CATHAY GENERAL BANCORP - Quarter Report: 2018 September (Form 10-Q)

caty20181030_10q.htm

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UNITED STATES

securities and exchange commission

Washington, D.C. 20549

form 10-q

[ X ]

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

For the quarterly period ended

September 30, 2018

[ ]

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

For the quarterly period ended

Commission file number

001-31830

Cathay General Bancorp

(Exact name of registrant as specified in its charter)

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

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

Registrant's telephone number, including area code:

(213) 625-4700

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☑ No ☐

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

Large accelerated filer ☑	Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☐
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, 81,075,803 shares outstanding as of October 31, 2018.

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CATHAY GENERAL BANCORP AND SUBSIDIARies

3^R^D quarter 2018 REPORT ON FORM 10-Q

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PART I – FINANCIAL INFORMATION		3

Item 1.	FINANCIAL STATEMENTS (Unaudited)	3
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)	6
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	41
Item 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	63
Item 4	CONTROLS AND PROCEDURES	64

PART II – OTHER INFORMATION		65

Item 1.	LEGAL PROCEEDINGS	65
Item 1A.	RISK FACTORS	66
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	66
Item 3.	DEFAULTS UPON SENIOR SECURITIES	67
Item 4.	MINE SAFETY DISCLOSURES	67
Item 5.	OTHER INFORMATION	67
Item 6.	EXHIBITS	67


SIGNATURES		68

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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 and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Such risks and uncertainties and other factors include, but are not limited to, adverse developments or conditions related to or arising from:

●

U.S. and international business and economic conditions;

●

possible additional provisions for loan losses and charge-offs;

●

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

●

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

●

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

●

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

●

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

●

potential goodwill impairment;

●

liquidity risk;

●

fluctuations in interest rates;

●

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

●

inflation and deflation;

●

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

●

environmental liabilities;

●

our ability to compete, including against larger competitors;

●

our ability to retain key personnel;

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successful management of reputational risk;

●

natural disasters and geopolitical events;

●

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

●

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

●

our ability to adapt our systems to technological changes;

●

risk management processes and strategies;

●

adverse results in legal proceedings;

●

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, 2017 (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, which speak to the date of this report. We have no intention and undertake no obligation to update any forward-looking statement or to publicly announce any revision of any forward-looking statement to reflect future developments or events, except as required by law.

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

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PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS (Unaudited)

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)	September 30, 2018			December 31, 2017

Assets
Cash and due from banks	$	204,178		$	247,056
Short-term investments and interest bearing deposits		377,839			292,745
Cash and cash equivalents		582,017			539,801
Securities available-for-sale (amortized cost of $1,320,843 at September 30, 2018 and $1,336,345 at December 31, 2017)		1,283,060			1,333,626
Loans held for sale		-			8,000
Loans		13,647,646			12,870,290
Less: Allowance for loan losses		(123,457	)		(123,279	)
Unamortized deferred loan fees, net		(2,086	)		(3,245	)
Loans, net		13,522,103			12,743,766
Equity securities		23,522			-
Federal Home Loan Bank stock		17,250			23,085
Other real estate owned, net		8,741			9,442
Affordable housing investments and alternative energy partnerships, net		295,857			272,871
Premises and equipment, net		102,565			103,064
Customers’ liability on acceptances		10,454			13,482
Accrued interest receivable		50,291			45,307
Goodwill		372,189			372,189
Other intangible assets, net		7,391			8,062
Other assets		186,282			167,491
Total assets	$	16,461,722		$	15,640,186

Liabilities and Stockholders’ Equity
Deposits
Non-interest-bearing demand deposits	$	2,957,881		$	2,783,127
Interest-bearing deposits:
Demand deposits		1,409,463			1,410,519
Money market deposits		2,134,097			2,248,271
Savings deposits		747,814			857,199
Time deposits		6,331,823			5,390,777
Total deposits		13,581,078			12,689,893

Securities sold under agreements to repurchase		-			100,000
Advances from the Federal Home Loan Bank		315,000			430,000
Other borrowings of affordable housing investments		17,332			17,481
Long-term debt		194,136			194,136
Deferred payments from acquisition		18,253			35,404
Acceptances outstanding		10,454			13,482
Other liabilities		208,694			186,486
Total liabilities		14,344,947			13,666,882
Commitments and contingencies		-			-
Stockholders’ Equity
Common stock, $0.01 par value, 100,000,000 shares authorized, 89,606,690 issued and 81,396,047 outstanding at September 30, 2018, and 89,104,022 issued and 80,893,379 outstanding at December 31, 2017		896			891
Additional paid-in-capital		939,801			932,874
Accumulated other comprehensive loss, net		(23,783	)		(2,511	)
Retained earnings		1,439,450			1,281,639
Treasury stock, at cost (8,210,643 shares at September 30, 2018, and at December 31, 2017)		(239,589	)		(239,589	)
Total equity		2,116,775			1,973,304
Total liabilities and equity	$	16,461,722		$	15,640,186

See accompanying notes to unaudited condensed consolidated financial statements.

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CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME

(Unaudited)

	Three months ended September 30,					Nine months ended September 30,
	2018			2017		2018			2017
	(In thousands, except share and per share data)
Interest and Dividend Income
Loans receivable, including loan fees	$	168,179		$	146,383	$	478,128		$	401,129
Investment securities		7,546			5,692		21,212			14,817
Federal Home Loan Bank stock		303			607		1,079			1,317
Term federal funds sold		-			108		-			108
Deposits with banks		838			1,288		3,667			3,140
Total interest and dividend income		176,866			154,078		504,086			420,511

Interest Expense
Time deposits		22,135			11,678		56,593			33,429
Other deposits		5,474			5,101		14,892			14,245
Securities sold under agreements to repurchase		124			874		1,446			3,489
Advances from Federal Home Loan Bank		1,430			872		3,286			1,465
Long-term debt		2,220			1,456		6,465			4,320
Deferred payments from acquisition		399			901		946			901
Total interest expense		31,782			20,882		83,628			57,849

Net interest income before reversal for credit losses		145,084			133,196		420,458			362,662
Reversal for credit losses		(1,500	)		-		(4,500	)		(2,500	)
Net interest income after reversal for credit losses		146,584			133,196		424,958			365,162

Non-Interest Income
Net gains/(losses) from equity securities		391			-		(4,580	)		-
Securities (losses)/gains, net		(14	)		24		(14	)		(439	)
Letters of credit commissions		1,459			1,302		4,110			3,618
Depository service fees		1,219			1,407		3,905			4,259
Gain from acquisition		-			5,440		340			5,440
Other operating income		4,780			4,788		17,151			12,953
Total non-interest income		7,835			12,961		20,912			25,831

Non-Interest Expense
Salaries and employee benefits		30,514			27,913		91,491			79,929
Occupancy expense		5,186			5,312		15,808			14,733
Computer and equipment expense		2,772			2,643		8,477			7,895
Professional services expense		5,286			4,942		17,055			14,541
Data processing service expense		3,080			2,918		9,450			7,846
FDIC and regulatory assessments		2,555			2,552		6,732			7,261
Marketing expense		1,263			2,103		5,521			4,833
Other real estate owned (income)/expense		(21	)		369		(236	)		747
Amortization of investments in low income housing and alternative energy partnerships		11,115			5,723		21,989			16,797
Amortization of core deposit intangibles		190			281		704			626
Acquisition and integration costs		179			3,277		2,083			3,277
Other operating expense		3,845			3,215		10,949			11,307
Total non-interest expense		65,964			61,248		190,023			169,792

Income before income tax expense		88,455			84,909		255,847			221,201
Income tax expense		18,698			35,163		48,610			71,099
Net income	$	69,757		$	49,746	$	207,237		$	150,102

Other comprehensive income, net of tax
Unrealized holding (losses)/gains on securities available-for-sale		(2,538	)		1,060		(16,803	)		3,338
Unrealized holding gain/(loss) on cash flow hedge derivatives		1,666			157		4,595			(94	)
Less: reclassification adjustments for (losses)/gains included in net income		(10	)		14		(10	)		(254	)
Total other comprehensive gain, net of tax		(862	)		1,203		(12,198	)		3,498
Total other comprehensive income	$	68,895		$	50,949	$	195,039		$	153,600

Net income per common share:
Basic	$	0.86		$	0.62	$	2.55		$	1.87
Diluted	$	0.85		$	0.61	$	2.53		$	1.86
Cash dividends paid per common share	$	0.24		$	0.21	$	0.72		$	0.63
Average common shares outstanding
Basic		81,311,899			80,665,398		81,224,555			80,073,249
Diluted		81,855,271			81,404,854		81,770,874			80,797,179

See accompanying notes to unaudited condensed consolidated financial statements.

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CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended September 30
	2018			2017
	(In thousands)
Cash Flows from Operating Activities
Net income	$	207,237		$	150,102
Adjustments to reconcile net income to net cash provided by operating activities:
Reversal for credit losses		(4,500	)		(2,500	)
Provision for losses on other real estate owned		-			889
Deferred tax liability		2,342			10,319
Depreciation and amortization		5,593			5,416
Net gains on sale and transfer of other real estate owned		(567	)		(394	)
Proceeds from sales of loans		8,000			7,500
Amortization on alternative energy partnerships, venture capital and other investments		5,384			2,778
Net loss on sales and calls of securities		14			438
Amortization/accretion of security premiums/discounts, net		2,371			990
Loss on sales or disposal of fixed assets		107			-
Unrealized loss on equity securities		4,580			-
Stock based compensation and stock issued to officers as compensation		5,976			4,449
Net change in accrued interest receivable and other assets		(7,863	)		(51,776	)
Gain on acquisition		(340	)		(5,440	)
Net change in other liabilities		10,998			828
Net cash provided by operating activities		239,332			123,599

Cash Flows from Investing Activities
Purchase of investment securities available-for-sale		(448,805	)		(450,745	)
Proceeds from sale of investment securities available-for-sale		99,644			99,541
Proceeds from repayments, maturities and calls of investment securities available-for-sale		346,328			389,829
Purchase of Federal Home Loan Bank stock		(5,430	)		-
Redemptions of Federal Home Loan Bank stock		11,265			6,459
Net increase in loans		(771,290	)		(686,225	)
Purchase of premises and equipment		(4,496	)		(976	)
Proceeds from sales of other real estate owned		3,302			2,186
Net increase in investment in affordable housing and alternative energy partnerships		(36,666	)		(20,867	)
Acquisition, net of cash acquired		-			(14,309	)
Net cash used for investing activities		(806,148	)		(675,107	)

Cash Flows from Financing Activities
Net increase in deposits		890,823			73,120
Net decrease in federal funds purchased and securities sold under agreements to repurchase		(100,000	)		(250,000	)
Advances from Federal Home Loan Bank		4,495,000			2,608,000
Repayment of Federal Home Loan Bank borrowings		(4,610,000	)		(2,393,000	)
Cash dividends paid		(58,498	)		(50,491	)
Repayment of other borrowings		(37,117	)		-
Proceeds from issuance of other borrowings		29,554			-
Proceeds from shares issued under Dividend Reinvestment Plan		1,982			1,849
Proceeds from exercise of stock options		838			1,018
Taxes paid related to net share settlement of RSUs		(3,550	)		(5,127	)
Net cash provided by (used in) financing activities		609,032			(14,631	)

Increase/(decrease) in cash and cash equivalents		42,216			(566,139	)
Cash and cash equivalents, beginning of the period		539,801			1,185,084
Cash and cash equivalents, end of the period	$	582,017		$	618,945

Supplemental disclosure of cash flow information
Cash paid during the period:
Interest	$	79,877		$	58,416
Income taxes paid	$	48,072		$	62,296
Non-cash investing and financing activities:
Net change in unrealized holding (loss)/gain on securities available-for-sale, net of tax	$	(16,793	)	$	3,592
Net change in unrealized holding gain/(loss) on cash flow hedge derivatives	$	4,595		$	(94	)
Transfers to other real estate owned from loans held for investment	$	1,646		$	726

See accompanying notes to unaudited condensed consolidated financial statements.

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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”), eight 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, 2018, the Bank operates 26 branches in Southern California, 14 branches in Northern California, 11 branches in New York State, three branches in Illinois, four branches in Washington State, two branches in Texas, one branch in Massachusetts, New Jersey, Maryland and Nevada, one branch 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 the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. 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, 2017.

The preparation of the condensed consolidated financial statements in accordance with GAAP requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The Company expects that the most significant estimates subject to change are the allowance for loan losses.

In the condensed consolidated statement of cash flows, the amounts for the nine months ended September 30, 2017 have been corrected in the current year and differ from the previously reported amounts of $159.1 million for net cash provided by investing activities, $50.1 million for decrease in cash and cash equivalents, $218.0 million for cash and cash equivalents, beginning of period and $167.9 million for cash and cash equivalents, end of period.

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3. Recent Accounting Pronouncements

Accounting Standards adopted in 2018

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).” The new guidance replaces existing revenue recognition guidance for contracts to provide goods or services to customers and amends existing guidance related to recognition of gains and losses on the sale of certain nonfinancial assets such as real estate. ASU 2014-09 clarifies the principles for recognizing revenue and replaces nearly all existing revenue recognition guidance in U.S. GAAP. Quantitative and qualitative disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers are also required. ASU 2014-09 as amended by ASU 2015-14, ASU 2016-08, ASU 2016-10 and ASU 2016-12, is effective for interim and annual periods beginning after December 15, 2017 and is applied on either a modified retrospective or full retrospective basis. Our revenue is primarily comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. Accordingly, the majority of the Company’s revenues was not affected. In addition, the new standard did not materially impact the timing or measurement of the Company’s revenue recognition as it is consistent with the Company’s existing accounting for contracts within the scope of the new standard. The Company adopted this guidance as of January 1, 2018 using the modified retrospective method where there was no cumulative effect adjustment to retained earnings as a result of adopting this new standard. In addition, the standard did not have a material impact on our consolidated financial statements. The Company has provided a disaggregation of the significant categories of revenues within the scope of this guidance and expanded the qualitative disclosures of the Company’s noninterest income. See footnote 17 - Revenue from Contracts with Customers for additional information.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This update requires an entity to measure equity investments with readily determinable fair values at fair value with changes in fair value recognized in net income. Equity investment without readily determinable fair values will be measured at fair value either upon the occurrence of an observable price change or upon identification of an impairment and any amount by which the carrying value exceeding the fair value will be recognized as an impairment in net income. This update also requires an entity to disclose fair value of financial instruments measured at amortized cost on the balance sheet to measure that fair value using the exit price option. In addition, this update requires separate presentation in comprehensive income for changes in the fair value of a liability and in the balance sheet by measurement category and form of financial asset. ASU 2016-01 became effective for interim and annual periods beginning after December 15, 2017. The adoption of the amendment resulted in approximately $8.6 million being reclassified from accumulated other comprehensive income to retained earnings, representing an increase to retained earnings as of January 1, 2018, and increased pre-tax income by $391,000 for the three months ended September 30, 2018 and decreased pre-tax income by $4.6 million for the nine months ended September 30, 2018. See footnote 7 – Investment Securities. Also, beginning in the first quarter of 2018, the Company is adopting the exit price notion on fair value measurement of its loan portfolio. As a result of this fair value change, the prior-year figures shown for loans on footnote - 13 for comparative purposes will no longer be comparable.

