Edgar Filing: CATHAY GENERAL BANCORP

caty_10q-033113.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 March 31, 2013

[ ]	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, 78,864,841 shares outstanding as of April 30, 2013.

CATHAY GENERAL BANCORP AND SUBSIDIARIES

1ST QUARTER 2013 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	61
Item 4.	CONTROLS AND PROCEDURES.	62

PART II - OTHER INFORMATION		62

Item 1.	LEGAL PROCEEDINGS.	62
Item 1A	RISK FACTORS.	62
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	62
Item 3.	DEFAULTS UPON SENIOR SECURITIES.	63
Item 4.	MINE SAFETY DISCLOSURES.	63
Item 5.	OTHER INFORMATION.	63
Item 6.	EXHIBITS.	63

SIGNATURES		65

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,” “continue,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “optimistic,” “plans,” “potential,” “possible,” “predicts,” “projects,” “seeks,” “shall,” “should,” “will,” and variations of these words and similar expressions are intended to identify these forward-looking statements. Forward-looking statements by us are based on estimates, beliefs, projections, and assumptions of management and are not guarantees of future performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Such risks and uncertainties and other factors include, but are not limited to, adverse developments or conditions related to or arising from:

U.S. and international business and economic conditions;

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;

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 our information systems;

our ability to adapt our systems to technological changes, including successfully implementing our core system conversion;

adverse results in legal proceedings;

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, 2012 (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)

	March 31, 2013			December 31, 2012
	(In thousands, except share and per share data)
Assets
Cash and due from banks	$	155,525		$	144,909
Short-term investments and interest bearing deposits		215,794			411,983
Securities held-to-maturity (market value of $823,906 in 2012)		-			773,768
Securities available-for-sale (amortized cost of $2,149,786 in 2013 and $1,290,676 in 2012)		2,190,296			1,291,480
Trading securities		4,758			4,703
Loans		7,364,340			7,429,147
Less: Allowance for loan losses		(178,692	)		(183,322	)
Unamortized deferred loan fees, net		(10,186	)		(10,238	)
Loans, net		7,175,462			7,235,587
Federal Home Loan Bank stock		37,130			41,272
Other real estate owned, net		45,316			46,384
Affordable housing investments, net		83,868			85,037
Premises and equipment, net		102,067			102,613
Customers’ liability on acceptances		22,334			41,271
Accrued interest receivable		26,992			26,015
Goodwill		316,340			316,340
Other intangible assets, net		4,883			6,132
Other assets		139,950			166,595

Total assets	$	10,520,715		$	10,694,089

Liabilities and Stockholders’ Equity
Deposits
Non-interest-bearing demand deposits	$	1,279,986		$	1,269,455
Interest-bearing deposits:
NOW deposits		622,454			593,133
Money market deposits		1,124,240			1,186,771
Savings deposits		472,122			473,805
Time deposits under $100,000		685,758			644,191
Time deposits of $100,000 or more		3,241,114			3,215,870
Total deposits		7,425,674			7,383,225

Securities sold under agreements to repurchase		1,150,000			1,250,000
Advances from the Federal Home Loan Bank		126,200			146,200
Other borrowings for affordable housing investments		19,232			18,713
Long-term debt		171,136			171,136
Acceptances outstanding		22,334			41,271
Other liabilities		56,574			54,040
Total liabilities		8,971,150			9,064,585
Commitments and contingencies		-			-
Stockholders’ equity
Preferred stock, 10,000,000 shares authorized, 129,000 issued and outstanding at March 31, 2013, and 258,000 issued and outstanding at December 31, 2012		127,724			254,580
Common stock, $0.01 par value, 100,000,000 shares authorized, 83,066,773 issued and 78,859,208 outstanding at March 31, 2013, and 82,985,853 issued and 78,778,288 outstanding at December 31, 2012		831			830
Additional paid-in-capital		769,955			768,925
Accumulated other comprehensive income, net		23,477			465
Retained earnings		744,867			721,993
Treasury stock, at cost (4,207,565 shares at March 31, 2013, and at December 31, 2012)		(125,736	)		(125,736	)
Total Cathay General Bancorp stockholders' equity		1,541,118			1,621,057
Noncontrolling interest		8,447			8,447
Total equity		1,549,565			1,629,504
Total liabilities and equity	$	10,520,715		$	10,694,089

