Edgar Filing: CATHAY GENERAL BANCORP

caty_10q-093012.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) OFTHE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OFTHE 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 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 þ No o

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 þ No o

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 þ		Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

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, 78,751,638 shares outstanding as of October 31, 2012.

CATHAY GENERAL BANCORP AND SUBSIDIARIES

3RD 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		64

Item 1.	LEGAL PROCEEDINGS.	64
Item 1A	RISK FACTORS.	64
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	64
Item 3.	DEFAULTS UPON SENIOR SECURITIES.	65
Item 4.	MINE SAFETY DISCLOSURES.	65
Item 5.	OTHER INFORMATION.	65
Item 6.	EXHIBITS.	65


SIGNATURES		66

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;

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.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30, 2012			December 31, 2011
	(In thousands, except share and per share data)
Assets
Cash and due from banks	$	114,646		$	117,888
Short-term investments and interest bearing deposits		426,456			294,956
Securities held-to-maturity (market value of $908,067 in 2012 and $1,203,977 in 2011)		849,376			1,153,504
Securities available-for-sale (amortized cost of $1,290,212 in 2012 and $1,309,521 in 2011)		1,293,571			1,294,478
Trading securities		4,619			4,542
Loans held for sale		-			760
Loans		7,259,930			7,059,212
Less: Allowance for loan losses		(184,438	)		(206,280	)
Unamortized deferred loan fees, net		(9,036	)		(8,449	)
Loans, net		7,066,456			6,844,483
Federal Home Loan Bank stock		45,493			52,989
Other real estate owned, net		60,642			92,713
Affordable housing investments, net		87,076			78,358
Premises and equipment, net		103,456			105,961
Customers’ liability on acceptances		30,553			37,300
Accrued interest receivable		29,542			32,226
Goodwill		316,340			316,340
Other intangible assets, net		7,638			11,598
Other assets		168,660			206,768

Total assets	$	10,604,524		$	10,644,864

Liabilities and Stockholders’ Equity
Deposits
Non-interest-bearing demand deposits	$	1,245,312		$	1,074,718
Interest-bearing deposits:
NOW deposits		569,708			451,541
Money market deposits		1,083,917			951,516
Savings deposits		460,182			420,030
Time deposits under $100,000		668,051			832,997
Time deposits of $100,000 or more		3,325,871			3,498,329
Total deposits		7,353,041			7,229,131

Securities sold under agreements to repurchase		1,350,000			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		18,746			18,920
Long-term debt		171,136			171,136
Acceptances outstanding		30,553			37,300
Other liabilities		53,912			46,864
Total liabilities		8,998,588			9,129,231
Commitments and contingencies		-			-
Stockholders’ Equity
Preferred stock, 10,000,000 shares authorized, 258,000 issued and outstanding in 2012 and 2011		253,678			250,992
Common stock, $0.01 par value, 100,000,000 shares authorized, 82,951,885 issued and 78,744,320 outstanding at September 30, 2012, and 82,860,122 issued and 78,652,557 outstanding at December 31, 2011		830			829
Additional paid-in-capital		768,169			765,641
Accumulated other comprehensive income/(loss), net		1,947			(8,732	)
Retained earnings		698,601			624,192
Treasury stock, at cost (4,207,565 shares at September 30, 2012, and at December 31, 2011)		(125,736	)		(125,736	)
Total Cathay General Bancorp stockholders' equity		1,597,489			1,507,186
Noncontrolling interest		8,447			8,447
Total equity		1,605,936			1,515,633
Total liabilities and equity	$	10,604,524		$	10,644,864

See accompanying notes to unaudited condensed consolidated financial statements.

