cathay_10q-063012.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
[ X ]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
 
OR
[    ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from    to  
 
Commission file number 0-18630
 
CATHAY GENERAL BANCORP
(Exact name of registrant as specified in its charter)
 
Delaware
  
95-4274680
(State of other jurisdiction of incorporation
  
(I.R.S. Employer
or organization)
  
Identification No.)
 
777 North Broadway, Los Angeles, California
90012
(Address of principal executive offices)
(Zip Code)
 
Registrant's telephone number, including area code:       (213) 625-4700

(Former name, former address and former fiscal year, if changed since last report)
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 R 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 R No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  R Accelerated filer  ¨
Non-accelerated filer    ¨  (Do not check if a smaller reporting company)    Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ¨ No R
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, 78,726,330 shares outstanding as of July 31, 2012.
 
 
1
 

CATHAY GENERAL BANCORP AND SUBSIDIARIES
2ND QUARTER 2012 REPORT ON FORM 10-Q
TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
5
     
Item 1. FINANCIAL STATEMENTS (Unaudited)
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
34
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
62
Item 4. CONTROLS AND PROCEDURES.
63
     
PART II - OTHER INFORMATION
63
Item 1. LEGAL PROCEEDINGS.
63
Item 1A RISK FACTORS.
63
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
64
Item 3. DEFAULTS UPON SENIOR SECURITIES.
64
Item 4. MINE SAFETY DISCLOSURES.
64
Item 5. OTHER INFORMATION.
64
Item 6. EXHIBITS.
65
     
SIGNATURES
66
 
 
2
 
Forward-Looking Statements
 
In this Quarterly Report on Form 10-Q, the term “Bancorp” refers to Cathay General Bancorp and the term “Bank” refers to Cathay Bank. The terms “Company,” “we,” “us,” and “our” refer to Bancorp and the Bank collectively. The statements in this report include forward-looking statements within the meaning of the applicable provisions of the Private Securities Litigation Reform Act of 1995 regarding management’s beliefs, projections, and assumptions concerning future results and events. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements in these provisions. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including statements about anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, growth plans, acquisition and divestiture opportunities, business prospects, strategic alternatives, business strategies, financial expectations, regulatory and competitive outlook, investment and expenditure plans, financing needs and availability, and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as “aims,” “anticipates,” “believes,” “can,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “plans,” “projects,” “seeks,” “shall,” “should,” “will,” “predicts,” “potential,” “continue,” “possible,” “optimistic,” 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;
 
 
·
credit risks of lending activities and deterioration in asset or credit quality;
 
 
·
current and potential future supervisory action by bank supervisory authorities;
 
 
·
increased costs of compliance and other risks associated with changes in regulation and the current regulatory environment, including the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), and the potential for substantial changes in the legal, regulatory, and enforcement framework and oversight applicable to financial institutions in reaction to recent adverse financial market events, including changes pursuant to the Dodd-Frank Act;
 
 
·
potential goodwill impairment;
 
 
·
liquidity risk;
 
 
·
fluctuations in interest rates;
 
 
·
inflation and deflation;
 
 
·
risks associated with acquisitions and the expansion of our business into new markets;
 
 
·
real estate market conditions and the value of real estate collateral;
 
 
·
environmental liabilities;
 
 
·
the effect of repeal of the federal prohibition on payment of interest on demand deposit accounts;
 
 
·
our ability to compete with larger competitors;
 
 
3
 
 
·
the possibility of higher capital requirements, including implementation of the Basel III capital standards of the Basel Committee;
 
 
·
our ability to retain key personnel;
 
 
·
successful management of reputational risk;
 
 
·
natural disasters and geopolitical events;
 
 
·
general economic or business conditions in California, Asia, and other regions where the Bank has operations;
 
 
·
restrictions on compensation paid to our executives as a result of our participation in the TARP Capital Purchase Program;
 
 
·
failures, interruptions or security breaches of systems or data breaches;
 
 
·
our ability to adapt our systems to technological changes, including successfully implementing our core system conversion;
 
 
·
changes in accounting standards or tax laws and regulations;
 
 
·
market disruption and volatility;
 
 
·
restrictions on dividends and other distributions by laws and regulations and by our regulators and our capital structure;
 
 
·
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, 2011 (Item 1A in particular), other reports and registration statements filed with the Securities and Exchange Commission (“SEC”), and other filings it makes with the SEC from time to time. Actual results in any future period may also vary from the past results discussed in this report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements, which speak to the date of this report. We have no intention and undertake no obligation to update any forward-looking statement or to publicly announce any revision of any forward-looking statement to reflect future developments or events, except as required by law.
 
Bancorp’s filings with the SEC are available at the website maintained by the SEC at http://www.sec.gov, or by request directed to Cathay General Bancorp, 9650 Flair Drive, El Monte, California 91731, Attention: Investor Relations (626) 279-3286.
 