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In February 2018, FASB issued ASU 2018-02 to help organizations address certain stranded income tax effects in accumulated other comprehensive income (“AOCI”) resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Legislation”). The amendment provides financial statement preparers with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the changes in the U.S. federal corporate income tax rate in the Tax Legislation (or portion thereof) is recorded. The amendment also includes disclosure requirements regarding the issuer’s accounting policy for releasing income tax effects from AOCI. The amendment is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, and organizations should apply the provisions of the amendment either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Legislation is recognized. The Company elected to reclassify the income tax effects of the Tax Legislation from accumulated other comprehensive income to retained earnings effective January 1, 2018. This resulted in the reclassification of $515,000 from accumulated other comprehensive income to retained earnings, representing an increase to retained earnings as of January 1, 2018. See footnote 18 – Stockholders Equity.

Other Accounting Standards

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

The new standard is effective for us on January 1, 2019, with early adoption permitted. We expect to adopt the new standard on its effective date. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required under the new standard for the comparative periods. We expect to adopt the new standard on January 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.

The new standard provides a number of optional practical expedients in transition. We expect to elect the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We expect to elect all of the new standard’s available transition practical expedients.

We expect that this standard will not have a material effect on our financial statements. While we continue to assess all of the effects of adoption, we currently believe the most significant effects relate to (1) the recognition of new ROU assets and lease liabilities on our balance sheet for our real estate and equipment operating leases; and (2) providing significant new disclosures about our leasing activities. We do not expect a significant change in our leasing activities between now and adoption.

On adoption, we currently expect to recognize additional operating liabilities ranging from $30 million to $40 million, with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.

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The new standard also provides practical expedients for an entity’s ongoing accounting. We currently expect to elect the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also currently expect to elect the practical expedient to not separate lease and non-lease components for all of our leases.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This update requires an entity to use a broader range of reasonable and supportable forecasts, in addition to historical experience and current conditions, to develop an expected credit loss estimate for financial assets and net investments that are not accounted for at fair value through net income. Credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses to the amount by which fair value is below amortized cost. ASU 2016-13 becomes effective for interim and annual periods beginning after December 15, 2019. The Company has designated a management team and begun its implementation efforts by identifying key interpretive issues, assessing its processes and identifying the system requirements against the new guidance to determine what modifications may be required. Management has also selected a loss forecasting modeling approach and has engaged a vendor to assist in the design and implementation of the loss forecasting modeling. The implementation efforts also involve, but are not limited to, assessing potential macroeconomic factors that will be used to determine the reasonable and supportable forecast period. The Company has not yet determined the effect of ASU 2016-13 on its accounting policies or the impact on the Company’s consolidated financial statements.

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

In March 2017, the FASB issued ASU 2017-08, “Receivables- Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” This update amends the amortization period for certain purchased callable debt securities held at a premium. The amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This update affects all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Adoption of ASU 2017-08 is not expected to have a significant impact on the Company’s consolidated financial statements.

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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 is currently evaluating the impact on its consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815),” which targeted improvements to accounting for hedging activities. The amendments in this update are intended to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” This update targets improvements in the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements, and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. It is permitted to early adopt any removed or modified disclosures upon issuance of this update and delay adoption of the additional disclosures until the effective date. Adoption of ASU 2018-13 is not expected to have a significant impact on the Company’s consolidated financial statements.

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4. Acquisition

On July 14, 2017, the Company completed the acquisition of SinoPac Bancorp, the parent of Far East National Bank (“FENB”), pursuant to a Stock Purchase Agreement, dated as of July 8, 2016, by and between the Company and Bank SinoPac Co. Ltd. Under the terms of the Stock Purchase Agreement, the Company purchased all of the issued and outstanding share capital of SinoPac Bancorp for an aggregate purchase price of $351.6 million plus additional post closing payments based on the realization of certain assets of FENB. The Company issued 926,192 shares of common stock as consideration and the remainder of the consideration is payable in cash of which $100 million was deferred and paid on November 14, 2017 and $35.4 million was deferred and will be released over the next three years. On December 12, 2017, additional cash consideration of $4.1 million was paid based on the realized gain from the sale of the building that housed FENB’s former Alhambra, California branch. SinoPac Bancorp was merged into Cathay General Bancorp on July 17, 2017 and subsequently, on October 27, 2017, FENB was merged into Cathay Bank. The acquisition allowed the Company to expand its number of branches in California. Prior to the closing of the acquisition, FENB operated nine branches in California, and a representative office in Beijing. The acquisition is accounted for as a business combination, subject to the provisions of ASC 805-10-50, Business Combinations.

The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the July 14, 2017 acquisition date. We have included the financial results of the business combinations in the condensed consolidated statement of income beginning on the acquisition date. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition date. We made significant estimates and exercised significant judgement in estimating fair values and accounting for such acquired assets and liabilities. The assets and liabilities have been accounted for under the acquisition method of accounting.

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The fair value of the assets and the liabilities acquired as of July 14, 2017 are shown below:

	SinoPac Bancorp
Assets acquired:
Cash and cash equivalents	$	166,932
Short-term investments		122,000
Securities available-for-sale		88,044
FHLB and FRB stock		19,890
Loans		705,792
Premises and equipment		6,239
Cash surrender value of life insurance		46,083
Deferred tax assets, net		40,690
Core deposit intangible		6,122
Accrued interest receivable and other assets		10,689
Total assets acquired		1,212,481

Liabilities assumed:
Deposits		813,888
Advances from the Federal Home Loan Bank		30,000
Accrued interest payable and other liabilities		8,512
Total liabilities assumed		852,400
Net assets acquired	$	360,081

Cash paid	$	284,984
Fair value of common stock issued		34,862
Total consideration paid	$	319,846

Purchase price payable to SinoPac		34,267
Total consideration	$	354,113
Gain from acquisition	$	5,968

The table above reflects net purchase price adjustments of $340,000 related to contingent consideration and imputed interest adjustments made during the nine months ended September 30, 2018.

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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. Outstanding stock options and restricted stock units with anti-dilutive effect were not included in the computation of diluted earnings per share. The following table sets forth earnings per common share calculations:

	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands, except share and per share data)	2018		2017		2018		2017
Net income	$	69,757	$	49,746	$	207,237	$	150,102

Weighted-average shares:
Basic weighted-average number of common shares outstanding		81,311,899		80,665,398		81,224,555		80,073,249

Dilutive effect of weighted-average outstanding common share equivalents
Warrants		234,105		399,957		268,988		409,019
Options		-		19,221		-		25,706
Restricted stock units		309,267		320,278		277,331		289,205
Diluted weighted-average number of common shares outstanding		81,855,271		81,404,854		81,770,874		80,797,179

Average stock options and restricted stock units with anti-dilutive effect		1,854		-		15,625		6,561
Earnings per common share:
Basic	$	0.86	$	0.62	$	2.55	$	1.87
Diluted	$	0.85	$	0.61	$	2.53	$	1.86

6. Stock-Based Compensation

Under the Company’s equity incentive plans, directors and eligible employees may be granted incentive or non-statutory stock options, restricted stock units (“RSUs”) and/or awarded non-vested stock. As of September 30, 2018, there were no stock options outstanding.

There were 35,880 and 43,540 stock option shares exercised in the nine months ended September 30, 2018 and 2017, respectively. The Company received $838,000 from the exercise of stock options for 35,880 shares at $23.37 per share that had an aggregate intrinsic value of $718,000 during the nine months ended September 30, 2018 compared to $1.0 million from the exercise of stock options that had an aggregate intrinsic value of $607,000 during the nine months ended September 30, 2017.

RSUs are granted under the Company’s long-term incentive plan 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 are time-vesting awards, others 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.

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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.

The following table presents RSU activity during the nine months ended September 30, 2018:

	Time-Based RSUs					Performance-Based RSUs
				Weighted-Average					Weighted-Average
				Grant Date					Grant Date
	Shares			Fair Value		Shares			Fair Value
Balance at December 31, 2017		221,738			32.72		339,872			33.52
Granted		141,810			43.30		55,455			39.46
Vested		(65,721	)		41.59		(68,459	)		41.22
Forfeited		(12,535	)		35.46		-			-
Balance at September 30, 2018		285,292			35.82		326,868			32.91

The compensation expense recorded for RSUs was $1.9 million for the three months ended September 30, 2018, compared to $1.3 million in the same period a year ago. For the nine months ended September 30, 2018 and 2017, compensation expense recorded relating to the RSUs was $5.3 million and $3.9 million, respectively. Unrecognized stock-based compensation expense related to RSUs was $11.8 million and $9.1 million as of September 30, 2018 and 2017, respectively. As of September 30, 2018, these costs are expected to be recognized over the next 1.9 years for time-based and performance-based RSU’s.

As of September 30, 2018, 2,582,001 shares were available under the Company’s 2005 Incentive Plan (as Amended and Restated) for future grants.

Tax benefit from share-based payment arrangements of $0.8 million reduced income tax expense in the first nine months of 2018 compared to $2.6 million in the same period a year ago.

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7. Investment Securities

Securities available-for-sale were $1.3 billion as of September 30, 2018, compared to $1.3 billion as of December 31, 2017.

The following tables reflect the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of debt securities available-for-sale as of September 30, 2018, and debt and equity investment securities as of December 31, 2017:

	September 30, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
	(In thousands)
Debt Securities Available-for-Sale
U.S. treasury securities	$	199,488	$	-	$	114	$	199,374
U.S. government agency entities		6,721		-		210		6,511
U.S. government sponsored entities		400,000		-		16,553		383,447
Mortgage-backed securities		648,532		130		22,023		626,639
Collateralized mortgage obligations		1,119		-		33		1,086
Corporate debt securities		64,983		1,020		-		66,003
Total	$	1,320,843	$	1,150	$	38,933	$	1,283,060

	December 31, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
	(In thousands)
Securities Available-for-Sale
U.S. treasury securities	$	249,877	$	-	$	357	$	249,520
U.S. government agency entities		9,047		11		70		8,988
U.S. government sponsored entities		400,000		-		9,664		390,336
State and municipal securities		1,944		-		30		1,914
Mortgage-backed securities		577,987		241		6,259		571,969
Collateralized mortgage obligations		1,533		-		17		1,516
Corporate debt securities		80,007		1,291		17		81,281
Mutual funds		6,500		-		270		6,230
Preferred stock of government sponsored entities		5,842		4,260		-		10,102
Other equity securities		3,608		8,162		-		11,770
Total	$	1,336,345	$	13,965	$	16,684	$	1,333,626

The amortized cost and fair value of investment securities as of September 30, 2018, by contractual maturities, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties.

	Securities Available-For-Sale
	Amortized cost		Fair value
	(In thousands)
Due in one year or less	$	199,497	$	199,383
Due after one year through five years		465,892		450,363
Due after five years through ten years		6,434		6,163
Due after ten years		649,020		627,151
Total	$	1,320,843	$	1,283,060

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There were no sales of mortgage-backed securities during the first nine months of 2018 and the first nine months of 2017. Proceeds from repayments, maturities and calls of mortgage-backed securities were $79.4 million and $48.5 million for the nine months ended September 30, 2018 and 2017, respectively. Proceeds of $99.6 million were received from the sale of other investment securities during the first nine months of 2018, compared to proceeds of $99.5 million from the sale of other investment securities during the first nine months of 2017. Proceeds from maturities and calls of other investment securities were $266.9 million during the nine months ended September 30, 2018, compared to $341.3 million during the same period a year ago. There were $14,000 of losses realized on sales of investment securities during the nine months ended September 30, 2018, compared to $438,000 of losses in the same period a year ago. There were no other than temporary impairment write-downs recorded during the first nine months of 2018 and the first nine months of 2017.

The adoption of ASU 2016-01 resulted in approximately $8.6 million being reclassified from accumulated other comprehensive income to retained earnings, representing an increase to retained earnings as of January 1, 2018. For the nine months ended September 30, 2018, the Company recognized a net loss of $4.6 million due to the decrease in fair value of equity investments with readily determinable fair values. Equity securities were $23.5 million as of September 30, 2018, compared to $28.1 million as of December 31, 2017.

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The tables below show the fair value and unrealized losses of the temporarily impaired securities in our investment securities portfolio as of September 30, 2018, and December 31, 2017:

	September 30, 2018
	Temporarily impaired securities
	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(In thousands)

Debt Securities Available-for-Sale
U.S. treasury securities	$	199,374	$	114	$	-	$	-	$	199,374	$	114
U.S. government agency entities		5,208		160		1,304		50		6,512		210
U.S. government sponsored entities		-		-		383,447		16,553		383,447		16,553
Mortgage-backed securities		247,059		6,088		372,218		15,935		619,277		22,023
Collateralized mortgage obligations		-		-		1,086		33		1,086		33
Total debt securities	$	451,641	$	6,362	$	758,055	$	32,571	$	1,209,696	$	38,933

Equity Securities
Preferred stock of government sponsored entities		6,397		3,706		-		-		6,397		3,706
Mutual funds		-		-		6,034		195		6,034		195
Other equity securities		1,008		679		-		-		1,008		679
Total equity securities	$	7,405	$	4,385	$	6,034	$	195	$	13,439	$	4,580

	December 31, 2017
	Temporarily impaired securities
	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(In thousands)

Securities Available-for-Sale
U.S. treasury securities	$	199,823	$	62	$	49,697	$	295	$	249,520	$	357
U.S. government agency entities		5,711		70		-		-		5,711		70
U.S. government sponsored entities		-		-		390,336		9,664		390,336		9,664
State and municipal securities		1,914		30		-		-		1,914		30
Mortgage-backed securities		342,436		3,147		178,617		3,112		521,053		6,259
Collateralized mortgage obligations		1,516		17		-		-		1,516		17
Corporate debt securities		5,015		17		-		-		5,015		17
Mutual funds		-		-		6,230		270		6,230		270
Total	$	556,415	$	3,343	$	624,880	$	13,341	$	1,181,295	$	16,684

As of September 30, 2018, the Company had unrealized losses on available-for-sale securities of $38.9 million. The unrealized losses on these securities were primarily attributed to yield curve movement, together with widened liquidity spreads and credit spreads. The issuers have not, to the Company’s knowledge, established any cause for default on these securities. Management believes the impairment was temporary and, accordingly, no impairment loss on these securities has been recognized in our condensed consolidated statements of operations. The Company expects to recover the amortized cost basis of its securities and has no intent to sell, and will not be required to sell, available-for-sale securities that have declined below their cost before their anticipated recovery.

Investment securities having a carrying value of $33.1 million as of September 30, 2018, and $272.2 million as of December 31, 2017, were pledged to secure public deposits, other borrowings, treasury tax and loan, and securities sold under agreements to repurchase.

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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; Las Vegas, Nevada, and Hong Kong. The Company has no specific industry concentration. The Company’s loans generally are collateralized by 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 other lenders, or through sale by the borrowers of the secured collateral.