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
	(In thousands, except share and per share data)
INTEREST AND DIVIDEND INCOME
Loans receivable, including loan fees	$	90,024		$	92,590		$	269,486		$	272,940
Investment securities- taxable		15,157			20,304			50,046			65,274
Investment securities- nontaxable		1,036			1,054			3,127			3,165
Federal Home Loan Bank stock		57			38			190			134
Federal funds sold and securities purchased under agreements to resell		2			33			18			81
Deposits with banks		471			360			1,596			901
Total interest and dividend income		106,747			114,379			324,463			342,495

INTEREST EXPENSE
Time deposits of $100,000 or more		7,970			10,496			26,152			32,115
Other deposits		3,261			4,777			11,045			15,871
Securities sold under agreements to repurchase		13,734			14,840			42,987			45,903
Advances from Federal Home Loan Bank		74			2,101			196			10,592
Long-term debt		1,291			1,208			3,895			3,630
Short-term borrowings		-			4			-			11
Total interest expense		26,330			33,426			84,275			108,122
Net interest income before provision for credit losses		80,417			80,953			240,188			234,373
Provision/(credit) for loan losses		-			9,000			(9,000	)		25,000
Net interest income after provision for loan losses		80,417			71,953			249,188			209,373

NON-INTEREST INCOME
Securities gains, net		8,652			8,833			13,241			20,243
Letters of credit commissions		1,728			1,440			4,873			4,113
Depository service fees		1,342			1,341			4,114			4,101
Other operating income		3,900			5,213			12,077			13,449
Total non-interest income		15,622			16,827			34,305			41,906

NON-INTEREST EXPENSE
Salaries and employee benefits		18,451			17,481			58,426			53,411
Occupancy expense		3,853			3,714			10,926			10,709
Computer and equipment expense		2,340			2,139			7,194			6,437
Professional services expense		5,273			4,846			15,224			13,534
FDIC and State assessments		2,094			2,642			6,554			9,864
Marketing expense		519			908			3,408			2,420
Other real estate owned expense		1,794			6,120			13,548			8,603
Operations of affordable housing investments, net		476			2,102			4,387			6,055
Amortization of core deposit intangibles		1,404			1,461			4,265			4,402
Cost associated with debt redemption		3,450			4,540			6,200			18,527
Other operating expense		8,190			2,430			12,925			7,614
Total non-interest expense		47,844			48,383			143,057			141,576
Income before income tax expense		48,195			40,397			140,436			109,703
Income tax expense		17,686			14,162			50,852			36,802
Net income		30,509			26,235			89,584			72,901
Less: net income attributable to noncontrolling interest		151			151			452			452
Net income attributable to Cathay General Bancorp		30,358			26,084			89,132			72,449
Dividends on preferred stock		(4,123	)		(4,111	)		(12,361	)		(12,323	)
Net income attributable to common stockholders		26,235			21,973			76,771			60,126
Other comprehensive income, net of tax
Unrealized holding gain/(loss) arising during the period		10,650			(4,753	)		18,353			7,264
Less: reclassification adjustments included in net income		5,015			5,120			7,674			11,733
Total other comprehensive gain/(loss), net of tax		5,635			(9,873	)		10,679			(4,469	)
Total comprehensive income	$	35,993		$	16,211		$	99,811		$	67,980
Net income per common share:
Basic	$	0.33		$	0.28		$	0.98		$	0.76
Diluted	$	0.33		$	0.28		$	0.98		$	0.76
Cash dividends paid per common share	$	0.01		$	0.01		$	0.03		$	0.03
Average common shares outstanding
Basic		78,729,272			78,640,308			78,706,150			78,628,477
Diluted		78,731,180			78,641,142			78,711,235			78,637,977

See accompanying notes to unaudited condensed consolidated financial statements.