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 March 31,
	2013			2012
	(In thousands, except share and per share data)
Interest and Dividend Income
Loans receivable, including loan fees	$	88,840		$	90,701
Investment securities- taxable		11,786			17,723
Investment securities- nontaxable		967			1,052
Federal Home Loan Bank stock		250			66
Federal funds sold and securities purchased under agreements to resell		-			5
Deposits with banks		208			588
Total interest and dividend income		102,051			110,135

Interest Expense
Time deposits of $100,000 or more		6,757			9,540
Other deposits		2,766			3,916
Securities sold under agreements to repurchase		11,392			14,655
Advances from Federal Home Loan Bank		80			53
Long-term debt		924			1,320
Short-term borrowings		-			-
Total interest expense		21,919			29,484
Net interest income before provision for credit losses		80,132			80,651
Provision/(credit) for loan losses		-			(4,000	)
Net interest income after provision for loan losses		80,132			84,651

Non-Interest Income
Securities gains, net		6,292			2,215
Letters of credit commissions		1,461			1,526
Depository service fees		1,474			1,389
Other operating income		5,654			3,701
Total non-interest income		14,881			8,831

Non-interest Expense
Salaries and employee benefits		22,853			19,878
Occupancy expense		3,644			3,584
Computer and equipment expense		2,676			2,463
Professional services expense		5,817			4,742
FDIC and State assessments		1,738			2,489
Marketing expense		437			1,406
Other real estate owned expense		623			4,693
Operations of affordable housing investments, net		1,695			1,960
Amortization of core deposit intangibles		1,396			1,457
Costs associated with debt redemption		5,645			2,750
Other operating expense		2,604			2,449
Total non-interest expense		49,128			47,871
Income before income tax expense		45,885			45,611
Income tax expense		16,887			16,547
Net income		28,998			29,064
Less: net income attributable to noncontrolling interest		151			151
Net income attributable to Cathay General Bancorp		28,847			28,913
Dividends on preferred stock and noncash charge from repayment		(5,184	)		(4,117	)
Net income attributable to common stockholders		23,663			24,796

Other comprehensive income, net of tax
Unrealized holding gain arising during the period		26,659			5,479
Less: reclassification adjustments included in net income		3,647			1,284
Total other comprehensive gain, net of tax		23,012			4,195
Total comprehensive income	$	51,859		$	33,108

Net income per common share:
Basic	$	0.30		$	0.32
Diluted	$	0.30		$	0.32
Cash dividends paid per common share	$	0.01		$	0.01
Average common shares outstanding
Basic		78,795,564			78,678,645
Diluted		78,815,141			78,690,132

See accompanying notes to unaudited condensed consolidated financial statements.

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended March 31
	2013			2012
	(In thousands)
Cash Flows from Operating Activities
Net income	$	28,998		$	29,064
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Credit for loan losses		-			(4,000	)
Provision/(credit) for losses on other real estate owned		(37	)		2,740
Deferred tax liability		6,227			2,356
Depreciation		1,527			1,471
Net losses on sale and transfer of other real estate owned		44			712
Net gains on sale of loans		(567	)		(278	)
Proceeds from sales of loans		23,672			25,140
Originations of loans held-for-sale		(23,105	)		(24,836	)
Net change in trading securities		(55	)		(99,930	)
Write-downs on venture capital investments		92			137
Gain on sales and calls of securities		(6,292	)		(2,215	)
Amortization/accretion of security premiums/discounts, net		1,114			1,314
Amortization of other intangible assets		1,428			1,491
Excess tax short-fall from share-based payment arrangements		69			565
Stock based compensation and stock issued to officers as compensation		1,037			546
Net change in accrued interest receivable and other assets		4,081			38,156
Net change in other liabilities		1,612			1,527
Net cash provided by/(used in) operating activities		39,845			(26,040	)