 
4
 
PART I – FINANCIAL INFORMATION
 
Item 1. FINANCIAL STATEMENTS (Unaudited)
 
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
   
June 30, 2012
     December 31, 2011  
   
(In thousands, except share data)
  
             
ASSETS
            
Cash and due from banks
   $ 134,744     $ 117,888  
Short-term investments and interest bearing deposits
     513,636       294,956  
Securities purchased under agreements to resell
     10,000       -  
Securities held-to-maturity (market value of $1,073,077 in 2012 and $1,203,977 in 2011)
     1,019,977       1,153,504  
Securities available-for-sale (amortized cost of $1,173,146 in 2012 and $1,309,521 in 2011)
     1,166,783       1,294,478  
Trading securities
     104,465       4,542  
Loans held for sale
     500       760  
Loans
     7,043,683       7,059,212  
Less:  Allowance for loan losses
     (192,274 )     (206,280 )
Unamortized deferred loan fees
     (8,855 )     (8,449 )
                 
Loans, net
     6,842,554       6,844,483  
Federal Home Loan Bank stock
     47,966       52,989  
Other real estate owned, net
     74,463       92,713  
Investments in affordable housing partnerships, net
     83,835       78,358  
Premises and equipment, net
     104,255       105,961  
Customers' liability on acceptances
     40,714       37,300  
Accrued interest receivable
     29,547       32,226  
Goodwill
     316,340       316,340  
Other intangible assets
     9,147       11,598  
Other assets
     162,257       206,768  
                 
Total assets .
   $ 10,661,183     $ 10,644,864  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
Deposits
                
Non-interest-bearing demand deposits
   $ 1,172,622     $ 1,074,718  
Interest-bearing accounts:
                
NOW accounts
     500,220       451,541  
Money market accounts
     1,020,304       951,516  
Savings accounts
     444,083       420,030  
Time deposits under $100,000
     886,176       832,997  
Time deposits of $100,000 or more
     3,360,828       3,498,329  
                 
Total deposits
     7,384,233       7,229,131  
                 
Securities sold under agreements to repurchase
     1,400,000       1,400,000  
Advances from the Federal Home Loan Bank
     21,200       225,000  
Other borrowings from financial institutions
     -       880  
Other borrowings for affordable housing investments
     18,834       18,920  
Long-term debt
     171,136       171,136  
Acceptances outstanding
     40,714       37,300  
Other liabilities
     52,062       46,864  
                 
Total liabilities
     9,088,179       9,129,231  
Commitments and contingencies
     -       -  
Stockholders' equity
                
Preferred stock, 10,000,000 shares authorized, 258,000 issued and outstanding at June 30, 2012, and at December 31, 2011
     252,780       250,992  
Common stock, $0.01 par value; 100,000,000 shares authorized, 82,927,085 issued and 78,719,520 outstanding at June 30, 2012, and 82,860,122 issued and 78,652,557 outstanding at December 31, 2011
     829       829  
Additional paid-in-capital
     767,218       765,641  
Accumulated other comprehensive loss, net
     (3,688 )     (8,732 )
Retained earnings
     673,154       624,192  
Treasury stock, at cost (4,207,565 shares at June 30, 2012, and at December 31, 2011)
     (125,736 )     (125,736 )
                 
Total Cathay General Bancorp stockholders' equity
     1,564,557       1,507,186  
Noncontrolling interest
     8,447       8,447  
Total equity
     1,573,004       1,515,633  
Total liabilities and equity
   $ 10,661,183     $ 10,644,864  
 
See accompanying notes to unaudited condensed consolidated financial statements
 
5
 
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
   
Three months ended June 30,
    
Six months ended June 30,
  
 
 
2012
    
2011
    
2012
    
2011
  
   
(In thousands, except share and per share data)
  
INTEREST AND DIVIDEND INCOME
                        
Loans receivable, including loan fees
   $ 88,761     $ 89,792     $ 179,462     $ 180,350  
Investment securities- taxable
     17,166       23,116       34,889       44,970  
Investment securities- nontaxable
     1,039       1,055       2,091       2,111  
Federal Home Loan Bank stock
     67       49       133       96  
Federal funds sold and securities purchased under agreements to resell
     11       7       16       48  
Deposits with banks
     537       320       1,125       541  
                                 
Total interest and dividend income
     107,581       114,339       217,716       228,116  
                                 
INTEREST EXPENSE
                                
Time deposits of $100,000 or more
     8,642       10,894       18,182       21,619  
Other deposits
     3,868       5,374       7,784       11,094  
Securities sold under agreements to repurchase
     14,598       14,892       29,253       31,063  
Advances from Federal Home Loan Bank
     69       3,642       122       8,491  
Long-term debt
     1,284       1,216       2,604       2,422  
Short-term borrowings
     -       6       -       7  
                                 
Total interest expense
     28,461       36,024       57,945       74,696  
                                 
Net interest income before provision for credit losses
     79,120       78,315       159,771       153,420  
Provision/(credit) for loan losses
     (5,000 )     10,000       (9,000 )     16,000  
                                 