The types of loans in the Company’s condensed consolidated balance sheets as of September 30, 2018, and December 31, 2017, were as follows:

	September 30, 2018			December 31, 2017
	(In thousands)
Commercial loans	$	2,674,089		$	2,461,266
Residential mortgage loans		3,569,111			3,062,050
Commercial mortgage loans		6,580,254			6,482,695
Real estate construction loans		597,018			678,805
Equity lines		221,599			180,304
Installment & other loans		5,575			5,170
Gross loans	$	13,647,646		$	12,870,290

Allowance for loan losses		(123,457	)		(123,279	)
Unamortized deferred loan fees		(2,086	)		(3,245	)

Total loans, net	$	13,522,103		$	12,743,766
Loans held for sale	$	-		$	8,000

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The following table presents the average balance and interest income recognized related to impaired loans for the periods indicated:

	Impaired Loans
	Average Recorded Investment								Interest Income Recognized
	Three months ended				Nine months ended				Three months ended				Nine months ended
	September 30,				September 30,				September 30,				September 30,
	2018		2017		2018		2017		2018		2017		2018		2017
	(In thousands)
Commercial loans	$	48,772	$	24,987	$	46,920	$	22,572	$	461	$	678	$	1,152	$	760
Real estate construction loans		5,980		29,780		7,490		29,868		-		99		-		287
Commercial mortgage loans		55,375		58,555		59,314		60,074		576		391		1,757		1,015
Residential mortgage loans and equity lines		13,724		13,937		14,032		15,208		108		96		279		287
Total impaired loans	$	123,851	$	127,259	$	127,756	$	127,722	$	1,145	$	1,264	$	3,188	$	2,349

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

	Impaired Loans
	September 30, 2018						December 31, 2017
	Unpaid Principal Balance		Recorded Investment		Allowance		Unpaid Principal Balance		Recorded Investment		Allowance
	(In thousands)

With no allocated allowance
Commercial loans	$	40,426	$	38,556	$	-	$	43,483	$	42,702	$	-
Real estate construction loans		5,776		4,922		-		8,821		8,185		-
Commercial mortgage loans		34,276		26,912		-		37,825		31,029		-
Residential mortgage loans and equity lines		6,791		6,776		-		1,301		1,301		-
Subtotal	$	87,269	$	77,166	$	-	$	91,430	$	83,217	$	-
With allocated allowance
Commercial loans	$	5,792	$	5,715	$	2,506	$	891	$	793	$	43
Commercial mortgage loans		27,549		27,523		917		21,733		21,635		1,738
Residential mortgage loans and equity lines		7,670		6,605		281		13,022		11,708		353
Subtotal	$	41,011	$	39,843	$	3,704	$	35,646	$	34,136	$	2,134
Total impaired loans	$	128,280	$	117,009	$	3,704	$	127,076	$	117,353	$	2,134

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The following tables present the aging of the loan portfolio by type as of September 30, 2018, and as of December 31, 2017:

	September 30, 2018
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Non-accrual Loans		Total Past Due		Loans Not Past Due		Total
Type of Loans:	(In thousands)
Commercial loans	$	28,212	$	17,329	$	3,467	$	17,118	$	66,126	$	2,607,963	$	2,674,089
Real estate construction loans		-		-		-		4,922		4,922		592,096		597,018
Commercial mortgage loans		-		9,157		3,214		13,172		25,543		6,554,711		6,580,254
Residential mortgage loans and equity lines		-		-		-		7,198		7,198		3,783,512		3,790,710
Installment and other loans		-		-		-		-		-		5,575		5,575
Total loans	$	28,212	$	26,486	$	6,681	$	42,410	$	103,789	$	13,543,857	$	13,647,646

	December 31, 2017
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Non-accrual Loans		Total Past Due		Loans Not Past Due		Total
Type of Loans:	(In thousands)
Commercial loans	$	11,079	$	5,192	$	-	$	14,296	$	30,567	$	2,430,699	$	2,461,266
Real estate construction loans		3,028		-		-		8,185		11,213		667,592		678,805
Commercial mortgage loans		17,573		5,602		-		19,820		42,995		6,439,700		6,482,695
Residential mortgage loans and equity lines		6,613		732		-		6,486		13,831		3,228,523		3,242,354
Installment and other loans		103		-		-		-		103		5,067		5,170
Total loans	$	38,396	$	11,526	$	-	$	48,787	$	98,709	$	12,771,581	$	12,870,290

The determination of the amount of the allowance for loan losses for impaired loans is based on management’s current judgment about the credit quality of the loan portfolio and takes into consideration known relevant internal and external factors that affect collectability when determining the appropriate level for the allowance for loan losses. The nature of the process by which the Bank determines the appropriate allowance for loan losses requires the exercise of considerable judgment. This allowance evaluation process is also applied to troubled debt restructurings since they are considered to be impaired loans. The allowance for loan losses and the reserve for off-balance sheet credit commitments are significant estimates that can and do change based on management’s process in analyzing the loan portfolio and on management’s assumptions about specific borrowers, underlying collateral, and applicable economic and environmental conditions, among other factors.

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

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

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As of September 30, 2018, accruing TDRs were $74.6 million and non-accrual TDRs were $27.7 million compared to accruing TDRs of $68.6 million and non-accrual TDRs of $33.4 million as of December 31, 2017. The Company allocated specific reserves of $1.6 million to accruing TDRs and $1.9 million to non-accrual TDRs as of September 30, 2018, and $1.9 million to accruing TDRs and $83,000 to non-accrual TDRs as of December 31, 2017. The following tables present TDRs that were modified during the three and nine months ended September 30, 2018 and 2017, their specific reserves as of September 30, 2018 and 2017, and charge-offs for the three and nine months ended September 30, 2018 and 2017:

	Three months ended September 30, 2018								September 30, 2018
	No. of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Charge-offs		Specific Reserve
	(Dollars in thousands)

Commercial loans		3	$	4,621	$	4,621	$	-	$	2,467
Commercial mortgage loans		1		339		339		-		-
Residential mortgage loans and equity lines		2		413		413		-		16
Total		6	$	5,373	$	5,373	$	-	$	2,483

	Three months ended September 30, 2017								September 30, 2017
	No. of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Charge-offs		Specific Reserve
	(Dollars in thousands)

Commercial loans		8	$	18,873	$	18,873	$	-	$	636
Commercial mortgage loans		5		4,123		3,818		305		10
Residential mortgage loans and equity lines		1		483		483		-		32
Total		14	$	23,479	$	23,174	$	305	$	678

	Nine months ended September 30, 2018								September 30, 2018
	No. of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Charge-offs		Specific Reserve
	(Dollars in thousands)

Commercial loans		21	$	12,212	$	12,212	$	-	$	2,493
Commercial mortgage loans		7		14,626		14,626		-		119
Residential mortgage loans and equity lines		4		1,213		1,213		-		24
Total		32	$	28,051	$	28,051	$	-	$	2,636

	Nine months ended September 30, 2017								September 30, 2017
	No. of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Charge-offs		Specific Reserve
	(Dollars in thousands)

Commercial loans		13	$	19,543	$	19,543	$	-	$	641
Real estate construction loans		2		28,489		28,489		-		-
Commercial mortgage loans		5		4,123		3,818		305		10
Residential mortgage loans and equity lines		1		483		483		-		32
Total		21	$	52,638	$	52,333	$	305	$	683

Modifications of the loan terms during the first nine months of 2018 were in the form of extensions of maturity dates, which ranged 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, 2018, which were all performing in accordance with their restructured terms, will continue to comply with the restructured terms because of the reduced principal or interest payments on these loans. A summary of TDRs by type of concession and by type of loan, as of September 30, 2018, and December 31, 2017, is shown below:

	September 30, 2018
Accruing TDRs	Payment Deferral		Rate Reduction		Rate Reduction and Payment Deferral		Total
	(In thousands)
Commercial loans	$	27,153	$	-	$	-	$	27,153
Commercial mortgage loans		14,248		7,446		19,568		41,262
Residential mortgage loans		3,433		329		2,421		6,183
Total accruing TDRs	$	44,834	$	7,775	$	21,989	$	74,598

	September 30, 2018
Non-accrual TDRs	Payment Deferral		Rate Reduction		Rate Reduction and Payment Deferral		Total
	(In thousands)
Commercial loans	$	14,579	$	-	$	-	$	14,579
Commercial mortgage loans		3,863		-		7,261		11,124
Residential mortgage loans		1,901		-		114		2,015
Total non-accrual TDRs	$	20,343	$	-	$	7,375	$	27,718

	December 31, 2017
Accruing TDRs	Payment Deferral		Rate Reduction		Rate Reduction and Payment Deferral		Total
	(In thousands)
Commercial loans	$	29,199	$	-	$	-	$	29,199
Commercial mortgage loans		11,504		5,871		15,468		32,843
Residential mortgage loans		3,416		335		2,772		6,523
Total accruing TDRs	$	44,119	$	6,206	$	18,240	$	68,565

	December 31, 2017
Non-accrual TDRs	Payment Deferral		Rate Reduction		Rate Reduction and Payment Deferral		Total
	(In thousands)
Commercial loans	$	12,944	$	-	$	-	$	12,944
Commercial mortgage loans		6,231		1,677		11,113		19,021
Residential mortgage loans		1,297		-		154		1,451
Total non-accrual TDRs	$	20,472	$	1,677	$	11,267	$	33,416

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

	Three months ended September 30,						Nine months ended September 30,
Accruing TDRs	2018			2017			2018			2017
	(In thousands)
Beginning balance	$	84,487		$	79,819		$	68,566		$	65,393
New restructurings		2,589			21,790			25,036			49,973
Restructured loans restored to accrual status		577			-			2,895			-
Payments		(13,055	)		(35,677	)		(19,801	)		(41,372	)
Restructured loans placed on non-accrual status		-			(3,574	)		(2,098	)		(9,396	)
Expiration of loan concession upon renewal		-			-			-			(2,240	)
Ending balance	$	74,598		$	62,358		$	74,598		$	62,358

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	Three months ended September 30,						Nine months ended September 30,
Non-accrual TDRs	2018			2017			2018			2017
	(In thousands)
Beginning balance	$	30,347		$	30,045		$	33,415		$	29,722
New restructurings		2,784			2,360			3,015			2,360
Restructured loans placed on non-accrual status		-			3,574			2,098			9,396
Charge-offs		-			(355	)		(161	)		(1,901	)
Payments		(4,836	)		(1,933	)		(7,754	)		(5,160	)
Foreclosures		-			-			-			(726	)
Restructured loans restored to accrual status		(577	)		-			(2,895	)		-
Ending balance	$	27,718		$	33,691		$	27,718		$	33,691

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, 2018.

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, 2018, there were no commitments to lend additional funds to those borrowers whose loans had been restructured, were considered impaired, or were on non-accrual status.

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

●

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

●

Special Mention – Borrower is fundamentally sound and loan is currently protected but adverse trends are apparent that, if not corrected, may affect ability to repay. Primary source of loan repayment remains viable but there is increasing reliance on collateral or guarantor support.

●

Substandard – These loans are inadequately protected by current sound net worth, paying capacity, or collateral. Well-defined weaknesses exist that could jeopardize repayment of debt. Loss may not be imminent, but if weaknesses are not corrected, there is a good possibility of some loss.

●

Doubtful – The possibility of loss is extremely high, but due to identifiable and important pending events (which may strengthen the loan), a loss classification is deferred until the situation is better defined.

●

Loss – These loans are considered uncollectible and of such little value that to continue to carry the loan as an active asset is no longer warranted.

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The following tables present the loan portfolio by risk rating as of September 30, 2018, and as of December 31, 2017:

	September 30, 2018
	Pass/Watch		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Commercial loans	$	2,494,780	$	125,373	$	53,936	$	-	$	2,674,089
Real estate construction loans		531,579		60,517		4,922		-		597,018
Commercial mortgage loans		6,181,227		315,010		84,017		-		6,580,254
Residential mortgage loans and equity lines		3,782,077		-		8,633		-		3,790,710
Installment and other loans		5,575		-		-		-		5,575
Total gross loans	$	12,995,238	$	500,900	$	151,508	$	-	$	13,647,646

Loans held for sale	$	-	$	-	$	-	$	-	$	-

	December 31, 2017
	Pass/Watch		Special Mention		Substandard		Doubtful		Total

Commercial loans	$	2,281,698	$	118,056	$	61,503	$	9	$	2,461,266
Real estate construction loans		616,411		54,209		8,185		-		678,805
Commercial mortgage loans		6,004,258		308,924		169,513		-		6,482,695
Residential mortgage loans and equity lines		3,232,606		-		9,748		-		3,242,354
Installment and other loans		5,170		-		-		-		5,170
Total gross loans	$	12,140,143	$	481,189	$	248,949	$	9	$	12,870,290

Loans held for sale	$	-	$	-	$	8,000	$	-	$	8,000

The following table presents the balance in the allowance for loan losses by portfolio segment and based on impairment method as of September 30, 2018, and as of December 31, 2017:

			Real Estate		Commercial		Residential
	Commercial		Construction		Mortgage		Mortgage Loans		Installment and
	Loans		Loans		Loans		and Equity Lines		Other Loans		Total
	(In thousands)
September 30, 2018
Loans individually evaluated for impairment
Allowance	$	2,506	$	-	$	917	$	281	$	-	$	3,704
Balance	$	44,272	$	4,922	$	54,435	$	13,381	$	-	$	117,010

Loans collectively evaluated for impairment
Allowance	$	54,008	$	21,226	$	31,865	$	12,628	$	26	$	119,753
Balance	$	2,629,817	$	592,096	$	6,525,819	$	3,777,329	$	5,575	$	13,530,636

Total allowance	$	56,514	$	21,226	$	32,782	$	12,909	$	26	$	123,457
Total balance	$	2,674,089	$	597,018	$	6,580,254	$	3,790,710	$	5,575	$	13,647,646

December 31, 2017
Loans individually evaluated for impairment
Allowance	$	43	$	-	$	1,738	$	353	$	-	$	2,134
Balance	$	43,495	$	8,185	$	52,664	$	13,009	$	-	$	117,353

Loans collectively evaluated for impairment
Allowance	$	49,753	$	24,838	$	35,872	$	10,660	$	22	$	121,145
Balance	$	2,417,771	$	670,620	$	6,430,031	$	3,229,345	$	5,170	$	12,752,937

Total allowance	$	49,796	$	24,838	$	37,610	$	11,013	$	22	$	123,279
Total balance	$	2,461,266	$	678,805	$	6,482,695	$	3,242,354	$	5,170	$	12,870,290

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The following tables detail activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2018, and September 30, 2017. 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, 2018 and 2017

				Real Estate		Commercial			Residential			Installment
	Commercial			Construction		Mortgage			Mortgage Loans			and Other
	Loans			Loans		Loans			and Equity Lines			Loans		Total
	(In thousands)

June 30, 2018 Ending Balance	$	55,179		$	20,663	$	33,976		$	12,062		$	19		121,899
Provision/(credit) for possible credit losses		1,270			519		(4,138	)		842			7		(1,500	)
Charge-offs		(122	)		-		-			-			-		(122	)
Recoveries		187			44		2,944			5			-		3,180
Net (charge-offs)/recoveries		65			44		2,944			5			-		3,058
September 30, 2018 Ending Balance	$	56,514		$	21,226	$	32,782		$	12,909		$	26	$	123,457