Cash Flows from Investing Activities
Decrease in short-term investments		196,189			19,900
Increase in securities purchased under agreements to resell		-			(50,000	)
Purchase of investment securities available-for-sale		(508,865	)		(424,637	)
Proceeds from sale of investment securities available-for-sale		320,234			148,134
Proceeds from repayments, maturities and calls of investment securities available-for-sale		57,495			226,173
Proceeds from repayments, maturities and calls of investment securities held-to-maturity		50,973			67,979
Redemptions of Federal Home Loan Bank stock		4,142			2,533
Net decrease in loans		61,833			131,822
Purchase of premises and equipment		(1,014	)		(905	)
Proceeds from sale of other real estate owned		1,351			10,186
Net increase in investment in affordable housing		(1,614	)		(4,902	)
Net cash provided by investing activities		180,724			126,283

Cash Flows from Financing Activities

Net increase in deposits		42,362			130,717
Net decrease in federal funds purchased and securities sold under agreements to repurchase		(100,000	)		-
Advances from Federal Home Loan Bank		298,020			260,000
Repayment of Federal Home Loan Bank borrowings		(317,500	)		(485,000	)
Cash dividends paid		(3,828	)		(4,012	)
Redemption of series B preferred stock		(129,000	)		-
Repayment of other borrowings		-			(879	)
Proceeds from shares issued under Dividend Reinvestment Plan		62			67
Proceeds from exercise of stock options		-			647
Excess tax short-fall from share-based payment arrangements		(69	)		(565	)
Net cash used in financing activities		(209,953	)		(99,025	)

Increase in cash and cash equivalents		10,616			1,218
Cash and cash equivalents, beginning of the period		144,909			117,888
Cash and cash equivalents, end of the period	$	155,525		$	119,106


Supplemental disclosure of cash flow information
Cash paid during the period:
Interest	$	22,827		$	30,699
Income taxes paid/(refund)	$	8,562		$	(20,424	)
Non-cash investing and financing activities:
Net change in unrealized holding gain on securities available-for-sale, net of tax	$	23,012		$	4,195
Transfers investment securities to available-for-sale from held-to-maturity	$	722,466		$	-
Transfers to other real estate owned from loans held for investment	$	366		$	8,338
Loans transferred from held for investment to held for sale, net	$	-		$	15,986
Loans to facilitate the sale of other real estate owned	$	75		$	-

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 March 31, 2013, 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, 2013. For further information, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

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 January 2013, the Financial Accounting Standard Board (“FASB”) issued ASU 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” ASU No. 2013-01 clarifies that the scope of Update 2011-11 applies to derivatives, repurchase agreements, and securities lending transactions to the extent that they are either offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement. ASU 2013-01 became effective for interim and annual periods beginning on or after January 1, 2013. Adoption of ASU 2013-01 did not have a significant impact on the Company’s consolidated financial statements. See Note 15 to the Company’s consolidated financial statements for the disclosure of adoption of ASU 2013-01.

In February 2013, the FASB issued ASU 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 amends Topic 220, “Comprehensive Income,” to improve the reporting of reclassification out of accumulated other comprehensive income. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified and to present significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. ASU 2013-02 became effective prospectively for reporting periods beginning after December 15, 2012. Adoption of ASU 2013-02 did not have a significant impact on the Company’s consolidated financial statements. See Note 15 to the Company’s consolidated financial statements for the disclosure of adoption of ASU 2013-02.

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:

	Three months ended March 31,
(Dollars in thousands, except share and per share data)	2013			2012
Net income attributable to Cathay General Bancorp	$	28,847		$	28,913
Dividends on preferred stock and noncash charge from repayment		(5,184	)		(4,117	)
Net income available to common stockholders	$	23,663		$	24,796

Weighted-average shares:
Basic weighted-average number of common shares outstanding		78,795,564			78,678,645
Dilutive effect of weighted-average outstanding common share equivalents
Stock options		19,577			11,487
Diluted weighted-average number of common shares outstanding		78,815,141			78,690,132

Average stock options and warrants with anti-dilutive effect		5,630,813			6,227,224
Earnings per common share:
Basic	$	0.30		$	0.32
Diluted	$	0.30		$	0.32

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 March 31, 2013, 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 the first quarter of 2013 or during 2012.

Option compensation expense totaled $129,000 for the three months ended March 31, 2013, and $194,000 for the three months ended March 31, 2012. Stock-based compensation is recognized ratably over the requisite service period for all awards. All unrecognized stock-based compensation expense was fully recognized as of March 31, 2013.