Net interest income after provision for loan losses
     84,120       68,315       168,771       137,420  
                                 
NON-INTEREST INCOME
                                
Securities gains, net
     2,374       5,178       4,589       11,410  
Letters of credit commissions
     1,619       1,395       3,145       2,673  
Depository service fees
     1,383       1,399       2,772       2,760  
Other operating income
     4,476       4,481       8,177       8,236  
                                 
Total non-interest income
     9,852       12,453       18,683       25,079  
                                 
NON-INTEREST EXPENSE
                                
Salaries and employee benefits
     20,097       17,659       39,975       35,930  
Occupancy expense
     3,489       3,457       7,073       6,995  
Computer and equipment expense
     2,391       2,115       4,854       4,298  
Professional services expense
     5,209       4,959       9,951       8,688  
FDIC and State assessments
     1,971       2,905       4,460       7,222  
Marketing expense
     1,483       817       2,889       1,512  
Other real estate owned expense
     7,061       2,262       11,754       2,483  
Operations of affordable housing investments, net
     1,951       1,977       3,911       3,953  
Amortization of core deposit intangibles
     1,404       1,460       2,861       2,941  
Cost associated with debt redemption
     -       5,176       2,750       13,987  
Other operating expense
     2,286       2,623       4,735       5,184  
                                 
Total non-interest expense
     47,342       45,410       95,213       93,193  
                                 
Income before income tax expense
     46,630       35,358       92,241       69,306  
Income tax expense
     16,619       10,906       33,166       22,640  
Net income
     30,011       24,452       59,075       46,666  
Less: net income attributable to noncontrolling interest
     150       150       301       301  
Net income attributable to Cathay General Bancorp
     29,861       24,302       58,774       46,365  
Dividends on preferred stock
     (4,121 )     (4,107 )     (8,238 )     (8,212 )
Net income attributable to common stockholders
     25,740       20,195       50,536       38,153  
                                 
Other comprehensive income, net of tax
                                
Unrealized holding gain arising during the period
     2,225       11,974       7,704       12,017  
Less: reclassification adjustments included in net income
     1,376       3,001       2,660       6,613  
                                 
Total other comprehensive gain, net of tax
     849       8,973       5,044       5,404  
Total comprehensive income
   $ 30,710     $ 33,275     $ 63,818     $ 51,769  
                                 
Net income per common share:
                                
Basic
   $ 0.33     $ 0.26     $ 0.64     $ 0.49  
Diluted
   $ 0.33     $ 0.26     $ 0.64     $ 0.49  
Cash dividends paid per common share
   $ 0.01     $ 0.01     $ 0.02     $ 0.02  
Average common shares outstanding
                                
Basic
     78,710,279       78,635,324       78,694,462       78,622,464  
Diluted
     78,712,172       78,637,108       78,701,152       78,636,369  
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
6
 
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
   
Six Months Ended June 30
  
   
2012
    
2011
  
   
(In thousands)
  
Cash Flows from Operating Activities
            
Net income
   $ 59,075     $ 46,666  
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
                
Provision (credit) for loan losses
    (9,000 )     16,000  
Provision for losses on other real estate owned
    7,487       4,315  
Deferred tax liability
     99       9,064  
Depreciation
     2,954       3,050  
Net losses/(gains) on sale and transfer of other real estate owned
    732       (4,522 )
Net gains on sale of loans
     (613 )     (1,259 )
Proceeds from sales of loans
    57,690       16,068  
Originations of loans held-for-sale
    (57,051 )     (10,992 )
Increase in trading securities, net
    (99,893 )     -  
Write-downs on venture capital investments
    187       57  
Gain on sales and calls of securities
    (4,589 )     (11,410 )
Decrease in unrealized loss from interest rate swaps mark-to-market
     (1,892 )     (1,164 )
Amortization/accretion of security premiums/discounts, net
    2,543       1,952  
Amortization of other intangible assets
     2,930       2,983  
Excess tax short-fall from share-based payment arrangements
     565       271  
Stock based compensation expense
    1,149       871  
Stock issued to officers as compensation
    113       -  
Decrease/(increase) in deferred loan fees, net
    406       (1 )
Decrease in accrued interest receivable
    2,679       3,451  
Decrease/(increase) in other assets, net
    43,839       (6,532 )
(Decrease)/increase in other liabilities
    (1,336 )     8,346  
Net cash provided by operating activities
    8,074       77,214  
                 