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended September 30
	2012			2011
	(In thousands)
Cash Flows from Operating Activities
Net income	$	89,584		$	72,901
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Provision (credit) for loan losses		(9,000	)		25,000
Provision for losses on other real estate owned		10,362			9,088
Deferred tax liability		5,901			4,380
Depreciation		4,435			4,577
Net gains on sale and transfer of other real estate owned		(700	)		(4,842	)
Net gains on sale of loans		(618	)		(2,851	)
Proceeds from sales of loans		58,505			20,699
Originations of loans held-for-sale		(57,861	)		(10,992	)
Increase in trading securities, net		(79	)		(153,440	)
Write-downs on venture capital investments		226			57
Gain on sales and calls of securities		(13,241	)		(20,243	)
Decrease in unrealized loss from interest rate swaps mark-to-market		(2,634	)		(2,580	)
Amortization/accretion of security premiums/discounts, net		3,800			2,903
Amortization of other intangible assets		4,368			4,475
Excess tax short-fall from share-based payment arrangements		679			276
Stock based compensation expense		1,801			1,278
Stock issued to officers as compensation		450			-
Decrease in deferred loan fees, net		587			739
Decrease in accrued interest receivable		2,684			5,463
Decrease in other assets, net		28,475			7,297
(Decrease)/increase in other liabilities		(1,365	)		4,214
Net cash provided by/(used in) operating activities		126,359			(31,601	)
Cash Flows from Investing Activities
(Increase)/decrease in short-term investments		(131,500	)		172,629
Increase in securities purchased under agreements to resell		-			30,000
Purchase of investment securities available-for-sale		(317,597	)		(371,116	)
Proceeds from maturities and calls of investment securities available-for-sale		494,199			385,000
Proceeds from sale of investment securities available-for-sale		60,951			503,561
Purchase of mortgage-backed securities available-for-sale		(654,386	)		(403,123	)
Proceeds from repayment of mortgage-backed securities available-for-sale		78,758			83,594
Proceeds from sale of mortgage-backed securities available-for-sale		368,972			759,654
Purchase of mortgage-backed securities held-to-maturity		-			(480,083	)
Proceeds from maturities and calls of investment securities held-to-maturity		301,981			82,703
Redemptions of Federal Home Loan Bank stock		7,496			7,698
Net increase in loans		(224,244	)		(283,232	)
Purchase of premises and equipment		(2,312	)		(1,995	)
Proceeds from sale of other real estate owned		33,167			50,115
Net increase in investment in affordable housing		(2,639	)		(968	)
Net cash provided by investing activities		12,846			534,437
Cash Flows from Financing Activities
Net increase in demand deposits, NOW accounts, money market and savings deposits		461,314			108,622
Net (decrease)/increase in time deposits		(337,224	)		25,062
Net decrease in federal funds purchased and securities sold under agreements to repurchase		(50,000	)		(153,500	)
Advances from Federal Home Loan Bank		406,200			3,473
Repayment of Federal Home Loan Bank borrowings		(610,000	)		(348,473	)
Dividends paid on common stock		(2,361	)		(2,359	)
Dividends paid on preferred stock		(9,675	)		(9,675	)
Repayment of other borrowings		(880	)		(5,695	)
Proceeds from shares issued under Dividend Reinvestment Plan		211			205
Proceeds from exercise of stock options		647			1,306
Excess tax short-fall from share-based payment arrangements		(679	)		(276	)
Net cash used in financing activities		(142,447	)		(381,310	)
(Decrease)/increase in cash and cash equivalents		(3,242	)		121,526
Cash and cash equivalents, beginning of the period		117,888			87,347
Cash and cash equivalents, end of the period	$	114,646		$	208,873

Supplemental disclosure of cash flow information
Cash paid during the period:
Interest	$	87,383		$	111,300
Income taxes paid	$	24,908		$	39,750
Non-cash investing and financing activities:
Net change in unrealized holding gain/(loss) on securities available-for-sale, net of tax	$	10,679		$	(4,469	)
Loans to facilitate sale of loans	$	-		$	6,094
Transfers to other real estate owned from loans held for investment	$	13,216		$	73,161
Transfers to other real estate owned from loans held for sale	$	-		$	2,873
Loans transferred from held for investment to held for sale,net	$	234		$	4,139
Loans to facilitate the sale of other real estate owned	$	1,785		$	7,703

See accompanying notes to unaudited condensed consolidated financial statements.