No stock options were exercised in the first quarter of 2013 compared to 39,784 shares issued on the exercise of stock options in the first quarter of 2012. Cash received totaled $647,000 and the aggregate intrinsic value totaled $34,000 from the exercise of stock options during the three months ended March 31, 2012. 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, 2012		3,996,630		$	29.45		2.2	$	-
Exercised		-			-
Forfeited		(339,340	)		20.45
Balance, March 31, 2013		3,657,290		$	30.28		2.2	$	-
Exercisable, March 31, 2013		3,657,290		$	30.28		2.2	$	-

At March 31, 2013, 2,674,892 shares were available under the Company’s 2005 Incentive Plan for future grants.

The Company granted restricted stock units for 125,133 shares at an average closing price of $18.24 per share in 2012 and for 147,661 shares at an average closing price of $14.78 in 2011. The Company granted restricted stock units for 14,416 shares on March 14, 2013, at the closing price of $20.57. The restricted stock units granted in 2011, 2012, and 2013 are scheduled to vest two years from grant date.

The following table presents information relating to the restricted stock units as of March 31, 2013:

	Units
Balance at December 31, 2012		256,616
Granted		14,416
Forfeited		-
Vested		(62,657	)
Balance at March 31, 2013		208,375

The compensation expense related to the restricted stock units was $609,000 for the three months ended March 31, 2013, compared to $353,000 for the three months ended March 31, 2012. Unrecognized stock-based compensation expense related to restricted stock units was $2.4 million at March 31, 2013, and is expected to be recognized over the next 1.5 years.

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

	Three months ended March 31,
(Dollars in thousands)	2013			2012
Short-fall of tax deductions in excess of grant-date fair value	$	(69	)	$	(565	)
Benefit of tax deductions on grant-date fair value		596			663
Total benefit of tax deductions	$	527		$	98

6. Investment Securities

Investment securities were $2.2 billion at March 31, 2013, compared to $2.1 billion at December 31, 2012. During the first quarter of 2013, due to the ongoing discussions regarding corporate income tax rates which could have a negative impact on the after-tax yields and fair values of the Company’s portfolio of municipal securities, the Company determined it may sell such securities in response to market conditions. As a result, the Company reclassified its municipal securities from securities held-to-maturity to securities available-for-sale. Concurrent with this reclassification, the Company also reclassified all other securities held-to-maturity, which together with the municipal securities had an amortized cost on the date of transfer of $722.5 million, to securities available-for-sale. At the reclassification date, a net unrealized gain was recorded in other comprehensive income for these securities totaling $40.5 million.

The following table reflects the amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment securities as of March 31, 2013, and December 31, 2012:

	March 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)

Securities Available-for-Sale
U.S. treasury securities	$	359,880	$	234	$	-	$	360,114
State and municipal securities		59,805		3,653		-		63,458
Mortgage-backed securities		1,449,816		42,335		1,553		1,490,598
Collateralized mortgage obligations		8,631		369		54		8,946
Asset-backed securities		136		-		4		132
Corporate debt securities		264,949		657		9,149		256,457
Mutual funds		6,000		48		13		6,035
Preferred stock of government sponsored entities		569		3,987		-		4,556
Total securities available-for-sale	$	2,149,786	$	51,283	$	10,773	$	2,190,296
Total investment securities	$	2,149,786	$	51,283	$	10,773	$	2,190,296

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Securities Held-to-Maturity
State and municipal securities	$	129,037	$	9,268	$	-	$	138,305
Mortgage-backed securities		634,757		40,801		-		675,558
Corporate debt securities		9,974		69		-		10,043
Total securities held-to-maturity	$	773,768	$	50,138	$	-	$	823,906

Securities Available-for-Sale
U.S. treasury securities	$	509,748	$	228	$	5	$	509,971
Mortgage-backed securities		404,505		12,194		5		416,694
Collateralized mortgage obligations		9,772		430		34		10,168
Asset-backed securities		145		-		4		141
Corporate debt securities		349,973		106		14,102		335,977
Mutual funds		6,000		79		-		6,079
Preferred stock of government sponsored entities		569		1,766		-		2,335
Trust preferred securities		9,964		151		-		10,115
Total securities available-for-sale	$	1,290,676	$	14,954	$	14,150	$	1,291,480
Total investment securities	$	2,064,444	$	65,092	$	14,150	$	2,115,386

The amortized cost and fair value of investment securities at March 31, 2013, by contractual maturities, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties.