Cash Flows from Investing Activities
                
(Increase)/decrease in short-term investments
    (218,680 )     110,261  
Increase in securities purchased under agreements to resell
     (10,000 )     (145,000 )
Purchase of investment securities available-for-sale
    (176,708 )     (56,758 )
Proceeds from maturities and calls of investment securities available-for-sale
    470,763       275,000  
Proceeds from sale of investment securities available-for-sale
    41,104       367,465  
Purchase of mortgage-backed securities available-for-sale
     (420,791 )     (278,044 )
Proceeds from repayment of mortgage-backed securities available-for-sale
    46,127       60,868  
Proceeds from sale of mortgage-backed securities available-for-sale
    179,493       470,411  
Purchase of mortgage-backed securities held-to-maturity
     -       (480,083 )
Proceeds from maturities and calls of investment securities held-to-maturity
    131,961       47,321  
Redemptions of Federal Home Loan Bank stock
    5,023       5,114  
Net increase in loans
    (926 )     (124,993 )
Purchase of premises and equipment
    (1,615 )     (1,670 )
Proceeds from sale of other real estate owned
    21,698       42,669  
Net increase in investment in affordable housing
    (1,427 )     (704 )
Net cash provided by investing activities
    66,022       291,857  
                 
Cash Flows from Financing Activities
                
Net increase in demand deposits, NOW accounts, money market and savings deposits
    239,424       20,013  
Net (decrease)/increase in time deposits
    (84,176 )     97,600  
Net decrease in federal funds purchased and securities sold under agreements to repurchase
    -       (102,000 )
Advances from Federal Home Loan Bank
    260,000       1,043,001  
Repayment of Federal Home Loan Bank borrowings
    (463,800 )     (1,390,501 )
Dividends paid on common stock
    (1,574 )     (1,572 )
Dividends paid on preferred stock
    (6,450 )     (6,450 )
Proceeds from other borrowings
    -       10,931  
Repayment of other borrowings
    (880 )     -  
Proceeds from shares issued under Dividend Reinvestment Plan
    134       109  
Proceeds from exercise of stock options
    647       1,306  
Excess tax short-fall from share-based payment arrangements
     (565 )     (271 )
Net cash used in financing activities
    (57,240 )     (327,834 )
Increase in cash and cash equivalents
    16,856       41,237  
Cash and cash equivalents, beginning of the period
    117,888       87,347  
Cash and cash equivalents, end of the period
  $ 134,744     $ 128,584  
                 
                 
Supplemental disclosure of cash flow information
                
Cash paid during the period:
                
Interest
  $ 58,516     $ 76,718  
Income taxes (refunded)/paid
   $ (2,717 )   $ 30,750  
Non-cash investing and financing activities:
                
Net change in unrealized holding gain on securities available-for-sale, net of tax
  $ 5,044     $ 5,403  
Loans to facilitate sale of loans
  $ -     $ 6,094  
Transfers to other real estate owned from loans held for investment
  $ 13,216     $ 41,502  
Transfers to other real estate owned from loans held for sale
   $ -     $ 2,873  
Loans transferred from held for investment to held for sale
  $ 15,986     $ 4,025  
Loans to facilitate the sale of other real estate owned
  $ 1,523     $ 6,825  
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
7
 
 
CATHAY GENERAL BANCORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Business

Cathay General Bancorp (“Bancorp”) is the holding company for Cathay Bank (the “Bank” and, together, the “Company”), six limited partnerships investing in affordable housing investments in which the Bank is the sole limited partner, and GBC Venture Capital, Inc.  The Bancorp also owns 100% of the common stock of five statutory business trusts created for the purpose of issuing capital securities.  The Bank was founded in 1962 and offers a wide range of financial services.  As of June 30, 2012, the Bank operated twenty branches in Southern California, eleven branches in Northern California, eight branches in New York State, three branches in Illinois, three branches in Washington State, two branches in Texas, one branch in Massachusetts, one branch in New Jersey, one branch in Hong Kong, and a representative office in Shanghai and in Taipei.  Deposit accounts at the Hong Kong branch are not insured by the Federal Deposit Insurance Corporation (the “FDIC”).

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.  For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

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

3. Recent Accounting Pronouncements
 
In April 2011, the FASB issued ASU 2011-03 “Transfers and Servicing: Reconsideration of Effective Control for Repurchase Agreements.” ASU 2011-03 improves the accounting for repurchase agreements and other similar transactions by removing the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms even in the event of default by the transferee, and the collateral maintenance implementation guidance related to that criterion. ASU 2011-03 was effective for interim and annual periods beginning on or after December 15, 2011, and applied prospectively.  Adoption of ASU 2011-03 did not have a significant impact on the Company’s consolidated financial statements.
 
 
8
 
 
In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  The provisions of ASU 2011-04 result in a consistent definition of fair value and common requirements for the measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”).  The changes to U.S. GAAP as a result of ASU 2011-04 are as follows: (1) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets (ASU 2011-04 extends that prohibition to all fair value measurements); (3) An exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity’s net exposure to either of those risks (This exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position); (4) Aligns the fair value measurement of instruments classified within an entity’s shareholders’ equity with the guidance for liabilities; and (5) Disclosure requirements have been enhanced for Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to qualitatively describe the sensitivity of fair value measurements to changes in unobservable inputs and the interrelationships between those inputs.  In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed.  Adoption of ASU 2011-04 did not have a significant impact on the Company’s consolidated financial statements.
 
