the Board of Directors of the Company and Cathay Bank, effective September 30, 2020. Mr. Tai will remain with Cathay Bank as an executive advisor through September 30, 2021, supporting the transition, in accordance with his previously disclosed consulting agreement.

 

In accordance with the Company’s succession plan, the Boards of Directors of the Company and of Cathay Bank appointed Chang M. Liu as CEO and President of the Company and as CEO of Cathay Bank, effective October 1, 2020. Mr. Liu is currently the President and Chief Operating Officer of Cathay Bank and is a member of the Board of Directors of Cathay Bank. Mr. Liu also will continue serving as President and a director of Cathay Bank, and will be appointed a member of the Board of Directors of the Company, effective October 1, 2020.

 

“It has been an honor and a privilege to have served and led the Company,” Mr. Tai said. “At the time I joined the Bank in 1999, Cathay was about $1.8 billion in asset size with limited presence in the East Coast. As of June 30, 2020, we are more than $19 billion strong in assets, with 61 branches across nine states in the U.S., one branch in Hong Kong, as well as representative offices in Beijing, Shanghai, and Taipei. I am incredibly proud of the Company that we have built and believe Chang is the right person to lead us into the next chapter. I wish Chang all the best in his new role. I am confident that Cathay’s legacy of unwavering commitment to deliver exceptional customer experience and stockholder value will continue under his leadership.”

 

“I am humbled by this opportunity and excited to serve and lead the Company going forward,” said Mr. Liu. “I have a deep respect for the work my predecessors have done in positioning the Company for future growth. I look forward to continuing to build on this strong foundation. I am committed to working closely with the board, and our seasoned executive team to continue to innovate our services while unlocking future growth opportunities.”

 

“The Board of Directors thanks Pin for his leadership and dedicated service to the Company.” said, Dunson K. Cheng, the Company’s and Cathay Bank’s Executive Chairman. “We appreciate Pin’s efforts in achieving both record revenue and earnings for the Company during his tenure. Chang’s expertise in banking and deep understanding of the Company’s business, culture and people is just what we need to capitalize on the many opportunities the future holds. We look forward to working with him.”

 

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Under Mr. Tai’s leadership, the Company has experienced significant growth, which included establishing additional branches in California and elsewhere, and the successful completion of the merger with Far East National Bank that expanded its geographic presence. Mr. Tai was instrumental in the development of the Company’s East Coast footprint and, under his direction while serving as the Chief Lending Officer, the Company’s lending divisions have been enhanced to capture greater market share.

 

Chang M. Liu is currently the President and Chief Operating Officer of Cathay Bank and serves as a member on its Board of Directors. Mr. Liu joined Cathay Bank in 2014 as Senior Vice President and Assistant Chief Lending Officer. He was promoted to Deputy Chief Lending Officer in 2015 and then in 2016 became the Executive Vice President and Chief Lending Officer. In February 2019, Chang was appointed as Chief Operating Officer, followed by the appointment as President when he joined as a member of the Board of Directors of Cathay Bank in October 2019. Mr. Liu has over 30 years of banking experience. Prior to joining Cathay Bank, Mr. Liu was the Executive Vice President and Chief Lending Officer at Pacific Trust Bank, the Senior Vice President of the Special Assets Group at U.S. Bank, and the Senior Vice President of the Commercial Real Estate Group at California National Bank.

 

ABOUT CATHAY GENERAL BANCORP

 

Cathay General Bancorp is the holding company for Cathay Bank, a California state-chartered bank. Founded in 1962, Cathay Bank offers a wide range of financial services. Cathay Bank currently operates 38 branches in California, 10 branches in New York State, four in Washington State, three in Illinois, two in Texas, one in Maryland, Massachusetts, Nevada, New Jersey, and Hong Kong, and a representative office in Beijing, Shanghai and Taipei. Cathay Bank’s website is found at http://www.cathaybank.com. Cathay General Bancorp’s website is found at http://www.cathaygeneralbancorp.com. Information set forth on such websites is not incorporated into this press release.

 

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