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 September 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 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:

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands, except share and per share data)	2012			2011			2012			2011
Net income attributable to Cathay General Bancorp	$	30,358		$	26,084		$	89,132		$	72,449
Dividends on preferred stock		(4,123	)		(4,111	)		(12,361	)		(12,323	)
Net income available to common stockholders	$	26,235		$	21,973		$	76,771		$	60,126

Weighted-average shares:
Basic weighted-average number of common shares outstanding		78,729,272			78,640,308			78,706,150			78,628,477
Dilutive effect of weighted-average outstanding common share equivalents
Stock options		1,908			834			5,085			9,500
Diluted weighted-average number of common shares outstanding		78,731,180			78,641,142			78,711,235			78,637,977

Average stock options and warrants with anti-dilutive effect		6,080,292			6,294,961			6,133,089			6,265,913
Earnings per common share:
Basic	$	0.33		$	0.28		$	0.98		$	0.76
Diluted	$	0.33		$	0.28		$	0.98		$	0.76

Options to purchase an additional 4.0 million shares, restricted stock units for an additional 206,818 shares, and warrants to purchase an additional 1.8 million shares at September 30, 2012, compared to options to purchase an additional 4.4 million shares, restricted stock units for an additional 89,570 shares, and warrants to purchase an additional 1.8 million shares at September 30, 2011, 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 September 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 nine months of 2012.

Option compensation expense totaled $194,000 for the three months ended September 30, 2012, and $194,000 for the three months ended September 30, 2011. For the nine months ended September 30, option compensation expense totaled $581,000 for 2012 and $756,000 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 $323,000 at September 30, 2012, and is expected to be recognized over the next 5 months.

No stock options were exercised in the third quarter of 2012 or in the same quarter a year ago. For the nine months ended September 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 nine months ended September 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:

	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
Forfeited		(33,604	)		28.92
Balance, September 30, 2012		4,033,810		$	29.41		2.5	$	61
Exercisable, September 30, 2012		3,926,694		$	29.57		2.4	$	61

At September 30, 2012, 2,436,865 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 for 1,943 shares on March 30, 2012, and restricted stock units for 47,314 shares 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 September 30, 2012:

	Units
Balance at December 31, 2011		171,410
Granted		49,257
Forfeited		(5,158	)
Vested		(11,814	)
Balance at September 30, 2012		203,695

The compensation expense recorded related to the restricted stock units was $459,000 for the three months ended September 30, 2012, compared to $213,000 for the three months ended September 30, 2011. For the nine months ended September 30, compensation expense recorded related to the restricted stock units was $1.2 million in 2012 and $523,000 in 2011. Unrecognized stock-based compensation expense related to restricted stock units was $1.7 million at September 30, 2012, and is expected to be recognized over the next 1.2 years.

The following table summarizes the tax short-fall from share-based payment arrangements:

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2012			2011			2012			2011
Short-fall of tax deductions in excess of grant-date fair value	$	(114	)	$	(5	)	$	(679	)	$	(276	)
Benefit of tax deductions on grant-date fair value		114			5			777			348
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 September 30, 2012, and December 31, 2011:

	September 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Securities Held-to-Maturity
State and municipal securities	$	129,173	$	9,392	$	-	$	138,565
Mortgage-backed securities		710,230		49,366		-		759,596
Corporate debt securities		9,973		-		67		9,906
Total securities held-to-maturity	$	849,376	$	58,758	$	67	$	908,067

Securities Available-for-Sale
U.S. treasury securities	$	309,746	$	177	$	3	$	309,920
U.S. government sponsored entities		50,000		103		-		50,103
Mortgage-backed securities		544,579		22,176		4		566,751
Collateralized mortgage obligations		11,329		496		44		11,781
Asset-backed securities		151		-		5		146
Corporate debt securities		357,873		-		20,324		337,549
Mutual funds		6,000		149		-		6,149
Preferred stock of government sponsored entities		569		318		-		887
Trust preferred securities		9,965		320		-		10,285
Total securities available-for-sale	$	1,290,212	$	23,739	$	20,380	$	1,293,571
Total investment securities	$	2,139,588	$	82,497	$	20,447	$	2,201,638

	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 September 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.