	Securities available-for-sale
	Amortized cost		Fair value
	(In thousands)
Due in one year or less	$	299,974	$	300,139
Due after one year through five years		186,517		184,546
Due after five years through ten years		222,033		221,132
Due after ten years (1)		1,441,262		1,484,479

Total	$	2,149,786	$	2,190,296

(1) Equity securities are reported in this category

Proceeds from sales of mortgage-backed securities were zero and repayments, maturities and calls of mortgage-backed securities were $98.4 million during the first quarter of 2013 compared to proceeds from sales of $117.6 million and repayments, maturities, and calls of $94.2 million during the same quarter a year ago. Proceeds from sales of other investment securities were $320.2 million during the first quarter of 2013 compared to $30.6 million during the same quarter a year ago. Proceeds from maturity and calls of investment securities were $10.1 million during the first quarter of 2013 compared to $200.0 million during the same quarter a year ago. Gains of $6.3 million and no losses of were realized on sales and calls of investment securities during the first quarter of 2013 compared to gains of $2.8 million and losses of $595,000 realized for the same quarter a year ago.

The Company's unrealized loss on investments in corporate bonds relates to 27 issues of investments in bonds of financial institutions, all of which were investment grade at the date of acquisition and as of March 31, 2013. 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 at maturity, it does not consider its investments in these corporate bonds to be other-than-temporarily impaired at March 31, 2013.

The temporarily impaired securities represent 24.2% of the fair value of investment securities as of March 31, 2013. Unrealized losses for securities with unrealized losses for less than twelve months represent 0.5%, and securities with unrealized losses for twelve months or more represent 4.4%, 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 March 31, 2013, 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 March 31, 2013, and December 31, 2012:

	March 31, 2013
	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 Available-for-Sale
Mortgage-backed securities	$	321,604	$	1,551	$	163	$	1	$	321,767	$	1,552
Mortgage-backed securities-Non-agency		-		-		96		1		96		1
Collateralized mortgage obligations		-		-		417		54		417		54
Asset-backed securities		-		-		132		4		132		4
Corporate debt securities		9,855		145		195,996		9,004		205,851		9,149
Mutual funds		1,987		13		-		-		1,987		13
Total securities available-for-sale	$	333,446	$	1,709	$	196,804	$	9,064	$	530,250	$	10,773
Total investment securities	$	333,446	$	1,709	$	196,804	$	9,064	$	530,250	$	10,773

	December 31, 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

Total securities held-to-maturity	$	-	$	-	$	-	$	-	$	-	$	-
Securities Available-for-Sale
U.S. treasury securities	$	49,969	$	5	$	-	$	-	$	49,969	$	5
Mortgage-backed securities		231		1		170		1		401		2
Mortgage-backed securities-Non-agency		-		-		96		2		96		2
Collateralized mortgage obligations		-		-		439		35		439		35
Asset-backed securities		-		-		141		4		141		4
Corporate debt securities		52,468		2,532		253,430		11,570		305,898		14,102
Total securities available-for-sale	$	102,668	$	2,538	$	254,276	$	11,612	$	356,944	$	14,150
Total investment securities	$	102,668	$	2,538	$	254,276	$	11,612	$	356,944	$	14,150

Investment securities having a carrying value of $1.36 billion at March 31, 2013, and $1.45 billion at December 31, 2012, 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 March 31, 2013, and December 31, 2012, were as follows:

	March 31, 2013			December 31, 2012
	(In thousands)
Type of Loans:
Commercial loans	$	2,031,789		$	2,127,107
Residential mortgage loans		1,183,460			1,146,230
Commercial mortgage loans		3,759,580			3,768,452
Equity lines		191,462			193,852
Real estate construction loans		184,067			180,950
Installment and other loans		13,982			12,556
Gross loans		7,364,340			7,429,147
Less:
Allowance for loan losses		(178,692	)		(183,322	)
Unamortized deferred loan fees		(10,186	)		(10,238	)
Total loans, net	$	7,175,462		$	7,235,587