In September 2011, the FASB issued ASU 2011-08 “Intangibles - Goodwill and Other.” ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. ASU 2011-08 was effective for interim and annual goodwill impairment tests performed after December 15, 2011.  ASU 2011-08 did not have a significant impact on the Company’s consolidated financial statements.

4. Earnings per Share
 
Basic earnings per share exclude 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.  Potential dilution is excluded from computation of diluted per-share amounts when a net loss from operations exists.
 
Outstanding stock options with anti-dilutive effect were not included in the computation of diluted earnings per share.   The following table sets forth earnings per common share calculations:
 
 
9
 
 
   
For the three months ended June 30,
    
For the six months ended June 30,
  
(Dollars in thousands, except share and per share data)
  
2012
    
2011
    
2012
    
2011
  
Net income attributable to Cathay General Bancorp
   $ 29,861     $ 24,302     $ 58,774     $ 46,365  
Dividends on preferred stock
     (4,121 )     (4,107 )     (8,238 )     (8,212 )
Net income available to common stockholders
   $ 25,740     $ 20,195     $ 50,536     $ 38,153  
                                 
Weighted-average shares:
                                
Basic weighted-average number of common shares outstanding
     78,710,279       78,635,324       78,694,462       78,622,464  
Dilutive effect of weighted-average outstanding common share equivalents
                                
Stock options
     1,893       1,784       6,690       13,905  
Diluted weighted-average number of common shares outstanding
     78,712,172       78,637,108       78,701,152       78,636,369  
                                 
Average stock options and warrants with anti-dilutive effect
     6,092,332       6,303,432       6,159,778       6,251,149  
Earnings per common share:
                                
Basic
   $ 0.33     $ 0.26     $ 0.64     $ 0.49  
Diluted
   $ 0.33     $ 0.26     $ 0.64     $ 0.49  
 
Options to purchase an additional 4.1 million shares, restricted stock units for an additional 188,766 shares, and warrants to purchase an additional 1.8 million shares at June 30, 2012, were not included in the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect.

5. Stock-Based Compensation
 
Under the Company’s equity incentive plans, directors and eligible employees may be granted incentive or non-statutory stock options and/or restricted stock units, or awarded non-vested stock. As of June 30, 2012, the only options granted by the Company were non-statutory stock options to selected Bank officers and non-employee directors at exercise prices equal to the fair market value of a share of the Company’s common stock on the date of grant.  Such options have a maximum ten-year term and vest in 20% annual increments (subject to early termination in certain events) except certain options granted to the Chief Executive Officer of the Company in 2005 and 2008.  If such options expire or terminate without having been exercised, any shares not purchased will again be available for future grants or awards.  There were no options granted during 2011 or during the first six months of 2012.
 
Option compensation expense totaled $194,000 for the three months ended June 30, 2012, and $196,000 for the three months ended June 30, 2011.  For the six months ended June 30, option compensation expense totaled $387,000 for 2012 and $562,000 for 2011.  Stock-based compensation is recognized ratably over the requisite service period for all awards.  Unrecognized stock-based compensation expense related to stock options totaled $516,000 at June 30, 2012, and is expected to be recognized over the next 8 months.
 
Stock options covering 39,784 shares were exercised in the first quarter of 2012 compared to none in the second quarter of 2012 and none in the second quarter of 2011.  For the six months ended June 30, stock options covering 39,784 shares were exercised in 2012 compared to 86,860 shares in 2011.  Cash received totaled $647,000 and the aggregate intrinsic value totaled $34,000 from the exercise of stock options during the six months ended June 30, 2012, compared to cash received of $1.3 million and the aggregate intrinsic value of $172,000 from the exercise of stock options for the same period a year ago.  The table below summarizes stock option activity for the periods indicated:
 
 
10
 

   
Shares
    
Weighted-Average
Exercise Price
    
Weighted-Average
Remaining Contractual
Life (in years)
    
Aggregate
Intrinsic
Value (in thousands)
  
                         
Balance, December 31, 2011
    4,356,985     $ 28.86       3.0     $ 37  
Exercised
    (39,784 )     16.28                  
Forfeited
    (249,506 )     22.27                  
Balance, March 31, 2012
    4,067,695     $ 29.40       3.0     $ 65  
                                 
Forfeited
    (281 )     23.37                  
                                 
Balance, June 30, 2012
    4,067,414     $ 29.40       2.7     $ 53  
Exercisable, June 30, 2012
     3,959,668     $ 29.57       2.6     $ 53  
 
At June 30, 2012, 2,398,620 shares were available under the Company’s 2005 Incentive Plan for future grants.
 
In 2011, the Company granted restricted stock units for 147,661 shares. The Company granted restricted stock units of 1,943 units on March 30, 2012, and 47,314 units on May 8, 2012.  The restricted stock units granted in 2011 and 2012 are scheduled to vest two years from grant date.
 