June 30, 2017 Ending Balance	$	46,744		$	17,844	$	36,840		$	14,364		$	17	$	115,809
Provision/(credit) for possible credit losses		3,800			4,117		(4,615	)		(3,309	)		7		-
Charge-offs		(80	)		-		(305	)		-			-		(385	)
Recoveries		575			47		5,482			7			-		6,111
Net (charge-offs)/recoveries		495			47		5,177			7			-		5,726
September 30, 2017 Ending Balance	$	51,039		$	22,008	$	37,402		$	11,062		$	24	$	121,535

Nine months ended September 30, 2018 and 2017

				Real Estate			Commercial			Residential			Installment
	Commercial			Construction			Mortgage			Mortgage Loans			and Other
	Loans			Loans			Loans			and Equity Lines			Loans		Total
	(In thousands)

2018 Beginning Balance	$	49,796		$	24,838		$	37,610		$	11,013		$	22	$	123,279
Provision/(credit) for possible credit losses		6,097			(3,744	)		(8,672	)		1,815			4		(4,500	)
Charge-offs		(629	)		-			(390	)		-			-		(1,019	)
Recoveries		1,250			132			4,234			81			-		5,697
Net recoveries		621			132			3,844			81			-		4,678
September 30, 2018 Ending Balance	$	56,514		$	21,226		$	32,782		$	12,909		$	26	$	123,457
Reserve for impaired loans	$	2,506		$	-		$	917		$	281		$	-	$	3,704
Reserve for non-impaired loans	$	54,008		$	21,226		$	31,865		$	12,628		$	26	$	119,753
Reserve for off-balance sheet credit commitments	$	1,615		$	1,174		$	78		$	215		$	6	$	3,088

2017 Beginning Balance	$	49,203		$	23,268		$	34,864		$	11,620		$	11	$	118,966
(Credit)/provision for possible credit losses		2,245			(1,403	)		(2,775	)		(580	)		13		(2,500	)
Charge-offs		(1,810	)		-			(860	)		-			-		(2,670	)
Recoveries		1,401			143			6,173			22			-		7,739
Net (charge-offs)/recoveries		(409	)		143			5,313			22			-		5,069
September 30, 2017 Ending Balance	$	51,039		$	22,008		$	37,402		$	11,062		$	24	$	121,535
Reserve for impaired loans	$	1,461			-		$	823		$	322			-	$	2,606
Reserve for non-impaired loans	$	49,578		$	22,008		$	36,579		$	10,740		$	24	$	118,929
Reserve for off-balance sheet credit commitments	$	2,760		$	1,206		$	109		$	175		$	4	$	4,254

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9. Commitments and Contingencies

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

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

10. Borrowed Funds

Borrowing from the Federal Home Loan Bank (“FHLB”). As of September 30, 2018, over-night borrowings from the FHLB were $240 million at a rate of 2.33% compared to $325 million at a rate of 1.41% as of December 31, 2017. As of September 30, 2018, the advances from the FHLB were $75 million at a rate of 1.99% compared to $105 million at a rate of 1.41% as of December 31, 2017. As of September 30, 2018, FHLB advances of $5 million will mature in October 2018, $50 million in December 2019, and $20 million in May 2023.

Other Borrowing. Pursuant to the Stock Purchase Agreement with Bank SinoPac Co. Ltd, $35.2 million of the purchase price were held back at a floating rate of three-month LIBOR rate plus 150 basis points and 50%, 30%, and 20% will be disbursed annually over three years on the anniversary dates, respectively. As of September 30, 2018, the outstanding balance was $18.3 million with a rate of 3.39% compared to $35.2 million at December 31, 2017.

Long-term Debt. On October 12, 2017, the Bank entered into a term loan agreement of $75.0 million with U.S. Bank. The loan has a floating rate of one-month LIBOR plus 175 basis points. As of September 30, 2018, the term loan has an interest rate of 3.875% compared to 3.125% at December 31, 2017. The principal amount of the long-term debt from U.S. Bank is due and payable in consecutive quarterly installments of $4.7 million each on the last day of each calendar quarter commencing December 31, 2018, with the final installment due and payable on October 12, 2020. The U.S. Bank loan proceeds were used to fund a portion of our acquisition of SinoPac Bancorp.

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11. Income Taxes

The effective tax rate for the first nine months of 2018 was 19.0% compared to 32.1% for the first nine months of 2017. The reduction in the effective tax rate was primarily due to the Tax Legislation, which reduced the Company’s federal corporate tax rate from 35% to 21% effective January 1, 2018, an alternative energy investment made in the second quarter and the impact of low income housing tax credits.

As of December 31, 2017, the Company had income tax refunds receivable of $7.2 million. These income tax receivables are included in other assets in the accompanying condensed consolidated balance sheets.

The Company’s tax returns are open for audit by the Internal Revenue Service back to 2015 and by the California Franchise Tax Board back to 2013.

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.

12. 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, state and municipal securities, mortgage-backed securities (“MBS”), commercial MBS, collateralized mortgage obligations, asset-backed securities, corporate bonds and trust preferred securities.

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

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

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

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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 nine months ended September 30, 2018 and December 31, 2017, 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, 2018, and December 31, 2017:

September 30, 2018	Fair Value Measurements Using						Total at
	Level 1		Level 2		Level 3		Fair Value
	(In thousands)
Assets

Debt securities available-for-sale
U.S. Treasury securities	$	199,374	$	-	$	-	$	199,374
U.S. government agencies		-		6,511		-		6,511
U.S. government sponsored entities		-		383,447		-		383,447
Mortgage-backed securities		-		626,639		-		626,639
Collateralized mortgage obligations		-		1,086		-		1,086
Corporate debt securities		-		66,003		-		66,003
Total debt securities available-for-sale		199,374		1,083,686		-		1,283,060

Equity securities
Preferred stock of government sponsored entities		6,397		-		-		6,397
Mutual funds		6,034		-		-		6,034
Other equity securities		11,091		-		-		11,091
Total equity securities		23,522		-		-		23,522

Warrants		-		-		168		168
Interest rate swaps		-		18,419		-		18,419
Foreign exchange contracts		-		400		-		400
Total assets	$	222,896	$	1,102,505	$	168	$	1,325,569

Liabilities

Option contracts	$	-	$	4	$	-	$	4
Foreign exchange contracts		-		1,648		-		1,648
Total liabilities	$	-	$	1,652	$	-	$	1,652

December 31, 2017	Fair Value Measurements Using						Total at
	Level 1		Level 2		Level 3		Fair Value
	(In thousands)
Assets

Securities available-for-sale
U.S. Treasury securities	$	249,520	$	-	$	-	$	249,520
U.S. government agency entities		-		8,988		-		8,988
U.S. government sponsored entities		-		390,336		-		390,336
State and municipal securities		-		1,914		-		1,914
Mortgage-backed securities		-		571,969		-		571,969
Collateralized mortgage obligations		-		1,516		-		1,516
Corporate debt securities		-		81,281		-		81,281
Mutual funds		6,230		-		-		6,230
Preferred stock of government sponsored entities		10,102		-		-		10,102
Other equity securities		11,770		-		-		11,770
Total securities available-for-sale		277,622		1,056,004		-		1,333,626
Warrants		-		-		91		91
Interest rate swaps		-		5,218		-		5,218
Foreign exchange contracts		-		1,832		-		1,832
Total assets	$	277,622	$	1,063,054	$	91	$	1,340,767

Liabilities

Option contracts	$	-	$	9	$	-	$	9
Interest rate swaps		-		2,699		-		2,699
Foreign exchange contracts		-		453		-		453
Total liabilities	$	-	$	3,161	$	-	$	3,161

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The Company measured the fair value of its warrants on a recurring basis using significant unobservable inputs. The fair value of warrants was $168,000 as of September 30, 2018, compared to $91,000 as of December 31, 2017. The fair value adjustment of warrants was included in other operating income in the third quarter of 2018. 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 2.73% to 3.27%, and stock volatility from 8.3% to 12.09%.

For financial assets measured at fair value on a nonrecurring basis that were still reflected in the condensed consolidated balance sheet as of September 30, 2018, the following tables provide the level of valuation assumptions used to determine each adjustment, the carrying value of the related individual assets as of September 30, 2018, and December 31, 2017, and the total losses for the periods indicated:

	As of September 30, 2018								Total Losses
	Fair Value Measurements Using						Total at		For the Three Months Ended				For the Nine Months Ended
	Level 1		Level 2		Level 3		Fair Value		September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
	(In thousands)
Assets
Impaired loans by type:
Commercial loans	$	-	$	-	$	3,209	$	3,209	$	-	$	-	$	-	$	25
Commercial mortgage loans		-		-		26,606		26,606		-		-		-		-
Residential mortgage loans and equity lines		-		-		6,323		6,323		-		-		-		-
Total impaired loans		-		-		36,138		36,138		-		-		-		25
Other real estate owned ⁽¹⁾		-		4,918		4,343		9,261		-		405		-		654
Investments in venture capital and private company stock		-		-		2,188		2,188		62		12		326		365
Total assets	$	-	$	4,918	$	42,669	$	47,587	$	62	$	417	$	326	$	1,044

(1) Other real estate owned balance of $8.7 million in the condensed consolidated balance sheet is net of estimated disposal costs.

	As of December 31, 2017								Total Losses
	Fair Value Measurements Using						Total at		For the Twelve Months Ended
	Level 1		Level 2		Level 3		Fair Value		December 31, 2017		December 31, 2016
	(In thousands)
Assets
Impaired loans by type:
Commercial loans	$	-	$	-	$	18,097	$	18,097	$	25	$	322
Commercial mortgage loans		-		-		31,459		31,459		-		-
Residential mortgage loans and equity lines		-		-		11,355		11,355		-		-
Total impaired loans		-		-		60,911		60,911		25		322
Other real estate owned ⁽¹⁾		-		5,677		4,322		9,999		457		9
Investments in venture capital and private company stock		-		-		2,583		2,583		392		976
Total assets	$	-	$	5,677	$	67,816	$	73,493	$	874	$	1,307

(1) Other real estate owned balance of $9.4 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 was 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 the Company’s primary objective in the event of default would be to monetize the collateral to settle the outstanding balance of the loan, less marketable collateral would receive a larger discount. During the reported periods, collateral discounts ranged from 55% in the case of accounts receivable collateral to 65% in the case of inventory collateral.

The significant unobservable inputs used in the fair value measurement of loans held for sale was primarily based on the quoted price or sale price adjusted by estimated sales cost and commissions.

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

13. Fair Value of Financial Instruments

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

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

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

Securities Purchased under Agreements to Resell. The fair value of securities purchased under agreements to resell is based on dealer quotes, a Level 2 measurement.

Securities. For securities, including securities held-to-maturity, available-for-sale, and for trading, fair values were based on quoted market prices at the reporting date. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities or dealer quotes. For certain actively traded agency preferred stock, U.S. Treasury securities, and other equity securities, the Company measures the fair value based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement. The Company also measures securities by using quoted market prices for similar securities or dealer quotes, a Level 2 measurement. This category generally includes U.S. Government agency securities, state and municipal securities, mortgage-backed securities (“MBS”), commercial MBS, collateralized mortgage obligations, asset-backed securities, and corporate bonds.

Loans Held for Sale. The Company records loans held for sale at fair value based on quoted prices from third party sources, or appraisal reports adjusted by sales commission assumptions.

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

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

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

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

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

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

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

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

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

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

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

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

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The following table presents the carrying and notional amounts and estimated fair value of financial instruments as of September 30, 2018, and December 31, 2017:

	September 30, 2018				December 31, 2017
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
	(In thousands)
Financial Assets
Cash and due from banks	$	204,178	$	204,178	$	247,056	$	247,056
Short-term investments and interest bearing deposits		377,839		377,839		292,745		292,745
Securities available-for-sale		1,283,060		1,283,060		1,333,626		1,333,626
Equity securities		23,522		23,522		-		-
Loans held for sale		-		-		8,000		8,000
Loans, net ⁽¹⁾		13,522,103		13,502,232		12,743,766		12,663,049
Investment in Federal Home Loan Bank stock		17,250		17,250		23,085		23,085
Warrants		168		168		91		91

	Notional				Notional
	Amount		Fair Value		Amount		Fair Value
Foreign exchange contracts	$	53,361	$	400	$	108,530	$	1,832
Interest rate swaps		756,819		18,419		514,159		5,218

Financial Liabilities	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value

Deposits	$	13,581,078	$	13,617,846	$	12,689,893	$	12,700,674
Securities sold under agreements to repurchase		-		-		100,000		100,163
Advances from Federal Home Loan Bank		315,000		314,507		430,000		429,482
Other borrowings		35,585		33,791		52,885		51,075
Long-term debt		194,136		142,068		194,136		141,865

	Notional				Notional
	Amount		Fair Value		Amount		Fair Value
Option contracts	$	1,623	$	4	$	1,014	$	9
Foreign exchange contracts		117,634		1,648		32,127		453
Interest rate swaps		-		-		145,399		2,699

	Notional					Notional
	Amount		Fair Value			Amount		Fair Value
Off-Balance Sheet Financial Instruments
Commitments to extend credit	$	2,645,086	$	(9,095	)	$	2,366,368	$	(7,224	)
Standby letters of credit		167,050		(1,509	)		140,814		(1,805	)
Other letters of credit		30,420		(20	)		27,353		(52	)
Bill of lading guarantees		1,108		-			24		-

(1) In accordance with the prospective adoption of ASU 2016-01, the fair value of loans as of September 30, 2018 was measured using an exit price notion. The fair value of loans as of December 31, 2017 was measured using an entry price notion.

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The following tables present the level in the fair value hierarchy for the estimated fair values of financial instruments as of September 30, 2018, and December 31, 2017.

	As of September 30, 2018
	Estimated
	Fair Value
	Measurements		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets
Cash and due from banks	$	204,178	$	204,178	$	-	$	-
Short-term investments and interest bearing deposits		377,839		377,839		-		-
Debt securities available-for-sale		1,283,060		199,374		1,083,686		-
Equity securities		23,522		23,522		-		-
Loans, net ⁽¹⁾		13,502,232		-		-		13,502,232
Investment in Federal Home Loan Bank stock		17,250		-		17,250		-
Warrants		168		-		-		168
Financial Liabilities
Deposits		13,617,846		-		-		13,617,846
Advances from Federal Home Loan Bank		314,507		-		314,507		-
Other borrowings		33,791		-		-		33,791
Long-term debt		142,068		-		142,068		-

	As of December 31, 2017
	Estimated
	Fair Value
	Measurements		Level 1		Level 2		Level 3
	(In thousands)
Financial Assets
Cash and due from banks	$	247,056	$	247,056	$	-	$	-
Short-term investments and interest bearing deposits		292,745		292,745		-		-
Securities available-for-sale		1,333,626		277,622		1,056,004		-
Loans held-for-sale		8,000		-		-		8,000
Loans, net ⁽¹⁾		12,663,049		-		-		12,663,049
Investment in Federal Home Loan Bank stock		23,085		-		23,085		-
Warrants		91		-		-		91
Financial Liabilities
Deposits		12,700,674		-		-		12,700,674
Securities sold under agreement to repurchase		100,163		-		100,163		-
Advances from Federal Home Loan Bank		429,482		-		429,482		-
Other borrowings		51,075		-		-		51,075
Long-term debt		141,865		-		141,865		-

14. 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.