At March 31, 2013, recorded investment in impaired loans totaled $230.5 million and was comprised of non-accrual loans of $100.3 million, and accruing troubled debt restructured (“TDR”) loans of $130.2 million. At December 31, 2012, recorded investment in impaired loans totaled $248.6 million and was comprised of non-accrual loans of $103.9 million and accruing TDR’s of $144.7 million. For impaired loans, the amounts previously charged off represent 22.1% at March 31, 2013, and 23.2% at December 31, 2012, 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
	Three months ended March 31,				Three months ended March 31,
	2013		2012		2013		2012
	(In thousands)
Commercial loans	$	22,126	$	45,142	$	183	$	257
Real estate construction loans		42,068		66,455		66		176
Commercial mortgage loans		162,257		184,867		1,562		1,088
Residential mortgage and equity lines		17,797		17,715		84		40
Total	$	244,248	$	314,179	$	1,895	$	1,561

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

	Impaired Loans
	March 31, 2013						December 31, 2012
	Unpaid Principal Balance		Recorded Investment		Allowance		Unpaid Principal Balance		Recorded Investment		Allowance
	(In thousands)

With no allocated allowance
Commercial loans	$	14,437	$	12,294	$	-	$	29,359	$	18,963	$	-
Real estate construction loans		9,304		7,277		-		9,304		7,277		-
Commercial mortgage loans		153,872		120,563		-		189,871		152,957		-
Residential mortgage and equity lines		3,643		3,633		-		4,303		4,229		-
Subtotal	$	181,256	$	143,767	$	-	$	232,837	$	183,426	$	-
With allocated allowance
Commercial loans	$	11,854	$	7,180	$	1,717	$	7,804	$	4,959	$	1,467
Real estate construction loans		54,657		34,795		8,080		54,718		34,856		8,158
Commercial mortgage loans		31,407		30,187		6,242		14,163		12,928		1,336
Residential mortgage and equity lines		16,704		14,615		1,318		14,264		12,428		1,222
Subtotal	$	114,622	$	86,777	$	17,357	$	90,949	$	65,171	$	12,183
Total impaired loans	$	295,878	$	230,544	$	17,357	$	323,786	$	248,597	$	12,183

The following table presents the aging of the loan portfolio by type as of March 31, 2013, and as of December 31, 2012:

	March 31, 2013
	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	$	15,766	$	-	$	333	$	13,192	$	29,291	$	2,002,498	$	2,031,789
Real estate construction loans		634		-		-		36,237		36,871		147,196		184,067
Commercial mortgage loans		56,343		4,133		467		39,221		100,164		3,659,416		3,759,580
Residential mortgage loans		11,189		1,134		-		11,679		24,002		1,350,920		1,374,922
Installment and other loans		-		-		-		-		-		13,982		13,982
Total loans	$	83,932	$	5,267	$	800	$	100,329	$	190,328	$	7,174,012	$	7,364,340

	December 31, 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	$	16,832	$	1,610	$	630	$	19,958	$	39,030	$	2,088,077	$	2,127,107
Real estate construction loans		-		1,471		-		36,299		37,770		143,180		180,950
Commercial mortgage loans		21,570		3,627		-		35,704		60,901		3,707,551		3,768,452
Residential mortgage loans		5,324		1,972		-		11,941		19,237		1,320,845		1,340,082
Installment and other loans		-		-		-		-		-		12,556		12,556
Total loans	$	43,726	$	8,680	$	630	$	103,902	$	156,938	$	7,272,209	$	7,429,147

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 they 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 a change in the stated interest rate, a reduction in the loan balance or accrued interest, or an extension of the maturity date that causes significant delay in payment.

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

At March 31, 2013, accruing TDRs were $130.2 million and non-accrual TDRs were $49.9 million compared to accruing TDRs of $144.7 million and non-accrual TDRs of $47.7 million at December 31, 2012. The Company allocated specific reserves of $4.7 million to accruing TDRs and $7.6 million to non-accrual TDRs at March 31, 2013, and $1.1 million to accruing TDRs and $7.8 million to non-accrual TDRs at December 31, 2012. The following table presents TDRs that were modified during the first quarter of 2013 and 2012, their specific reserve at March 31, 2013, and charge-offs during the first quarters of 2013 and 2012:

	Three months ended March 31, 2013								March 31, 2013
	No. of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Charge-offs		Specific Reserve
	(Dollars in thousands)