The following table presents information relating to the restricted stock units as of June 30, 2012:
 
 
   
Units
  
Balance at December 31, 2011
    171,410  
Granted
    49,257  
Forfeited
     (517 )
Vested
     (11,814 )
Balance at June 30, 2012
    208,336  
 
 
The compensation expense recorded related to the restricted stock units was $409,000 for the three months ended June 30, 2012, compared to $213,000 for the three months ended June 30, 2011.   For the six months ended June 30, compensation expense recorded related to the restricted stock units was $762,000 in 2012 and $309,000 in 2011.  Unrecognized stock-based compensation expense related to restricted stock units was $2.2 million at June 30, 2012, and is expected to be recognized over the next 1.4 years.
 
The following table summarizes the tax short-fall from share-based payment arrangements:
 
   
For the three months ended June 30,
    
For the six months ended June 30,
  
(Dollars in thousands)
  
2012
    
2011
    
2012
    
2011
  
Short-fall of tax deductions in excess of grant-date fair value
   $ -     $ (37 )   $ (565 )   $ (271 )
Benefit of tax deductions on grant-date fair value
     -       37       663       343  
Total benefit of tax deductions
   $ -     $ -     $ 98     $ 72  
 
6. Investment  Securities
 
The following table reflects the amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment securities as of June 30, 2012, and December 31, 2011:

 
11
 
 
   
June 30, 2012
  
   
Amortized
Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Fair Value
  
   
(In thousands)
  
Securities Held-to-Maturity
                        
U.S. government sponsored entities
  $ 99,988     $ 445     $ -     $ 100,433  
State and municipal securities
    129,307       7,490       -       136,797  
Mortgage-backed securities
    780,709       45,449       -       826,158  
Corporate debt securities
     9,973       -       284       9,689  
Total securities held-to-maturity
   $ 1,019,977     $ 53,384     $ 284     $ 1,073,077  
                                 
Securities Available-for-Sale
                                
U.S. treasury securities
  $ 159,871     $ -     $ 36     $ 159,835  
U.S. government sponsored entities
    50,000       182       -       50,182  
Mortgage-backed securities
    527,100       17,373       5       544,468  
Collateralized mortgage obligations
    12,785       521       90       13,216  
Asset-backed securities
    157       -       5       152  
Corporate debt securities
     397,795       339       30,224       367,910  
Mutual funds
     6,000       122       -       6,122  
Preferred stock of government sponsored entities
    569       1,607       -       2,176  
Trust preferred securities
    17,401       379       31       17,749  
Other equity securities
     1,468       3,505       -       4,973  
Total securities available-for-sale
  $ 1,173,146     $ 24,028     $ 30,391     $ 1,166,783  
Total investment securities
   $ 2,193,123     $ 77,412     $ 30,675     $ 2,239,860  
 
 
   
December 31, 2011
  
 
  
Amortized
Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Fair Value
  
   
(In thousands)
  
Securities Held-to-Maturity
                        
U.S. government sponsored entities
  $ 99,966     $ 1,406     $ -     $ 101,372  
State and municipal securities
    129,577       7,053       -       136,630  
Mortgage-backed securities
    913,990       42,351       -       956,341  
Corporate debt securities
     9,971       -       337       9,634  
Total securities held-to-maturity
   $ 1,153,504     $ 50,810     $ 337     $ 1,203,977  
                                 
Securities Available-for-Sale
                                
U.S. government sponsored entities
  $ 500,007     $ 1,226     $ 7     $ 501,226  
State and municipal securities
    1,869       59       -       1,928  
Mortgage-backed securities
    325,706       12,361       436       337,631  
Collateralized mortgage obligations
    16,184       540       238       16,486  
Asset-backed securities
    172       -       6       166  
Corporate debt securities
     412,045       113       31,729       380,429  
Mutual funds
     6,000       48       13       6,035  
Preferred stock of government sponsored entities
    569       1,085       -       1,654  
Trust preferred securities
    45,501       486       24       45,963  
Other equity securities
     1,468       1,492       -       2,960  
Total securities available-for-sale
  $ 1,309,521     $ 17,410     $ 32,453     $ 1,294,478  
Total investment securities
   $ 2,463,025     $ 68,220     $ 32,790     $ 2,498,455  
 
 
The amortized cost and fair value of investment securities at June 30, 2012, 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.   
 
 
 
12
 
 
   
Securities Available-for-Sale
    
Securities Held-to-Maturity
  
   
Amortized Cost
    
Fair Value
    
Amortized Cost
    
Fair Value
  
   
(In thousands)
  
Due in one year or less
  $ 32,843     $ 32,873     $ 99,988     $ 100,433  
Due after one year through five years
    255,162       254,378       -       -  
Due after five years through ten years
    393,762       369,662       50,183       52,556  
Due after ten years (1)
    491,379       509,870       869,806       920,088  
                                 
Total
  $ 1,173,146     $ 1,166,783     $ 1,019,977     $ 1,073,077  
 
 
(1) Equity securities are reported in this category
 
Proceeds from sales of mortgage-backed securities were $179.5 million and repayments, maturities and calls of mortgage-backed securities were $178.1 million during the first six months of 2012 compared to proceeds from sales of $470.4 million and repayments, maturities, and calls of $108.2 million during the same period a year ago.  Proceeds from sales of other investment securities were $41.1 million during the first six months of 2012 compared to $367.5 million during the same period a year ago.  Proceeds from maturity and calls of investment securities were $470.8 million during the first six months of 2012 compared to $275.0 million during the same period a year ago.  Gains of $5.2 million and losses of $608,000 were realized on sales and calls of investment securities during the first six months of 2012 compared to gains of $11.4 million  and no losses realized for the same period a year ago.