As of September 30, 2018, the Company’s market capitalization was above book value and there was no triggering event that required the Company to assess goodwill for impairment as of an interim date.

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15. Financial Derivatives

It is the policy of the Company not to speculate on the future direction of interest rates. However, the Company enters into financial derivatives to seek to mitigate exposure to interest rate risks related to our interest-earning assets and interest-bearing liabilities. We believe that these transactions, when properly structured and managed, may provide a hedge against inherent interest rate risk in the Company’s assets or liabilities and against risk in specific transactions. In such instances, the Company may enter into interest rate swap contracts or other types of financial derivatives. Prior to considering any hedging activities, we seek to analyze the costs and benefits of the hedge in comparison to other viable alternative strategies. All hedges must be approved by the Bank’s Investment Committee.

The Company follows ASC Topic 815 that establishes accounting and reporting standards for financial derivatives, including certain financial derivatives embedded in other contracts, and hedging activities. It requires the recognition of all financial derivatives as assets or liabilities in the Company’s consolidated balance sheet and measurement of those financial derivatives at fair value. The accounting treatment of changes in fair value is dependent upon whether or not a financial derivative is designated as a hedge and, if so, the type of hedge. Fair value is determined using third-party models with observable market data. For derivatives designated as cash flow hedges, changes in fair value are recognized in other comprehensive income and are reclassified to earnings when the hedged transaction is reflected in earnings. For derivatives designated as fair value hedges, changes in the fair value of the derivatives are reflected in current earnings, together with changes in the fair value of the related hedged item if there is a highly effective correlation between changes in the fair value of the interest rate swaps and changes in the fair value of the underlying asset or liability that is intended to be hedged. If there is not a highly effective correlation between changes in the fair value of the interest rate swap and changes in the fair value of the underlying asset or liability that is intended to be hedged, then only the changes in the fair value of the interest rate swaps are reflected in the Company’s consolidated financial statements.

In May 2014, the Bancorp entered into interest rate swap contracts in the notional amount of $119.1 million for a period of ten years. The objective of these interest rate swap contracts, which were designated as hedging instruments in cash flow hedges, was to hedge the quarterly interest payments on the Bancorp’s $119.1 million of Junior Subordinated Debentures that had been issued to five trusts, throughout the ten-year period beginning in June 2014 and ending in June 2024, from the risk of variability of these payments resulting from changes in the three-month LIBOR interest rate. The Bancorp pays a weighted average fixed interest rate of 2.61% and receives a variable interest rate of the three-month LIBOR at a weighted average rate of 2.35% as of September 30, 2018. As of September 30, 2018, the notional amount of cash flow interest rate swaps was $119.1 million and their unrealized gain of $1.9 million, net of taxes, was included in other comprehensive income compared to unrealized loss of $2.3 million at September 30, 2017. The amount of periodic net settlement of interest rate swaps included in interest expense was $83,000 for the three months ended September 30, 2018, compared to $407,000 for the same quarter a year ago. For the nine months ended September 30, 2018, the periodic net settlement of interest rate swaps included in interest expense was $480,000 compared to $1.3 million for the same period in 2017. As of September 30, 2018, and 2017, the ineffective portion of these interest rates swaps was not significant.

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As of September 30, 2018, the Bank’s outstanding interest rate swap contracts had a notional amount of $637.7 million for various terms from two to ten years. The Bank entered into these interest rate swap contracts that are matched to individual fixed-rate commercial real estate loans in the Bank’s loan portfolio. These contracts have been designated as hedging instruments to hedge the risk of changes in the fair value of the underlying commercial real estate loans due to changes in interest rates. The swap contracts are structured so that the notional amounts reduce over time to match the contractual amortization of the underlying loan and allow prepayments with the same pre-payment penalty amounts as the related loan. The Bank pays a weighted average fixed rate of 4.71% and receives a variable rate of the one-month LIBOR rate plus a weighted average spread of 266 basis points, or at a weighted average rate of 4.78%. As of September 30, 2018, and September 30, 2017, the notional amount of fair value interest rate swaps was $637.7 million and $510.6 million with net unrealized gains of $15.7 million and $1.9 million, respectively, included in other non-interest income. The amount of periodic net settlement of interest rate swaps increasing interest income was $96,000 for the three months ended September 30, 2018, compared to a decrease of $514,000 for the same period a year ago. The amount of periodic net settlement of interest rate swaps decreasing interest income was $132,000 for the nine months ended September 30, 2018, compared to $1.9 million for the same period a year ago. As of September 30, 2018, and 2017, the ineffective portion of these interest rate swaps was not significant.

Interest rate swap contracts involve the risk of dealing with institutional derivative counterparties and their ability to meet contractual terms. Institutional counterparties must have a strong credit profile and be approved by the Company’s Board of Directors. The Company’s credit exposure on interest rate swaps is limited to the net favorable value and interest payments of all swaps by each counterparty. Credit exposure may be reduced by the amount of collateral pledged by the counterparty. The Bancorp’s interest rate swaps have been assigned by the counterparties to a derivatives clearing organization and daily margin is indirectly maintained with the derivatives clearing organization. There was no cash posted as collateral by the Bancorp related to derivative contracts as of September 30, 2018 compared to $4.5 million as of December 31, 2017.

The Company enters into foreign exchange forward contracts with various counterparties to mitigate the risk of fluctuations in foreign currency exchange rates for foreign exchange certificates of deposit or foreign exchange contracts entered into with our clients. These contracts are not designated as hedging instruments and are recorded at fair value in our consolidated balance sheet. Changes in the fair value of these contracts as well as the related foreign exchange certificates of deposit and foreign exchange contracts are recognized immediately in net income as a component of non-interest income. Period end gross positive fair values are recorded in other assets and gross negative fair values are recorded in other liabilities. At September 30, 2018, the notional amount of option contracts totaled $1.6 million with a net negative fair value of $4,000. At September 30, 2018, spot, forward, and swap contracts in the total notional amount of $53.4 million had a positive fair value of $400,000. Spot, forward, and swap contracts in the total notional amount of $117.6 million had a negative fair value of $1.6 million at September 30, 2018. At December 31, 2017, the notional amount of option contracts totaled $1.0 million with a net negative fair value of $9,000. At December 31, 2017, spot, forward, and swap contracts in the total notional amount of $108.5 million had a positive fair value of $1.8 million. Spot, forward, and swap contracts in the total notional amount of $32.1 million had a negative fair value of $453,000 at December 31, 2017.

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16. 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, 2018, and December 31, 2017, are presented in the following table:

							Gross Amounts Not Offset in the Balance Sheet
	Gross Amounts Recognized		Gross Amounts Offset in the Balance Sheet		Net Amounts Presented in the Balance Sheet		Financial Instruments		Collateral Posted			Net Amount
	(In thousands)
September 30, 2018
Assets:
Derivatives	$	18,419	$	-	$	18,419	$	-	$	-		$	18,419

Liabilities:
Securities sold under agreements to repurchase	$	-	$	-	$	-	$	-	$	-		$	-
Derivatives	$	-	$	-	$	-	$	-	$	-		$	-

December 31, 2017
Assets:
Derivatives	$	5,218	$	-	$	5,218	$	-	$	-		$	5,218

Liabilities:
Securities sold under agreements to repurchase	$	100,000	$	-	$	100,000	$	-	$	(100,000	)	$	-
Derivatives	$	2,699	$	-	$	2,699	$	-	$	(2,699	)	$	-

17. Revenue from Contracts with Customers

On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers - Topic 606 and all subsequent ASUs that modified ASC 606, Revenue from Contracts with Customers. The Company adopted ASC 606 using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. The new standard did not materially impact the timing or measurement of the Company’s revenue recognition as it is consistent with the Company’s existing accounting for contracts within the scope of the new standard. There was no cumulative effect adjustment to retained earnings as a result of adopting this new standard.

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The following is a summary of revenue from contracts with customers that are in-scope and not in-scope under Topic 606:

	Three months Ended September 30,				Nine months Ended September 30,
	2018		2017		2018		2017
	(In thousands)
Non-interest income, in-scope⁽¹⁾:
Fees and service charges on deposit accounts	$	2,027	$	2,286	$	6,421	$	7,043
Wealth management fees		1,528		353		4,252		1,906
Other service fees⁽²⁾		3,376		3,863		10,140		10,212
Total in-scope noninterest income		6,931		6,502		20,813		19,161

Noninterest income, not in-scope⁽³⁾		904		6,459		99		6,670
Total noninterest income	$	7,835	$	12,961	$	20,912	$	25,831

(1) There were no adjustments to the Company's financial statements recorded as a result of the adoption of ASC 606. For comparability, the Company has adjusted prior period amounts to conform to the periods presentation.

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

(3) 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 once the performance obligations are met. The adoption of ASU 2014-09 had no impact to the recognition of fees and service charges on deposit accounts.

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. 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.

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In addition, given the short term nature of the Company’s 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.

18. Stockholders’ Equity

Total equity was $2.12 billion as of September 30, 2018, an increase of $143.5 million, from $1.97 billion as of December 31, 2017, primarily due to net income of $207.2 million partially offset by common stock cash dividends of $58.5 million and decreases in other comprehensive income of $12.2 million.

The U.S. Treasury received warrants to purchase common stock of 1,846,374 shares at an exercise price of $20.96 as part of the Company’s participation in the U.S. Treasury Troubled Asset Relief Program Capital Purchase Program. As a result of the anti-dilution adjustments under the warrant, the exercise price at December 31, 2017, has been adjusted to $20.41 and the number of warrants increased by 1.03%. At September 30, 2018, 345,534 warrants remain exercisable compared to 943,327 warrants at December 31, 2017.

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, 2018, and September 30, 2017, was as follows:

	Three months ended September 30, 2018									Three months ended September 30, 2017
	Pre-tax			Tax expense/ (benefit)			Net-of-tax			Pre-tax			Tax expense/ (benefit)			Net-of-tax
	(In thousands)
Beginning balance, loss, net of tax
Securities available-for-sale							$	(24,084	)							$	1,001
Cash flow hedge derivatives								1,163									(2,421	)
Total							$	(22,921	)							$	(1,420	)

Net unrealized (losses)/gains arising during the period
Securities available-for-sale	$	(3,603	)	$	(1,065	)	$	(2,538	)	$	1,829		$	769		$	1,060
Cash flow hedge derivatives		2,365			699			1,666			271			114			157
Total		(1,238	)		(366	)		(872	)		2,100			883			1,217

Reclassification adjustment for net losses in net income
Securities available-for-sale		14			4			10			(24	)		(10	)		(14	)
Cash flow hedge derivatives		-			-			-			-			-			-
Total		14			4			10			(24	)		(10	)		(14	)

Total other comprehensive (loss)/income
Securities available-for-sale		(3,589	)		(1,061	)		(2,528	)		1,805			759			1,046
Cash flow hedge derivatives		2,365			699			1,666			271			114			157
Total	$	(1,224	)	$	(362	)	$	(862	)	$	2,076		$	873		$	1,203
Ending balance, (loss)/gain, net of tax
Securities available-for-sale							$	(26,612	)							$	2,047
Cash flow hedge derivatives								2,829									(2,264	)
Total							$	(23,783	)							$	(217	)

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	Nine months ended September 30, 2018									Nine months ended September 30, 2017
	Pre-tax			Tax expense/ (benefit)			Net-of-tax			Pre-tax			Tax expense/ (benefit)			Net-of-tax
	(In thousands)
Beginning balance, loss, net of tax
Securities available-for-sale							$	(1,060	)							$	(1,545	)
Cash flow hedge derivatives								(1,451	)								(2,170	)
Total							$	(2,511	)							$	(3,715	)

Reclassification adjustment for stranded tax effects of Tax Cuts and Jobs Act ⁽¹⁾
Securities available-for-sale		-			200			(200	)		-			-			-
Cash flow hedge derivatives		-			315			(315	)		-			-			-
Total		-			515			(515	)		-			-			-

Reclassification adjustment for equity securities ⁽²⁾
Equity securities		(12,151	)		(3,592	)		(8,559	)		-			-			-

Net unrealized (losses)/gains arising during the period
Securities available-for-sale	$	(23,854	)	$	(7,051	)	$	(16,803	)	$	5,758		$	2,420		$	3,338
Cash flow hedge derivatives		6,523			1,928			4,595			(162	)		(68	)		(94	)
Total		(17,331	)		(5,123	)		(12,208	)		5,596			2,352			3,244

Reclassification adjustment for net losses in net income
Securities available-for-sale		14			4			10			439			185			254
Cash flow hedge derivatives		-			-			-			-			-			-
Total		14			4			10			439			185			254

Total other comprehensive (loss)/income
Securities available-for-sale		(23,840	)		(7,047	)		(16,793	)		6,197			2,605			3,592
Cash flow hedge derivatives		6,523			1,928			4,595			(162	)		(68	)		(94	)
Total	$	(17,317	)	$	(5,119	)	$	(12,198	)	$	6,035		$	2,537		$	3,498
Ending balance, (loss)/gain, net of tax
Securities available-for-sale							$	(26,612	)							$	2,047
Cash flow hedge derivatives								2,829									(2,264	)
Total							$	(23,783	)							$	(217	)

(1) These amounts were recorded as of January 1, 2018 as a result of the adoption of ASU 2018-2.

(2) This amount was recorded as of January 1, 2018 as a result of the adoption of ASU 2016-1.

19. Stock Repurchase Program

On February 1, 2016, the Company’s Board of Directors approved a stock repurchase program to buy back up to $45.0 million of our common stock. The Company did not repurchase any shares under the February 2016 repurchase program in 2017 or for the nine months ended September 30, 2018. As of September 30, 2018, and December 31, 2017, the Company may repurchase up to $7.5 million of its common stock under the February 2016 repurchase program.

20. Subsequent Events

Between October 22 and 25, 2018, the Company repurchased 200,326 shares of common stock for $7.5 million and completed its February 2016 $45 million repurchase program. The Company repurchased 1,580,904 shares at an average price of $28.46 per share under the February 2016 buyback program. On October 26, 2018, the Company announced a new stock repurchase program to repurchase up to $45.0 million of the Company’s common stock. Between October 29 and November 7, 2018, the Company repurchased 255,000 shares of its common stock for $9.7 million, or a $38.26 average price per share under the October 2018 repurchase program. As of November 8, 2018, there was $35.3 million remaining under the Company’s October 2018 stock repurchase program.

The Company has evaluated the effect of events that have occurred subsequent to September 30, 2018, through the date of issuance of the consolidated financial statements, and there have been no other material events that would require recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements.

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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, 2017.

Critical Accounting Policies

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

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

Accounting for the allowance for loan losses involves significant judgments and assumptions by management, which have a material impact on the carrying value of net loans. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances as described in “Allowance for Credit Losses” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Highlights

●	Total loans increased $298.9 million, or 9.3% annualized, to $13.6 billion for the quarter.

●	Diluted earnings per share increased 39.3% to $0.85 per share for the third quarter of 2018 compared to $0.61 per share for the same quarter a year ago.