Commercial loans		4		4,007		4,007	$	-	$	61
Commercial mortgage loans		2		1,175		1,175		-		10
Residential mortgage and equity lines		6		1,696		1,696		-		265
Total		12	$	6,878	$	6,878	$	-	$	336

	Three months ended March 31, 2012								March 31, 2012
	No. of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Charge-offs		Specific Reserve
	(Dollars in thousands)

Commercial loans		5	$	1,988	$	1,988	$	-	$	68
Commercial mortgage loans		9		26,693		23,375		3,318		268
Residential mortgage and equity lines		2		1,587		1,587		-		-
Total		16	$	30,268	$	26,950	$	3,318	$	336

Modifications of the loan terms during the first quarter of 2013 were in the form of changes in the stated interest rate, and in payment terms to interest only from principal and interest, multiple note structure, and shortening of the maturity date. The length of time for which modifications involving a reduction of the stated interest rate were documented ranged from six months to twelve months from the modification date. Modifications involving a shortening of the maturity date were for periods up to three years from the modification date, adjusted from longer term original maturity dates of over 25 years.

We expect that the TDR loans on accruing status as of March 31, 2013, which were all performing in accordance with their restructured terms, will continue to comply with the restructured terms because of the reduced principal or interest payments on these loans. A summary of TDRs by type of concession, and by type of loan as of March 31, 2013, and December 31, 2012, is shown below:

	March 31, 2013
Accruing TDRs	Principal Deferral		Rate Reduction		Rate Reduction and Payment Deferral		Total
			(In thousands)
Commercial loans	$	491	$	2,994	$	2,797	$	6,282
Real estate construction loans		-		-		5,834		5,834
Commercial mortgage loans		27,565		16,153		67,812		111,530
Residential mortgage loans		1,455		1,604		3,510		6,569
Total accruing TDRs	$	29,511	$	20,751	$	79,953	$	130,215

	March 31, 2013
Non-accrual TDRs	Interest Deferral		Principal Deferral		Rate Reduction		Rate Reduction and Forgiveness of Principal		Rate Reduction and Payment Deferral		Total
	(In thousands)
Commercial loans	$	-	$	2,425	$	-	$	1,475	$	-	$	3,900
Real estate construction loans		-		16,577		9,449		-		-		26,026
Commercial mortgage loans		1,606		2,777		5,067		-		7,088		16,538
Residential mortgage loans		267		2,146		295		-		706		3,414
Total non-accrual TDRs	$	1,873	$	23,925	$	14,811	$	1,475	$	7,794	$	49,878

	December 31, 2012
Accruing TDRs	Principal Deferral		Rate Reduction		Rate Reduction and Forgiveness of Principal		Rate Reduction and Payment Deferral		Total
			(In thousands)
Commercial loans	$	531	$	3,020	$	-	$	413	$	3,964
Real estate construction loans		-		-		-		5,834		5,834
Commercial mortgage loans		27,003		16,656		739		85,783		130,181
Residential mortgage loans		1,461		1,024		-		2,231		4,716
Total accruing TDRs	$	28,995	$	20,700	$	739	$	94,261	$	144,695

	December 31, 2012
Non-accrual TDRs	Interest Deferral		Principal Deferral		Rate Reduction		Rate Reduction and Forgiveness of Principal		Rate Reduction and Payment Deferral		Total
	(In thousands)
Commercial loans	$	-	$	912	$	-	$	1,518	$	-	$	2,430
Real estate construction loans		-		16,767		9,579		-		-		26,346
Commercial mortgage loans		1,685		2,817		5,746		-		5,076		15,324
Residential mortgage loans		275		2,010		586		-		760		3,631
Total non-accrual TDRs	$	1,960	$	22,506	$	15,911	$	1,518	$	5,836	$	47,731

The activity within our TDR loans for the periods indicated are shown below:

	Three months ended March 31,
Accruing TDRs	2013			2012
	(In thousands)
Beginning balance	$	144,695		$	120,016
New restructurings		4,816			21,712
Restructured loans restored to accrual status		630			2,853
Payments		(17,892	)		(1,348	)
Restructured loans placed on nonaccrual		(2,034	)		-
Ending balance	$	130,215		$	143,233