The Company's unrealized loss on investments in corporate bonds relates to a number of investments in bonds of financial institutions, all of which were investment grade at the date of acquisition and as of June 30, 2012.  The unrealized losses were primarily caused by the widening of credit spreads since the dates of acquisition. The contractual terms of those investments do not permit the issuers to settle the security at a price less than the amortized cost of the investment. The Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments. Therefore, it is expected that these bonds would not be settled at a price less than the amortized cost of the investment. Because the Company does not intend to sell and would not be required to sell these investments until a recovery of fair value, which may be maturity, it does not consider its investments in these corporate bonds to be other-than-temporarily impaired at June 30, 2012.

The temporarily impaired securities represent 22.2% of the fair value of investment securities as of June 30, 2012.  Unrealized losses for securities with unrealized losses for less than twelve months represent 2.2%, and securities with unrealized losses for twelve months or more represent 9.2%, of the historical cost of these securities.  Unrealized losses on these securities generally resulted from increases in interest rate spreads subsequent to the date that these securities were purchased.
 
At June 30, 2012, management believed the impairment was temporary and, accordingly, no impairment loss has been recognized in our condensed consolidated statements of operations.  The Company expects to recover the amortized cost basis of its debt securities, and has no intent to sell and will not be required to sell available-for-sale debt securities that have declined below their cost before their anticipated recovery.

 
13
 
 
The table below shows the fair value and unrealized losses of the temporarily impaired securities in our investment securities portfolio as of June 30, 2012, and December 31, 2011:
 
   
As of June 30, 2012
  
   
Temporarily Impaired Securities
  
                                     
   
Less than 12 months
    
12 months or longer
    
Total
  
   
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
  
   
(Dollars in thousands)
  
                                     
Securities Held-to-Maturity
                                    
Corporate debt securities
  $ 9,688     $ 284     $ -     $ -     $ 9,688     $ 284  
                                                 
Total securities held-to-maturity
   $ 9,688     $ 284     $ -     $ -     $ 9,688     $ 284  
Securities Available-for-Sale
                                                
U.S. treasury securities
  $ 159,835     $ 36     $ -     $ -     $ 159,835     $ 36  
Mortgage-backed securities
    69       1       194       2       263       3  
Mortgage-backed securities-Non-agency
    -       -       97       2       97       2  
Collateralized mortgage obligations
    -       -       498       90       498       90  
Asset-backed securities
    -       -       152       5       152       5  
Corporate debt securities
    72,765       5,063       249,819       25,161       322,584       30,224  
Trust preferred securities
    3,154       31       -       -       3,154       31  
                                                 
Total securities available-for-sale
  $ 235,823     $ 5,131     $ 250,760     $ 25,260     $ 486,583     $ 30,391  
Total investment securities
   $ 245,511     $ 5,415     $ 250,760     $ 25,260     $ 496,271     $ 30,675  
 
 
   
As of December 31, 2011
  
   
Temporarily Impaired Securities
  
                                     
   
Less than 12 months
    
12 months or longer
    
Total
  
   
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
  
   
(Dollars in thousands)
  
Securities Held-to-Maturity
                                    
Corporate debt securities
  $ 9,635     $ 337     $ -     $ -     $ 9,635     $ 337  
                                                 
    Total securities held-to-maturity
   $ 9,635     $ 337     $ -     $ -     $ 9,635     $ 337  
Securities Available-for-Sale
                                                
U.S. government sponsored entities
   $ 49,993     $ 7     $ -     $ -     $ 49,993     $ 7  
Mortgage-backed securities
    564       4       35       1       599       5  
Mortgage-backed securities-Non-agency
    -       -       6,719       431       6,719       431  
Collateralized mortgage obligations
    -       -       570       238       570       238  
Asset-backed securities
    -       -       166       6       166       6  
Corporate debt securities
    185,577       14,201       172,857       17,528       358,434       31,729  
Mutual funds
    1,987       13       -       -       1,987       13  
Trust preferred securities
    5,674       24       -       -       5,674       24  
                                                 
    Total securities available-for-sale
  $ 243,795     $ 14,249     $ 180,347     $ 18,204     $ 424,142     $ 32,453  
                                                 
Total investment securities
   $ 253,430     $ 14,586     $ 180,347     $ 18,204     $ 433,777     $ 32,790  
 
 
Investment securities having a carrying value of $1.54 billion at June 30, 2012, and $1.68 billion at December 31, 2011, were pledged to secure public deposits, other borrowings, treasury tax and loan, Federal Home Loan Bank advances, securities sold under agreements to repurchase, interest rate swaps, and foreign exchange transactions. 
 