	Securities available-for-sale				Securities held-to-maturity
	Amortized cost		Fair value		Amortized cost		Fair value
	(In thousands)
Due in one year or less	$	157,806	$	157,804	$	-	$	-
Due after one year through five years		385,083		378,412		-		-
Due after five years through ten years		241,904		233,331		57,554		61,206
Due after ten years (1)		505,419		524,024		791,822		846,861
Total	$	1,290,212	$	1,293,571	$	849,376	$	908,067

(1) Equity securities are reported in this category

Proceeds from sales of mortgage-backed securities were $369.0 million and repayments, maturities and calls of mortgage-backed securities were $280.7 million during the first nine months of 2012 compared to proceeds from sales of $759.7 million and repayments, maturities, and calls of $166.3 million during the same period a year ago. Proceeds from sales of other investment securities were $61.0 million during the first nine months of 2012 compared to $503.6 million during the same period a year ago. Proceeds from maturity and calls of investment securities were $494.2 million during the first nine months of 2012 compared to $385.0 million during the same period a year ago. Gains of $13.8 million and losses of $607,000 were realized on sales and calls of investment securities during the first nine months of 2012 compared to gains of $20.2 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 September 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 September 30, 2012.

The temporarily impaired securities represent 17.7% of the fair value of investment securities as of September 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 6.2%, 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 September 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.

The table below shows the fair value and unrealized losses of the temporarily impaired securities in our investment securities portfolio as of September 30, 2012, and December 31, 2011:

	As of September 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	$	9,906	$	67	$	-	$	-	$	9,906	$	67
Total securities held-to-maturity	$	9,906	$	67	$	-	$	-	$	9,906	$	67
Securities Available-for-Sale
U.S. treasury securities	$	49,943	$	3	$	-	$	-	$	49,943	$	3
Mortgage-backed securities		9		1		168		1		177		2
Mortgage-backed securities-Non-agency		-		-		96		2		96		2
Collateralized mortgage obligations		-		-		519		44		519		44
Asset-backed securities		-		-		146		5		146		5
Corporate debt securities		62,266		2,707		267,383		17,617		329,649		20,324
Total securities available-for-sale	$	112,218	$	2,711	$	268,312	$	17,669	$	380,530	$	20,380
Total investment securities	$	122,124	$	2,778	$	268,312	$	17,669	$	390,436	$	20,447

	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 $1.57 billion at September 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.

7. Loans

Most of the Company’s business activity is with Asian customers located in Southern and Northern California; New York City, New York; 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 September 30, 2012, and December 31, 2011, were as follows:

	September 30, 2012			December 31, 2011
	(In thousands)
Type of Loans:
Commercial loans	$	2,082,920		$	1,868,275
Residential mortgage loans		1,073,880			972,262
Commercial mortgage loans		3,704,777			3,748,897
Equity lines		199,403			214,707
Real estate construction loans		187,248			237,372
Installment and other loans		11,702			17,699
Gross loans		7,259,930			7,059,212
Less:
Allowance for loan losses		(184,438	)		(206,280	)
Unamortized deferred loan fees		(9,036	)		(8,449	)
Total loans, net	$	7,066,456		$	6,844,483
Loans held for sale	$	-		$	760

No loans were held for sale at September 30, 2012, compared to $760,000 at December 31, 2011. In the first nine months of 2012, we added three new loans of $16.0 million, sold four loans of $16.2 million for a net loss on sale of $26,000, and transferred a loan of $500,000 to held for investment.

At September 30, 2012, recorded investment in impaired loans totaled $265.1 million and was comprised of nonaccrual loans of $94.9 million, and accruing troubled debt restructured (“TDR”) loans of $170.2 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 22.1% at September 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:

	Impaired Loans
	Average Recorded Investment								Interest Income Recognized
	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended September 30,				For the nine months ended September 30,
	2012		2011		2012		2011		2012		2011		2012		2011
	(In thousands)
Commercial loans	$	25,987	$	55,599	$	33,672	$	49,370	$	49	$	264	$	146	$	789
Real estate construction loans		41,404		78,307		51,176		83,011		177		488		531		1,461
Commercial mortgage loans		178,206		180,554		180,959		225,195		1,971		895		5,477		3,100
Residential mortgage and equity lines		18,370		17,798		18,420		17,252		49		9		148		28
Total	$	263,967	$	332,258	$	284,227	$	374,828	$	2,246	$	1,656	$	6,302	$	5,378