Quarterly Statement of Operations Review

Net Income

Net income for the quarter ended September 30, 2018, was $69.8 million, an increase of $20.1 million, or 40.2%, compared to net income of $49.7 million for the same quarter a year ago. Diluted earnings per share for the quarter ended September 30, 2018, was $0.85 compared to $0.61 for the same quarter a year ago. Third quarter of 2018 net income, compared to the same quarter a year ago, included an increase of $5.4 million in amortization expense of investments in low income housing and alternative energy partnerships and a decrease of $3.1 million in acquisition and integration costs related to the FENB acquisition.

Return on average stockholders’ equity was 13.19% and return on average assets was 1.72% for the quarter ended September 30, 2018, compared to a return on average stockholders’ equity of 9.77% and a return on average assets of 1.29% for the same quarter a year ago.

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Financial Performance

	Three months ended
	September 30, 2018			September 30, 2017
Net income	$69.8 million			$49.7 million
Basic earnings per common share	$	0.86		$	0.62
Diluted earnings per common share	$	0.85		$	0.61
Return on average assets		1.72	%		1.29	%
Return on average total stockholders' equity		13.19	%		9.77	%
Efficiency ratio		43.14	%		41.91	%

Net Interest Income Before Provision for Credit Losses

Net interest income before provision for credit losses increased $11.9 million, or 8.9%, to $145.1 million during the third quarter of 2018, compared to $133.2 million during the same quarter a year ago. The increase was due primarily to an increase in interest income from loans and securities, offset by increases in interest expense from time deposits and long-term debt.

The net interest margin was 3.83% for the third quarter of 2018, compared to 3.75% for the third quarter of 2017, and 3.83% for the second quarter of 2018.

For the third quarter of 2018, the yield on average interest-earning assets was 4.67%, the cost of funds on average interest-bearing liabilities was 1.15%, and the cost of interest-bearing deposits was 1.05%. In comparison, for the third quarter of 2017, the yield on average interest-earning assets was 4.34%, the cost of funds on average interest-bearing liabilities was 0.81%, and the cost of interest-bearing deposits was 0.68%. The increase in the yield on average interest earning assets resulted mainly from higher rates on loans. The net interest spread, defined as the difference between the yield on average interest-earning assets and the cost of funds on average interest-bearing liabilities, was 3.52% for the quarter ended September 30, 2018, compared to 3.53% 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, 2018, and 2017. Average outstanding amounts included in the table are daily averages.

Interest-Earning Assets and Interest-Bearing Liabilities
	Three months ended September 30,
	2018								2017
				Interest		Average						Interest		Average
	Average			Income/		Yield/			Average			Income/		Yield/
(Dollars in thousands)	Balance			Expense		Rate ⁽¹⁾⁽²⁾			Balance			Expense		Rate ⁽¹⁾⁽²⁾
Interest earning assets:
Total loans and leases ⁽¹⁾	$	13,434,018		$	168,179		4.97	%	$	12,317,721		$	146,383		4.71	%
Investment securities		1,399,031			7,546		2.14			1,396,859			5,692		1.62
Federal Home Loan Bank stock		17,250			303		6.95			32,369			607		7.44
Interest bearing deposits		178,434			838		1.86			292,595			1,288		1.75
Federal funds sold and securities purchased under agreements to resell		-			-		-			35,707			108		1.20
Total interest-earning assets		15,028,733			176,866		4.67			14,075,251			154,078		4.34
Non-interest earning assets:
Cash and due from banks		196,692								294,466
Other non-earning assets		1,036,279								1,094,648
Total non-interest earning assets		1,232,971								1,389,114
Less: Allowance for loan losses		(124,579	)							(105,390	)
Deferred loan fees		(2,777	)							(4,852	)
Total assets	$	16,134,348							$	15,354,123

Interest bearing liabilities:
Interest bearing demand accounts	$	1,396,436		$	694		0.20		$	1,349,508		$	588		0.17
Money market accounts		2,234,139			4,435		0.79			2,496,548			3,944		0.63
Savings accounts		780,412			345		0.18			942,452			569		0.24
Time deposits		5,997,268			22,135		1.46			4,939,189			11,678		0.94
Total interest-bearing deposits		10,408,255			27,609		1.05			9,727,697			16,779		0.68

Securities sold under agreements to repurchase		16,304			124		3.02			109,239			874		3.17
Other borrowings		307,298			1,829		2.36			324,581			1,773		2.17
Long-term debt		194,136			2,220		4.54			119,136			1,456		4.85
Total interest-bearing liabilities		10,925,993			31,782		1.15			10,280,653			20,882		0.81
Non-interest bearing liabilities:
Demand deposits		2,877,646								2,714,244
Other liabilities		232,924								339,001
Total equity		2,097,786								2,020,224
Total liabilities and equity	$	16,134,349							$	15,354,122
Net interest spread							3.52	%							3.53	%
Net interest income				$	145,084							$	133,196
Net interest margin							3.83	%							3.75	%

(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⁾
	Three months ended September 30,
	2018-2017
	Increase (Decrease) in
	Net Interest Income Due to:
(In thousands)	Changes in Volume			Changes in Rate			Total Change

Interest-earning assets:
Loans and leases	$	13,712		$	8,084		$	21,796
Investment securities		9			1,845			1,854
Federal Home Loan Bank stock		(267	)		(38	)		(305	)
Federal funds sold & securities purchased under agreements to resell		(54	)		(54	)		(108	)
Deposits with other banks		(530	)		80			(450	)
Total changes in interest income		12,870			9,917			22,787

Interest-bearing liabilities:
Interest bearing demand accounts		21			86			107
Money market accounts		(441	)		932			491
Savings accounts		(88	)		(137	)		(225	)
Time deposits		2,890			7,567			10,457
Securities sold under agreements to repurchase		(710	)		(40	)		(750	)
Other borrowed funds		(97	)		152			55
Long-term debt		864			(101	)		763
Total changes in interest expense		2,439			8,459			10,898
Changes in net interest income	$	10,431		$	1,458		$	11,889

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

Provision/(Reversal) for Credit Losses

The Company recorded a reversal for credit losses of $1.5 million in the third quarter of 2018 compared to no reversal for credit losses in the same quarter a year ago. The reversal for credit losses was based on a review of the appropriateness of the allowance for loan losses at September 30, 2018. The following table summarizes the charge-offs and recoveries for the periods indicated:

	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
	(In thousands)
Charge-offs:
Commercial loans	$	122		$	80		$	629		$	1,810
Real estate loans ⁽¹⁾		-			305			390			860
Total charge-offs		122			385			1,019			2,670
Recoveries:
Commercial loans		187			575			1,250			1,401
Construction loans		44			47			132			143
Real estate loans⁽¹⁾		2,949			5,489			4,315			6,195
Total recoveries		3,180			6,111			5,697			7,739
Net (recoveries)/charge-offs	$	(3,058	)	$	(5,726	)	$	(4,678	)	$	(5,069	)

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

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Non-Interest Income

Non-interest income, which includes revenues from depository service fees, letters of credit commissions, securities gains (losses), wire transfer fees, and other sources of fee income, was $7.8 million for the third quarter of 2018, a decrease of $5.1 million, or 39.5%, compared to $13.0 million for the third quarter of 2017, primarily due to a $5.4 million decrease in gain from the FENB acquisition.

Non-Interest Expense

Non-interest expense increased $4.7 million, or 7.7%, to $66.0 million in the third quarter of 2018 compared to $61.2 million in the same quarter a year ago. The increase in non-interest expense in the third quarter of 2018 was primarily due to a $2.6 million increase in salaries and employee benefits expense and a $5.4 million increase in amortization expense of investments in low income housing and alternative energy partnerships offset by a $3.1 million decrease in acquisition and integration costs, when compared to the same quarter a year ago. The efficiency ratio was 43.1% in the third quarter of 2018 compared to 41.9% for the same quarter a year ago.

Income Taxes

The effective tax rate for the third quarter of 2018 was 21.1% compared to 41.4% for the third quarter of 2017. The effective tax rate includes the reduction of the corporate tax rate from the enactment of the Tax Legislation, an alternative energy investment made in the second quarter and the impact of low income housing tax credits. Income tax expense for 2018 is expected to be reduced by $0.8 million in benefits from the distribution of restricted stock units and exercises of stock options.

Year-to-Date Statement of Operations Review

Net income for the nine months ended September 30, 2018, was $207.2 million, an increase of $57.1 million, or 38.1%, compared to net income of $150.1 million for the same period a year ago. Diluted earnings per share was $2.53 compared to $1.86 per share for the same period a year ago. The net interest margin for the nine months ended September 30, 2018, was 3.80% compared to 3.63% for the same period a year ago.

Return on average stockholders’ equity was 13.56% and return on average assets was 1.75% for the nine months ended September 30, 2018, compared to a return on average stockholders’ equity of 10.46% and a return on average assets of 1.39% for the same period a year ago. The efficiency ratio for the nine months ended September 30, 2018, was 43.05% compared to 43.71% 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, 2018, and 2017. Average outstanding amounts included in the table are daily averages.

Interest-Earning Assets and Interest-Bearing Liabilities
	Nine months ended September 30,
	2018								2017
				Interest		Average						Interest		Average
	Average			Income/		Yield/			Average			Income/		Yield/
(Dollars in thousands)	Balance			Expense		Rate ⁽¹⁾⁽²⁾			Balance			Expense		Rate ⁽¹⁾⁽²⁾
Interest earning assets:
Total loans and leases ⁽¹⁾	$	13,126,693		$	478,128		4.87	%	$	11,668,814		$	401,129		4.60	%
Investment securities		1,357,818			21,212		2.09			1,297,789			14,817		1.53
Federal Home Loan Bank stock		18,975			1,079		7.60			22,345			1,317		7.88
Interest bearing deposits		281,883			3,667		1.74			359,580			3,140		1.17
Federal funds sold and securities purchased under agreements to resell		-			-		-			12,033			108		1.20
Total interest-earning assets		14,785,369			504,086		4.56			13,360,561			420,511		4.21
Non-interest earning assets:
Cash and due from banks		209,456								235,097
Other non-earning assets		996,466								965,906
Total non-interest earning assets		1,205,922								1,201,003
Less: Allowance for loan losses		(123,591	)							(113,299	)
Deferred loan fees		(3,117	)							(4,531	)
Total assets	$	15,864,583							$	14,443,734

Interest bearing liabilities:
Interest bearing demand accounts	$	1,394,743		$	2,003		0.19		$	1,282,904		$	1,639		0.17
Money market accounts		2,230,365			11,674		0.70			2,359,871			11,362		0.64
Savings accounts		807,402			1,216		0.20			817,540			1,244		0.20
Time deposits		5,833,807			56,593		1.30			4,840,293			33,429		0.92
Total interest-bearing deposits		10,266,317			71,486		0.93			9,300,608			47,674		0.69

Securities sold under agreements to repurchase		66,300			1,446		2.92			149,267			3,489		3.13
Other borrowings		287,771			4,231		1.97			177,372			2,366		1.78
Long-term debt		194,136			6,465		4.45			119,136			4,320		4.85
Total interest-bearing liabilities		10,814,524			83,628		1.03			9,746,383			57,849		0.79
Non-interest bearing liabilities:
Demand deposits		2,796,831								2,542,754
Other liabilities		210,391								236,332
Total equity		2,042,837								1,918,265
Total liabilities and equity	$	15,864,583							$	14,443,734
Net interest spread							3.53	%							3.42	%
Net interest income				$	420,458							$	362,662
Net interest margin							3.80	%							3.63	%

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

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

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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,
	2018-2017
	Increase (Decrease) in
	Net Interest Income Due to:
(In thousands)	Changes in Volume			Changes in Rate			Total Change

Interest-earning assets:
Loans and leases	$	52,138		$	24,861		$	76,999
Investment securities		714			5,681			6,395
Federal Home Loan Bank stock		(193	)		(46	)		(239	)
Federal funds sold & securities purchased under agreements to resell		(54	)		(54	)		(108	)
Deposits with other banks		(468	)		995			527
Total changes in interest income		52,137			31,437			83,574

Interest-bearing liabilities:
Interest bearing demand accounts		150			213			363
Money market accounts		(391	)		703			312
Savings accounts		(15	)		(13	)		(28	)
Time deposits		7,796			15,368			23,164
Securities sold under agreements to repurchase		(1,823	)		(220	)		(2,043	)
Other borrowed funds		1,602			263			1,865
Long-term debt		2,316			(171	)		2,145
Total changes in interest expense		9,635			16,143			25,778
Changes in net interest income	$	42,502		$	15,294		$	57,796

(1)

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

Balance Sheet Review

Assets

Total assets were $16.5 billion as of September 30, 2018, an increase of $821.5 million, or 5.3%, from $15.6 billion as of December 31, 2017, primarily due to loan growth and increases in short-term investments.

Investment Securities

Investment securities represented 7.8% of total assets as of September 30, 2018, compared to 8.5% of total assets as of December 31, 2017. Securities available-for-sale were $1.3 billion as of September 30, 2018, compared to $1.3 billion as of December 31, 2017.

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	September 30, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
	(In thousands)
Debt Securities Available-for-Sale
U.S. treasury securities	$	199,488	$	-	$	114	$	199,374
U.S. government agency entities		6,721		-		210		6,511
U.S. government sponsored entities		400,000		-		16,553		383,447
Mortgage-backed securities		648,532		130		22,023		626,639
Collateralized mortgage obligations		1,119		-		33		1,086
Corporate debt securities		64,983		1,020		-		66,003
Total	$	1,320,843	$	1,150	$	38,933	$	1,283,060

	December 31, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
	(In thousands)
Securities Available-for-Sale
U.S. treasury securities	$	249,877	$	-	$	357	$	249,520
U.S. government agency entities		9,047		11		70		8,988
U.S. government sponsored entities		400,000		-		9,664		390,336
State and municipal securities		1,944		-		30		1,914
Mortgage-backed securities		577,987		241		6,259		571,969
Collateralized mortgage obligations		1,533		-		17		1,516
Corporate debt securities		80,007		1,291		17		81,281
Mutual funds		6,500		-		270		6,230
Preferred stock of government sponsored entities		5,842		4,260		-		10,102
Other equity securities		3,608		8,162		-		11,770
Total	$	1,336,345	$	13,965	$	16,684	$	1,333,626

For additional information, see Note 7 to the Company’s unaudited condensed consolidated financial statements.

Investment securities having a carrying value of $33.1 million as of September 30, 2018, and $272.2 million as of December 31, 2017, were pledged to secure public deposits, other borrowings, treasury tax and loan and securities sold under agreements to repurchase.