 
14
 
 
7. Loans
 
Most of the Company’s business activity is predominately with Asian customers located in Southern and Northern California; New York City; Houston and Dallas, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Edison, New Jersey; and Hong Kong.  The Company has no specific industry concentration, and generally its loans are collateralized with real property or other pledged collateral of the borrowers.  Loans are generally expected to be paid off from the operating profits of the borrowers, refinancing by another lender, or through sale by the borrowers of the secured collateral.
 
The components of loans in the condensed consolidated balance sheets as of June 30, 2012, and December 31, 2011, were as follows:
 
   
June 30, 2012
    
December 31, 2011
  
   
(In thousands)
  
Type of Loans:
            
Commercial loans
  $ 1,945,720     $ 1,868,275  
Residential mortgage loans
    1,001,976       972,262  
Commercial mortgage loans
    3,695,440       3,748,897  
Equity lines
    203,788       214,707  
Real estate construction loans
    180,086       237,372  
Installment and other loans
    16,673       17,699  
Gross loans
    7,043,683       7,059,212  
                 
Less:
                
Allowance for loan losses
    (192,274 )     (206,280 )
Unamortized deferred loan fees
    (8,855 )     (8,449 )
Total loans, net
   $ 6,842,554     $ 6,844,483  
Loans held for sale
   $ 500     $ 760  
 
 
Loans held for sale of $500,000 at June 30, 2012, decreased $260,000 from $760,000 at December 31, 2011.  In the six months of 2012, we added three new loans of $16.0 million and sold four loans of $16.2 million for a net loss on sale of $26,000.  At June 30, 2012, loans held for sale were comprised of a residential construction loan of $500,000.

At June 30, 2012, recorded investment in impaired loans totaled $276.6 million and was comprised of nonaccrual loans of $122.8 million, nonaccrual loans held for sale of $500,000, and accruing troubled debt restructured (“TDR”) loans of $153.2 million.  At December 31, 2011, recorded investment in impaired loans totaled $322.0 million and was comprised of nonaccrual loans of $201.2 million, nonaccrual loans held for sale of $760,000, and accruing TDR’s of $120.0 million.  For impaired loans, the amounts previously charged off represent 21.9% at June 30, 2012, and 25.6% at December 31, 2011, of the contractual balances for impaired loans.  The following table presents the average balance and interest income recognized related to impaired loans for the periods  indicated:
 
 
15
 
 
   
Impaired Loans
  
   
Average Recorded Investment
    
Interest Income Recognized
  
   
For the Three Months Ended
    
For the Six Months Ended
    
For the Three Months Ended
    
For the Six Months Ended
  
   
June 30,
    
June 30,
    
June 30,
    
June 30,
  
   
2012
    
2011
    
2012
    
2011
    
2012
    
2011
    
2012
    
2011
  
    (In thousands)  
Commercial loans
   $ 29,970     $ 50,379     $ 37,556     $ 46,204     $ 32     $ 263     $ 62     $ 525  
Real estate construction loans
     45,775       84,787       56,115       85,402       111       77       221       153  
Commercial mortgage loans
     179,835       242,697       182,351       247,885       1,849       1,052       3,115       2,099  
Residential mortgage and equity lines
     19,177       17,424       18,446       16,974       38       57       76       100  
Total
  $ 274,757     $ 395,287     $ 294,468     $ 396,465     $ 2,030     $ 1,449     $ 3,474     $ 2,877  
 
 
The following table presents impaired loans and the related allowance for credit losses as of the dates indicated:
 

   
Impaired Loans
  
   
June 30, 2012
    
December 31, 2011
  
                                     
   
Unpaid Principal Balance
    
Recorded
Investment
    
Allowance
    
Unpaid Principal Balance
    
Recorded
Investment
    
Allowance
  
   
(In thousands)
  
                                     
With no allocated allowance
                                    
Commercial loans
   $ 24,282     $ 15,472     $ -     $ 46,671     $ 38,194     $ -  
Real estate construction loans
     66,473       44,622       -       134,836       78,767       -  
Commercial mortgage loans
     209,480       171,248       -       187,580       149,034       -  
Residential mortgage and equity lines
     5,891       5,818       -       8,555       7,987       -  
Subtotal
  $ 306,126     $ 237,160     $ -     $ 377,642     $ 273,982     $ -  
With allocated allowance
                                                
Commercial loans
   $ 18,247     $ 12,932     $ 3,687     $ 11,795     $ 7,587     $ 3,336  
Commercial mortgage loans
     14,413       13,435       1,896       29,722       28,023       2,969  
Residential mortgage and equity lines
     15,178       13,044       1,659       13,813       12,381       1,249  
Subtotal
  $ 47,838     $ 39,411     $ 7,242     $ 55,330     $ 47,991     $ 7,554