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

	Impaired Loans
	September 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	$	22,832	$	17,561	$	-	$	46,671	$	38,194	$	-
Real estate construction loans		53,613		40,877		-		134,836		78,767		-
Commercial mortgage loans		204,549		165,440		-		187,580		149,034		-
Residential mortgage and equity lines		4,318		4,244		-		8,555		7,987		-
Subtotal	$	285,312	$	228,122	$	-	$	377,642	$	273,982	$	-
With allocated allowance
Commercial loans	$	15,182	$	9,490	$	1,791	$	11,795	$	7,587	$	3,336
Real estate construction loans		9,932		779		279		-		-		-
Commercial mortgage loans		13,902		12,969		1,729		29,722		28,023		2,969
Residential mortgage and equity lines		16,072		13,736		1,626		13,813		12,381		1,249
Subtotal	$	55,088	$	36,974	$	5,425	$	55,330	$	47,991	$	7,554
Total impaired loans	$	340,400	$	265,096	$	5,425	$	432,972	$	321,973	$	7,554

The following table presents the aging of the loan portfolio by type as of September 30, 2012, and as of December 31, 2011:

	As of September 30, 2012
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Non-accrual Loans		Total Past Due		Loans Not Past Due		Total
Type of Loans:	(In thousands)
Commercial loans	$	4,498	$	2,930	$	-	$	23,035	$	30,463	$	2,052,457	$	2,082,920
Real estate construction loans		-		17,095		-		9,422		26,517		160,731		187,248
Commercial mortgage loans		8,424		6,523		-		48,754		63,701		3,641,076		3,704,777
Residential mortgage and equity lines		344		4,006		-		13,733		18,083		1,255,200		1,273,283
Installment and other loans		-		40		-		-		40		11,662		11,702
Total loans	$	13,266	$	30,594	$	-	$	94,944	$	138,804	$	7,121,126	$	7,259,930

	As of December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Non-accrual Loans		Total Past Due		Loans Not Past Due		Total
Type of Loans:	(In thousands)
Commercial loans	$	1,683	$	-	$	-	$	30,661	$	32,344	$	1,835,931	$	1,868,275
Real estate construction loans		20,326		-		-		46,012		66,338		171,034		237,372
Commercial mortgage loans		13,627		20,277		6,726		107,784		148,414		3,600,483		3,748,897
Residential mortgage and equity lines		5,871		-		-		16,740		22,611		1,164,358		1,186,969
Installment and other loans		-		-		-		-		-		17,699		17,699
Total loans	$	41,507	$	20,277	$	6,726	$	201,197	$	269,707	$	6,789,505	$	7,059,212

The determination of the amount of the allowance for credit 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 collectibility 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. This allowance evaluation process is also applied to troubled debt restructurings since trouble debt restructurings are considered to be impaired loans.

A troubled debt restructuring (“TDR”) is a formal modification of the terms of a loan when the lender, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including change in the stated interest rate, reduction in the loan balance or accrued interest, or 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.

At September 30, 2012, accruing TDRs were $170.2 million and non-accrual TDRs were $19.1 million compared to accruing TDRs of $120.0 million and non-accrual TDRs of $50.9 million at December 31, 2011. The Company has allocated specific reserves of $1.1 million to accruing TDRs and $208,000 to non-accrual TDRs at September 30, 2012, and $1.4 million to accruing TDRs and $1.6 million to non-accrual TDRs at December 31, 2011. The following table presents TDRs that were modified during the first nine months of 2012 and 2011, their specific reserve at September 30, and charge-offs during the first nine months of 2012 and 2011:

	For the nine months ended September 30, 2012								As of September 30, 2012
	No. of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Charge-offs		Specific Reserve
					(Dollars in thousands)

Commercial loans		8		2,144	$	2,144	$	-	$	75
Commercial mortgage loans		15