Equity Securities

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Loans

Gross loans, excluding loans held for sale, were $13.6 billion at September 30, 2018, an increase of $777.4 million, or 6.0%, from $12.9 billion at December 31, 2017. The increase was primarily due to increases of $507.1 million, or 16.6%, in residential mortgage loans, $212.8 million, or 8.6%, in commercial loans, and $97.6 million, or 1.5%, in commercial mortgage loans, which were partially offset by a decrease of $81.8 million, or 12.0%, in real estate construction loans. The loan balances and composition at September 30, 2018, compared to December 31, 2017 are presented below:

	September 30, 2018			% of Gross Loans			December 31, 2017			% of Gross Loans			% Change
Type of Loans	(Dollars in thousands)
Commercial loans	$	2,674,089			19.6	%	$	2,461,266			19.1	%		8.6	%
Residential mortgage loans		3,569,111			26.2			3,062,050			23.8			16.6
Commercial mortgage loans		6,580,254			48.2			6,482,695			50.4			1.5
Equity lines		221,599			1.6			180,304			1.4			22.9
Real estate construction loans		597,018			4.4			678,805			5.3			(12.0	)
Installment and other loans		5,575			0.0			5,170			0.0			7.8
Gross loans	$	13,647,646			100	%	$	12,870,290			100	%		6.0	%

Allowance for loan losses		(123,457	)					(123,279	)					0.1
Unamortized deferred loan fees		(2,086	)					(3,245	)					(35.7	)

Total loans, net	$	13,522,103					$	12,743,766						6.1	%

Loans held for sale	$	-					$	8,000						(100.0	%)

Non-performing Assets

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

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

The ratio of non-performing assets, excluding non-accrual loans held for sale, to total assets was 0.4% at September 30, 2018, compared to 0.4% at December 31, 2017. Total non-performing assets decreased $396,000, or 0.7%, to $57.8 million at September 30, 2018, compared to $58.2 million at December 31, 2017, primarily due to a decrease of $6.4 million, or 13.1%, in non-accrual loans, and a decrease of $701,000, or 7.4%, in other real estate owned, offset by an increase of $6.7 million, or 100.0%, in accruing loans past due 90 days or more.

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As a percentage of gross loans, excluding loans held for sale, plus OREO, our non-performing assets was 0.42% as of September 30, 2018, compared to 0.45% as of December 31, 2017. The non-performing loan portfolio coverage ratio, defined as the allowance for credit losses to non-performing loans, decreased to 257.8% as of September 30, 2018, from 262.1% as of December 31, 2017.

The following table presents the changes in non-performing assets and troubled debt restructurings (“TDRs”) as of September 30, 2018, compared to December 31, 2017, and to September 30, 2017:

(Dollars in thousands)	September 30, 2018			December 31, 2017			% Change			September 30, 2017			% Change
Non-performing assets
Accruing loans past due 90 days or more	$	6,681		$	-			100		$	3,900			71
Non-accrual loans:
Construction loans		4,922			8,185			(40	)		14,267			(66	)
Commercial mortgage loans		13,172			19,820			(34	)		28,379			(54	)
Commercial loans		17,118			14,296			20			15,942			7
Residential mortgage loans		7,199			6,486			11			6,763			6
Total non-accrual loans	$	42,411		$	48,787			(13	)	$	65,351			(35	)
Total non-performing loans		49,092			48,787			1			69,251			(29	)
Other real estate owned		8,741			9,442			(7	)		18,115			(52	)
Total non-performing assets	$	57,833		$	58,229			(1	)	$	87,366			(34	)
Accruing troubled debt restructurings	$	74,598		$	68,565			9		$	62,358			20
Non-accrual loans held for sale	$	-		$	8,000			(100	)	$	-			-

Allowance for loan losses	$	123,457		$	123,279			0		$	121,535			2

Total gross loans outstanding, at period-end ⁽¹⁾	$	13,647,646		$	12,870,290			6		$	12,597,434			8

Allowance for loan losses to non-performing loans, at period-end ⁽²⁾		251.48	%		252.69	%					175.50	%
Allowance for loan losses to gross loans, at period-end ⁽¹⁾		0.90	%		0.96	%					0.96	%

(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, 2018, total non-accrual loans were $42.4 million, a decrease of $6.4 million, or 13.1%, from $48.8 million at December 31, 2017, and a decrease of $23.0 million, or 35.1%, from $65.4 million at September 30, 2017. The allowance for the collateral-dependent loans is calculated based on the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals, sales contracts, or other available market price information, less cost to sell. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as non-performing. We continue to monitor the collateral coverage of these loans, based on recent appraisals, on a quarterly basis and adjust the allowance accordingly. Non-accrual loans also include those TDRs that do not qualify for accrual status.

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

	September 30, 2018				December 31, 2017
	Real				Real
	Estate⁽¹⁾		Commercial		Estate ⁽¹⁾		Commercial
	(In thousands)
Type of Collateral
Single/multi-family residence	$	10,786	$	8,219	$	14,952	$	7,575
Commercial real estate		13,992		-		19,540		-
Personal property (UCC)		514		8,900		-		6,721
Total	$	25,292	$	17,119	$	34,492	$	14,296

(1)

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

	September 30, 2018				December 31, 2017
	Real				Real
	Estate ⁽¹⁾		Commercial		Estate ⁽¹⁾		Commercial
	(In thousands)
Type of Business
Real estate development	$	9,226	$	-	$	16,672	$	-
Wholesale/Retail		9,322		11,716		11,429		7,743
Food/Restaurant		-		-		137		-
Import/Export		-		5,403		-		6,553
Other		6,744		-		6,254		-
Total	$	25,292	$	17,119	$	34,492	$	14,296

(1)

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

Impaired Loans

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

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As of September 30, 2018, recorded investment in impaired loans totaled $117.0 million and was comprised of non-accrual loans, excluding loans held for sale, of $42.4 million and accruing TDRs of $74.6 million. As of December 31, 2017, recorded investment in impaired loans totaled $117.4 million and was comprised of non-accrual loans, excluding loans held for sale, of $48.8 million and accruing TDRs of $68.6 million. For impaired loans, the amounts previously charged off represented 7.4% as of September 30, 2018, and 7.2% as of December 31, 2017, of the contractual balances for impaired loans. As of September 30, 2018, $25.3 million, or 59.6%, of the $42.4 million of non-accrual loans, excluding loans held for sale, was secured by real estate compared to $34.5 million, or 70.7%, of the $48.8 million of non-accrual loans, excluding loans held for sale, that was secured by real estate as of December 31, 2017. The Bank 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, 2018, $3.7 million of the $123.5 million allowance for loan losses was allocated for impaired loans and $119.8 million was allocated to the general allowance. As of December 31, 2017, $2.1 million of the $123.3 million allowance for loan losses was allocated for impaired loans and $121.1 million was allocated to the general allowance.

The allowance for loan losses to non-accrual loans increased to 291.1% as of September 30, 2018, from 252.7% as of December 31, 2017, primarily due to an increase in the non-accrual loans. Non-accrual loans also include those TDRs that do not qualify for accrual status.

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

	Impaired Loans
	September 30, 2018						December 31, 2017
	Unpaid Principal Balance		Recorded Investment		Allowance		Unpaid Principal Balance		Recorded Investment		Allowance
	(In thousands)

With no allocated allowance
Commercial loans	$	40,426	$	38,556	$	-	$	43,483	$	42,702	$	-
Real estate construction loans		5,776		4,922		-		8,821		8,185		-
Commercial mortgage loans		34,276		26,912		-		37,825		31,029		-
Residential mortgage loans and equity lines		6,791		6,776		-		1,301		1,301		-
Subtotal	$	87,269	$	77,166	$	-	$	91,430	$	83,217	$	-
With allocated allowance
Commercial loans	$	5,792	$	5,715	$	2,506	$	891	$	793	$	43
Commercial mortgage loans		27,549		27,523		917		21,733		21,635		1,738
Residential mortgage loans and equity lines		7,670		6,605		281		13,022		11,708		353
Subtotal	$	41,011	$	39,843	$	3,704	$	35,646	$	34,136	$	2,134
Total impaired loans	$	128,280	$	117,009	$	3,704	$	127,076	$	117,353	$	2,134

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Loan Interest Reserves

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

As of September 30, 2018, construction loans of $543.1 million were disbursed with pre-established interest reserves of $73.0 million compared to $545.0 million of such loans disbursed with pre-established interest reserves of $72.3 million at December 31, 2017. The balance for construction loans with interest reserves that have been extended was $89.8 million with pre-established interest reserves of $3.0 million at September 30, 2018, compared to $62.1 million with pre-established interest reserves of $2.0 million at December 31, 2017. Land loans of $23.0 million were disbursed with pre-established interest reserves of $850,000 at September 30, 2018, compared to $32.7 million of land loans disbursed with pre-established interest reserves of $1.3 million at December 31, 2017. The balance for land loans with interest reserves that have been extended was $5.5 million at September 30, 2018 with pre-established interest reserves of $30,000, compared to $6.9 million in land loans with pre-established interest reserves of $221,000 at December 31, 2017.

At September 30, 2018 and December 31, 2017, the Bank had no loans on non-accrual status with available interest reserves. At September 30, 2018, $4.9 million of non-accrual non-residential construction loans had been originated with pre-established interest reserves. At December 31, 2017, $8.2 million of non-accrual non-residential construction loans and $8.0 million of non-accrual land loans had been originated with pre-established interest reserves. While we typically expect loans with interest reserves to be repaid in full according to the original contractual terms, some loans require one or more extensions beyond the original maturity before full repayment. Typically, these extensions are required due to construction delays, delays in the sale or lease of property, or some combination of these two factors.

Loan Concentration

Most of the Company’s business activities are with customers located in the high-density Asian-populated areas of Southern and Northern California; New York City, New York; Dallas and Houston, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Edison, New Jersey; Rockville, Maryland; Las Vegas, Nevada; and Hong Kong. The Company has no specific industry concentration. The Company’s loans generally 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, 2018, or as of December 31, 2017.

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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 34% of the Bank’s total risk-based capital as of September 30, 2018, and 41% as of December 31, 2017. Total CRE loans represented 271% of total risk-based capital as of September 30, 2018, and 293% as of December 31, 2017 and were below the Bank’s internal limit for CRE loans of 400% of total capital at both dates.

Allowance for Credit Losses

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

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

The allowance for loan losses was $123.5 million and the allowance for off-balance sheet unfunded credit commitments was $3.1 million at September 30, 2018, which represented the amount believed by management to be appropriate to absorb credit losses inherent in the loan portfolio, including unfunded credit commitments. The $123.5 million allowance for loan losses at September 30, 2018, decreased $178,000, or 0.1%, from $123.3 million at December 31, 2017. The allowance for loan losses represented 0.90% of period-end gross loans, excluding loans held for sale, and 251.5% of non-performing loans at September 30, 2018. The comparable ratios were 0.96% of period-end gross loans, excluding loans held for sale, and 252.7% of non-performing loans at December 31, 2017.

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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,
	2018			2017			2018			2017
	(Dollars in thousands)
Allowance for loan losses
Balance at beginning of period	$	121,899		$	115,809		$	123,279		$	118,966
Reversal for credit losses		(1,500	)		-			(4,500	)		(2,500	)
Charge-offs :
Commercial loans		(122	)		(80	)		(629	)		(1,810	)
Real estate loans		-			(305	)		(390	)		(860	)
Total charge-offs		(122	)		(385	)		(1,019	)		(2,670	)
Recoveries:
Commercial loans		187			575			1,250			1,401
Construction loans		44			47			132			143
Real estate loans		2,949			5,489			4,315			6,195
Total recoveries		3,180			6,111			5,697			7,739

Balance at end of period	$	123,457		$	121,535		$	123,457		$	121,535
Reserve for off-balance sheet credit commitments
Balance at beginning of period	$	3,088		$	4,513		$	4,588		$	3,224
Provision for credit losses		-			(259	)		(1,500	)		1,030
Balance at end of period	$	3,088		$	4,254		$	3,088		$	4,254

Average loans outstanding during the period ⁽¹⁾	$	13,434,018		$	12,317,721		$	13,126,693		$	11,668,814
Total gross loans outstanding, at period-end ⁽¹⁾	$	13,647,646		$	12,597,434		$	13,647,646		$	12,597,434
Total non-performing loans, at period-end ⁽²⁾	$	49,092		$	69,251		$	49,092		$	69,251
Ratio of net (recoveries)/charge-offs to average loans outstanding during the period ⁽¹⁾		(0.09	%)		(0.18	%)		(0.05	%)		(0.06	%)
Provision for credit losses to average loans outstanding during the period ⁽¹⁾		(0.04	%)		(0.01	%)		(0.06	%)		(0.02	%)
Allowance for credit losses to non-performing loans, at period-end ⁽²⁾		257.77	%		181.64	%		257.77	%		181.64	%
Allowance for credit losses to gross loans, at period-end ⁽¹⁾		0.93	%		1.00	%		0.93	%		1.00	%

(1) Excluding loans held for sale.

(2) Excluding non-accrual loans held for sale.

Our allowance for loan losses consists of the following:

•

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

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•

General allowance: The unclassified portfolio is segmented on a group basis. Segmentation is determined by loan type and common risk characteristics. The non-impaired loans are grouped into 19 segments: two commercial segments, ten commercial real estate segments, one residential construction segment, one non-residential construction segment, one SBA segment, one installment loans segment, one residential mortgage segment, one equity lines of credit segment, and one overdrafts segment. The allowance is provided for each segmented group based on the group’s historical loan loss experience aggregated based on loan risk classifications which take into account the current financial condition of the borrowers and guarantors, the prevailing value of the underlying collateral if collateral dependent, charge-off history, management’s knowledge of the portfolio, general economic conditions, environmental factors including the trends in delinquency and non-accrual, and other significant factors, such as the national and local economy, volume and composition of the portfolio, strength of management and loan staff, underwriting standards, and concentration of credit. In addition, management review reports on past-due loans to ensure appropriate classification.

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

	September 30, 2018					December 31, 2017
			Percentage of					Percentage of
			Loans in Each					Loans in Each
			Category					Category
			to Average					to Average
	Amount		Gross Loans			Amount		Gross Loans
Type of Loan:	(Dollars in thousands)
Commercial loans	$	56,514		18.9	%	$	49,796		19.1	%
Residential mortgage loans ⁽¹⁾		12,909		26.4			11,013		24.5
Commercial mortgage loans		32,782		50.0			37,610		51.2
Real estate construction loans		21,226		4.7			24,838		5.2
Installment and other loans		26		0.0			22		0.0
Total	$	123,457		100	%	$	123,279		100	%

(1)

Residential mortgage loans includes equity lines.

The allowance allocated to commercial loans increased $6.7 million, or 13.5%, to $56.5 million at September 30, 2018, from $49.8 million at December 31, 2017. The increase is a result of the continued trade instability and pending tariffs between the U.S. and China and an increase in volume and non-accrual and past due commercial loans year to date.

The allowance allocated for residential mortgage loans increased by $1.9 million, or 17.2%, to $12.9 million as of September 30, 2018, from $11.0 million at December 31, 2017 primarily due to the increase in volume.

The allowance allocated to commercial mortgage loans decreased $4.8 million, or 12.8%, to $32.8 million at September 30, 2018, from $37.6 million at December 31, 2017 as a result of the $85.5 million decrease in substandard loans, decrease in non-accrual and past due loans and net recoveries year to date.

The allowance allocated to real estate construction loans decreased $3.6 million, or 14.5%, to $21.2 million at September 30, 2018 from $24.8 million at December 31, 2017. The decrease is due primarily to the decrease in loans outstanding and a reduction in non-accrual and past due loans year to date.