	Three months ended March 31,
Non-accrual TDRs	2013			2012
	(In thousands)
Beginning balance	$	47,731		$	50,870
New restructurings		2,062			5,238
Restructured loans placed on nonaccrual		2,034			-
Charge-offs		(679	)		(4,018	)
Payments		(640	)		(27,694	)
Restructured loans restored to accrual status		(630	)		(2,853	)

Ending balance	$	49,878		$	21,543

A loan is considered to be in payment default once it is 60 to 90 days contractually past due under the modified terms. One land loan of $2.0 million and two commercial loans of $111,000 were modified as TDRs within the previous twelve months and subsequently defaulted as of March 31, 2013, for the three months ended March 31, 2013. Collectively, these three TDRs did not incur any charge-offs within the twelve months ended March 31, 2013.

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

As of March 31, 2013, there were no commitments to lend additional funds to those borrowers whose loans have been restructured, were considered impaired, or were on non-accrual status.

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

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

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

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

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

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

The following table presents loan portfolio by risk rating as of March 31, 2013, and as of December 31, 2012:

	March 31, 2013
	Pass/Watch		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Commercial loans	$	1,870,832	$	72,872	$	82,957	$	5,128	$	2,031,789
Real estate construction loans		120,395		17,692		37,212		8,768		184,067
Commercial mortgage loans		3,360,744		148,987		249,608		241		3,759,580
Residential mortgage and equity lines		1,358,500		1,915		14,106		401		1,374,922
Installment and other loans		13,982		-		-		-		13,982

Total gross loans	$	6,724,453	$	241,466	$	383,883	$	14,538	$	7,364,340

	December 31, 2012
	Pass/Watch		Special Mention		Substandard		Doubtful		Total
	(In thousands)
Commercial loans	$	1,944,989	$	76,776	$	94,077	$	11,265	$	2,127,107
Real estate construction loans		109,269		18,000		45,171		8,510		180,950
Commercial mortgage loans		3,344,783		162,455		261,214		-		3,768,452
Residential mortgage and equity lines		1,322,768		816		16,084		414		1,340,082
Installment and other loans		12,556		-		-		-		12,556

Total gross loans	$	6,734,365	$	258,047	$	416,546	$	20,189	$	7,429,147

The allowance for loan losses and the reserve for off-balance sheet credit commitments are significant estimates that can and do change based on management’s process in analyzing the loan portfolio and on management’s assumptions about specific borrowers, underlying collateral, and applicable economic and environmental conditions, among other factors.

The following table presents the balance in the allowance for loan losses by portfolio segment and based on impairment method as of March 31, 2013, and as of December 31, 2012.

	Commercial Loans		Real Estate Construction Loans		Commercial Mortgage Loans		Residential Mortgage Loans and Equity Lines		Installment and Other Loans		Total
	(In thousands)
March 31, 2013
Loans individually evaluated for impairment
Allowance	$	1,717	$	8,080	$	6,242	$	1,318	$	-	$	17,357
Balance	$	19,474	$	42,071	$	150,750	$	18,249	$	-	$	230,544

Loans collectively evaluated for impairment
Allowance	$	59,339	$	12,617	$	78,574	$	10,773	$	32	$	161,335
Balance	$	2,012,315	$	141,996	$	3,608,830	$	1,356,673	$	13,982	$	7,133,796

Total allowance	$	61,056	$	20,697	$	84,816	$	12,091	$	32	$	178,692
Total balance	$	2,031,789	$	184,067	$	3,759,580	$	1,374,922	$	13,982	$	7,364,340

December 31, 2012
Loans individually evaluated for impairment
Allowance	$	1,467	$	8,158	$	1,336	$	1,222	$	-	$	12,183
Balance	$	23,922	$	42,133	$	165,885	$	16,657	$	-	$	248,597

Loans collectively evaluated for impairment
Allowance	$	64,634	$	14,859	$	81,137	$	10,481	$	28	$	171,139
Balance	$	2,103,185	$	138,817	$	3,602,567	$	1,323,425	$	12,556	$	7,180,550

Total allowance	$	66,101	$	23,017	$	82,473	$	11,703	$	28	$	183,322
Total balance	$	2,127,107	$	180,950	$	3,768,452	$	1,340,082	$	12,556	$	7,429,147

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2013, and March 31, 2012. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.