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Deposits

Total deposits were $13.6 billion at September 30, 2018, an increase of $891 million, or 7.0%, from $12.7 billion at December 31, 2017. The following table displays the deposit mix as of the dates indicated:

	September 30, 2018					December 31, 2017
	Amount		Percentage			Amount		Percentage
	(Dollars in thousands)
Deposits
Non-interest-bearing demand deposits	$	2,957,881		21.8	%	$	2,783,127		21.9	%
Interest bearing demand deposits		1,409,463		10.4			1,410,519		11.1
Money market deposits		2,134,097		15.7			2,248,271		17.7
Savings deposits		747,814		5.5			857,199		6.8
Time deposits		6,331,823		46.6			5,390,777		42.5
Total deposits	$	13,581,078		100.0	%	$	12,689,893		100.0	%

The following table shows the maturity distribution of time deposits as of September 30, 2018:

	At September 30, 2018
	Time Deposits -under $100,000			Time Deposits -$100,000 and over			Total Time Deposits
	(In thousands)
Less than three months	$	182,247		$	934,668		$	1,116,915
Three to six months		549,058			1,024,516			1,573,574
Six to twelve months		690,620			1,952,419			2,643,039
Over one year		233,421			764,874			998,295
Total	$	1,655,346		$	4,676,477		$	6,331,823

Percent of total deposits		12.2	%		34.4	%		46.6	%

Borrowings

Borrowings include federal funds purchased, funds obtained as advances from the FHLB of San Francisco, and borrowings from other financial institutions.

Borrowing from the FHLB. As of September 30, 2018, over-night borrowings from the FHLB were $240 million at a rate of 2.33% compared to $325 million at a rate of 1.41% as of December 31, 2017. As of September 30, 2018, the advances from the FHLB were $75 million at a rate of 1.99% compared to $105 million at a rate of 1.41% as of December 31, 2017. As of September 30, 2018, FHLB advances of $5 million will mature in October 2018, $50 million in December 2019, and $20 million in May 2023.

Other Borrowing. Pursuant to the Stock Purchase Agreement with Bank SinoPac Co. Ltd, $35.2 million of the purchase price was held back at a floating rate of three-month LIBOR rate plus 150 basis points and 50%, 30%, and 20% will be disbursed annually over three years on the anniversary dates, respectively. As of September 30, 2018, the outstanding balance was $18.3 million with a rate of 3.39% compared to $35.2 million at December 31, 2017.

Long-term Debt. On October 12, 2017, the Bank entered into a term loan agreement of $75.0 million with U.S. Bank. The loan has a floating rate of one-month LIBOR plus 175 basis points. As of September 30, 2018, the term loan has an interest rate of 3.875% compared to 3.125% at December 31, 2017. The principal amount of the long-term debt from U.S. Bank is due and payable in consecutive quarterly installments of $4.7 million each on the last day of each calendar quarter commencing December 31, 2018, with the final installment due and payable on October 12, 2020. We used the U.S. Bank loan proceeds to fund a portion of our acquisition of SinoPac Bancorp.

At September 30, 2018, Junior Subordinated Notes totaled $119.1 million with a weighted average interest rate of 4.52%, compared to $119.1 million with a weighted average rate of 3.78% at December 31, 2017. The Junior Subordinated Notes have a stated maturity term of 30 years. As of September 30, 2018, and December 31, 2017, the Company’s assets exceeded the $15 billion threshold and, as a result, the Junior Subordinated Notes no longer qualify as Tier 1 capital for regulatory reporting purposes. The trusts are not consolidated with the Company in accordance with an accounting pronouncement that took effect in December 2003.

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Off-Balance-Sheet Arrangements and Contractual Obligations

The following table summarizes the Company’s contractual obligations to make future payments as of September 30, 2018. Payments for deposits and borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts.

	Payment Due by Period
			More than		3 years or
			1 year but		more but
	1 year		less than		less than		5 years
	or less		3 years		5 years		or more		Total
	(In thousands)

Contractual obligations:
Deposits with stated maturity dates	$	5,333,528	$	960,308	$	37,976	$	11	$	6,331,823
Advances from the Federal Home Loan Bank		245,000		50,000		20,000		-		315,000
Other borrowings		10,548		7,705		-		17,332		35,585
Long-term debt		18,750		56,250		-		119,136		194,136
Operating leases		8,470		11,692		8,551		5,816		34,529
Total contractual obligations and other commitments	$	5,616,296	$	1,085,955	$	66,527	$	142,295	$	6,911,073

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

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

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

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Capital Resources

Total equity was $2.12 billion as of September 30, 2018, an increase of $143.5 million, from $1.97 billion as of December 31, 2017, primarily due to net income of $207.2 million offset by common stock cash dividends of $58.5 million and decreases of other comprehensive income of $21.3 million due in part to the adoption of new accounting pronouncements in the first quarter of 2018.

The following table summarizes changes in total equity for the nine months ended September 30, 2018:

	Nine months ended
(In thousands)	September 30, 2018
Net income	$	207,237
Stock issued to directors		650
Stock options exercised and RSUs distributed		838
Proceeds from shares issued through the Dividend Reinvestment Plan		1,982
Shares withheld related to net share settlement of RSUs		(1,865	)
Share-based compensation		5,326
Other comprehensive income		(21,272	)
Retained earnings adjustments upon initial adoption of new pronouncements ⁽¹⁾		9,074
Cash dividends paid to common stockholders		(58,498	)
Net increase in total equity	$	143,472

⁽¹⁾ These adjustments are a result of the adoption of ASU 2016-01 and 2018-2, effective as of January 1, 2018.

Capital Adequacy Review

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

Both Bancorp’s and the Bank’s regulatory capital continued to exceed the regulatory minimum requirements under Basel III rules that became effective January 1, 2015, with transitional provisions as of September 30, 2018. In addition, the capital ratios of the Bank place it in the “well capitalized” category, which is defined as institutions with a common equity tier 1 capital ratio equal to or greater than 6.5%, a Tier 1 risk-based capital ratio equal to or greater than 8%, a total risk-based capital ratio equal to or greater than 10%, and a Tier 1 leverage capital ratio equal to or greater than 5%.

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The following table presents Bancorp’s and the Bank’s capital and leverage ratios as of September 30, 2018, and December 31, 2017:

	Cathay General Bancorp								Cathay Bank
	September 30, 2018				December 31, 2017				September 30, 2018				December 31, 2017
(Dollars in thousands)	Balance		%		Balance		%		Balance		%		Balance		%

Common equity Tier 1 capital (to risk-weighted assets)	$	1,737,774		12.81	$	1,572,025		12.19	$	1,869,674		13.81	$	1,734,719		13.46
Common equity Tier 1 capital minimum requirement		610,239		4.50		580,552		4.50		609,308		4.50		579,921		4.50
Excess	$	1,127,535		8.31	$	991,473		7.69	$	1,260,366		9.31	$	1,154,798		8.96

Tier 1 capital (to risk-weighted assets)	$	1,737,774		12.81	$	1,572,025		12.19	$	1,869,674		13.81	$	1,734,719		13.46
Tier 1 capital minimum requirement		813,652		6.00		774,070		6.00		812,411		6.00		773,229		6.00
Excess	$	924,122		6.81	$	797,955		6.19	$	1,057,263		7.81	$	961,490		7.46

Total capital (to risk-weighted assets)	$	1,979,819		14.60	$	1,820,860		14.11	$	1,996,219		14.74	$	1,862,806		14.45
Total capital minimum requirement		1,084,870		8.00		1,032,093		8.00		1,083,215		8.00		1,030,971		8.00
Excess	$	894,949		6.60	$	788,767		6.11	$	913,004		6.74	$	831,835		6.45

Tier 1 capital (to average assets) – Leverage ratio	$	1,737,774		11.03	$	1,572,025		10.35	$	1,869,674		11.88	$	1,734,719		11.82
Minimum leverage requirement		630,229		4.00		607,349		4.00		629,371		4.00		586,959		4.00
Excess	$	1,107,545		7.03	$	964,676		6.35	$	1,240,303		7.88	$	1,147,760		7.82

Risk-weighted assets	$	13,560,870			$	12,901,161			$	13,540,185			$	12,887,142
Total average assets ⁽¹⁾	$	15,755,724			$	15,183,720			$	15,734,283			$	14,673,981

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

Dividend Policy

Holders of common stock are entitled to dividends as and when declared by our Board of Directors out of funds legally available for the payment of dividends. Although we have historically paid cash dividends on our common stock, we are not required to do so. The amount of future dividends will depend on our earnings, financial condition, capital requirements and other factors, and will be determined by our Board of Directors. The terms of our Junior Subordinated Notes also limit our ability to pay dividends. We increased the common stock dividend from $0.21 per share in the fourth quarter of 2016, to $0.24 per share in the fourth quarter of 2017.

The Company declared a cash dividend of $0.24 per share on 81,380,559 shares outstanding on September 4, 2018, for distribution to holders of our common stock on September 14, 2018, $0.24 per share on 81,240,446 shares outstanding on June 1, 2018, for distribution to holders of our common stock on June 11, 2018, and $0.24 per share on 81,126,888 shares outstanding on March 1, 2018, for distribution to holders of our common stock on March 12, 2018. The Company paid total cash dividends of $58.5 million during the first nine months of 2018.

Financial Derivatives

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As of September 30, 2018, the Bank’s outstanding interest rate swap contracts had a notional amount of $637.7 million for various terms from two to ten years. The Bank entered into these interest rate swap contracts that are matched to individual fixed-rate commercial real estate loans in the Bank’s loan portfolio. These contracts have been designated as hedging instruments to hedge the risk of changes in the fair value of the underlying commercial real estate loans due to changes in interest rates. The swap contracts are structured so that the notional amounts reduce over time to match the contractual amortization of the underlying loan and allow prepayments with the same pre-payment penalty amounts as the related loan. The Bank pays a weighted average fixed rate of 4.71% and receives a variable rate of the one-month LIBOR rate plus a weighted average spread of 266 basis points, or at a weighted average rate of 4.78%. As of September 30, 2018, and September 30, 2017, the notional amount of fair value interest rate swaps was $637.7 million and $510.6 million with net unrealized gains of $15.7 million and $1.9 million, respectively, included in other non-interest income. The amount of periodic net settlement of interest rate swaps increasing interest income was $96,000 for the three months ended September 30, 2018, compared to a decrease of $514,000 for the same quarter a year ago. The amount of periodic net settlement of interest rate swaps decreasing interest income was $132,000 for the nine months ended September 30, 2018, compared to $1.9 million for the same period a year ago. As of September 30, 2018, and 2017, the ineffective portion of these interest rate swaps was not significant.

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The Company enters into foreign exchange forward contracts with various counterparties to mitigate the risk of fluctuations in foreign currency exchange rates for foreign exchange certificates of deposit or foreign exchange contracts entered into with our clients. These contracts are not designated as hedging instruments and are recorded at fair value in our Consolidated Balance Sheet. Changes in the fair value of these contracts as well as the related foreign exchange certificates of deposit and foreign exchange contracts are recognized immediately in net income as a component of non-interest income. Period end gross positive fair values are recorded in other assets and gross negative fair values are recorded in other liabilities. At September 30, 2018, the notional amount of option contracts totaled $1.6 million with a net negative fair value of $4,000. At September 30, 2018, spot, forward, and swap contracts in the total notional amount of $53.4 million had a positive fair value of $400,000. Spot, forward, and swap contracts in the total notional amount of $117.6 million had a negative fair value of $1.6 million at September 30, 2018. At December 31, 2017, the notional amount of option contracts totaled $1.0 million with a net negative fair value of $9,000. At December 31, 2017, spot, forward, and swap contracts in the total notional amount of $108.5 million had a positive fair value of $1.8 million. Spot, forward, and swap contracts in the total notional amount of $32.1 million had a negative fair value of $453,000 at December 31, 2017.

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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, 2018, our average monthly liquidity ratio (defined as net cash plus short-term and marketable securities to net deposits and short-term liabilities) was 12.8% compared to 12.1% as of December 31, 2017.

The Bank is a shareholder of the FHLB, which enables the Bank to have access to lower-cost FHLB financing when necessary. At September 30, 2018, the Bank had an approved credit line with the FHLB of San Francisco totaling $4.0 billion. Total advances from the FHLB of San Francisco were $315.0 million and standby letter of credits issued by FHLB on the Company’s behalf were $216.2 million as of September 30, 2018. These borrowings bear fixed rates and are secured by loans. See Note 9 to the Consolidated Financial Statements. At September 30, 2018, the Bank pledged $20.6 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 $17.7 million from the Federal Reserve Bank Discount Window at September 30, 2018.

Liquidity can also be provided through the sale of liquid assets, which consist of federal funds sold, securities purchased under agreements to resell, and securities available-for-sale. At September 30, 2018, investment securities totaled $1.3 billion, with $33.1 million pledged as collateral for borrowings and other commitments. The remaining $1.2 billion was available as additional liquidity or to be pledged as collateral for additional borrowings.

Approximately 84% of our time deposits mature within one year or less as of September 30, 2018. Management anticipates that there may be some outflow of these deposits upon maturity due to the keen competition in the Bank’s marketplace. However, based on our historical runoff experience, we expect the outflow will not be significant and can be replenished through our normal growth in deposits. Management believes all the above-mentioned sources will provide adequate liquidity during the next twelve months for the Bank to meet its operating needs.

The business activities of Bancorp consist primarily of the operation of the Bank and limited activities in other investments. The Bank paid dividends to Bancorp totaling $94.8 million during the first nine months of 2018 and $208.2 million during 2017.

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

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

We have established a tolerance level in our policy to define and limit net interest income volatility to a change of plus or minus 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, 2018:

	Net Interest		Market Value
	Income		of Equity
Change in Interest Rate (Basis Points)	Volatility ⁽¹⁾		Volatility ⁽²⁾
+200		10.4		3.1
+100		5.3		1.6
-100		-8.3		0.9
-200		-19.8		2.8

(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.

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.

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There has not been any change in our internal control over financial reporting that occurred during the third quarter of 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS.

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

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Item 1A. RISK FACTORS.

There is no material change in the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, in response to Item 1A in Part I of Form 10-K.

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

ISSUER PURCHASES OF EQUITY SECURITIES
Period	(a) Total Number of Shares (or Units) Purchased	(b) Average Price Paid per Share (or Unit)	(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
Month #1 (July 1, 2018 - July 30, 2018)	0	$0	0	$7,543,008
Month #2 (August 1, 2018 - August 31, 2018)	0	$0	0	$7,543,008
Month #3 (September 1, 2018 - September 30, 2018)	0	$0	0	$7,543,008
Total	0	$0	0	$7,543,008

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 31.1

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

Exhibit 31.2

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

Exhibit 32.1

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

Exhibit 32.2

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

Exhibit 101.INS

XBRL Instance Document *

Exhibit 101.SCH

XBRL Taxonomy Extension Schema Document*

Exhibit 101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document*

Exhibit 101.DEF

XBRL Taxonomy Extension Definition Linkbase Document*

Exhibit 101.LAB

XBRL Taxonomy Extension Label Linkbase Document*

Exhibit 101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document*

+ Filed herewith.

++ Furnished herewith.

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

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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 8, 2018

		/s/ Pin Tai
		Pin Tai
		Chief Executive Officer and
		President



Date: November 8, 2018
		/s/ Heng W. Chen
		Heng W. Chen
		Executive Vice President and
		Chief Financial Officer