UNITED STATES
securities and exchange commission
Washington, D.C. 20549
form 10-q
(Mark One)
[ X ] quarterly report pursuant to section 13 or 15(d) of THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended |
June 30, 2013 |
OR
[ ] transition report pursuant to section 13 or 15 (d) of the SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from |
|
to |
|
|
Commission file number |
0-18630 |
|
CATHAY GENERAL BANCORP |
|
(Exact name of registrant as specified in its charter) |
|
Delaware |
|
95-4274680 |
|
(State of other jurisdiction of incorporation |
|
(I.R.S. Employer |
|
or organization) |
|
Identification No.) |
|
777 North Broadway, Los Angeles, California |
|
90012 |
|
(Address of principal executive offices) |
|
(Zip Code) |
Registrant's telephone number, including area code: (213) 625-4700
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer ☑ |
Accelerated filer ☐ |
|
Non-accelerated filer ☐ (Do not check if a smaller reporting company) |
Smaller reporting company☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
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, 78,889,306 shares outstanding as of July 26, 2013.
CATHAY GENERAL BANCORP AND SUBSIDIARies
2ND 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. |
35 | |
|
Item 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
63 | |
|
Item 4. |
CONTROLS AND PROCEDURES. |
64 | |
|
PART II - OTHER INFORMATION |
65 | ||
|
Item 1. |
LEGAL PROCEEDINGS. |
65 | |
|
Item 1A |
RISK FACTORS. |
65 | |
|
Item 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
65 | |
|
Item 3. |
DEFAULTS UPON SENIOR SECURITIES. |
66 | |
|
Item 4. |
MINE SAFETY DISCLOSURES. |
66 | |
|
Item 5. |
OTHER INFORMATION. |
66 | |
|
Item 6. |
EXHIBITS. |
66 | |
|
SIGNATURES |
68 | ||
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; |
|
● |
potential 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)
(In thousands, except share and per share data) June 30, 2013 December 31, 2012 Assets Cash and due from banks Short-term investments and interest bearing deposits Securities held-to-maturity (market value of $823,906 in 2012) Securities available-for-sale (amortized cost of $2,044,312 in 2013 and $1,290,676 in 2012) Trading securities Loans Less: Allowance for loan losses Unamortized deferred loan fees, net Loans, net Federal Home Loan Bank stock Other real estate owned, net Affordable housing investments, net Premises and equipment, net Customers’ liability on acceptances Accrued interest receivable Goodwill Other intangible assets, net Other assets Total assets Liabilities and Stockholders’ Equity Deposits Non-interest-bearing demand deposits Interest-bearing deposits: NOW deposits Money market deposits Savings deposits Time deposits under $100,000 Time deposits of $100,000 or more Total deposits Securities sold under agreements to repurchase Advances from the Federal Home Loan Bank Other borrowings for affordable housing investments Long-term debt Acceptances outstanding Other liabilities Total liabilities Commitments and contingencies Stockholders’ Equity Preferred stock, 10,000,000 shares authorized, 129,000 issued and outstanding at June 30, 2013, and 258,000 issued Common stock, $0.01 par value, 100,000,000 shares authorized, 83,091,449 issued and 78,883,884 outstanding at June 30, 2013, and Additional paid-in-capital Accumulated other comprehensive (loss)/income, net Retained earnings Treasury stock, at cost (4,207,565 shares at June 30, 2013, and at December 31, 2012) Total Cathay General Bancorp stockholders' equity Noncontrolling interest Total equity Total liabilities and equity
$
133,003
$
144,909
139,840
411,983
-
773,768
2,018,305
1,291,480
4,816
4,703
7,694,373
7,429,147
(179,733
)
(183,322
)
(11,685
)
(10,238
)
7,502,955
7,235,587
32,918
41,272
49,141
46,384
87,456
85,037
102,611
102,613
23,084
41,271
26,374
26,015
316,340
316,340
4,113
6,132
162,279
166,595
$
10,603,235
$
10,694,089
$
1,347,134
$
1,269,455
629,858
593,133
1,121,290
1,186,771
484,704
473,805
816,539
644,191
3,310,996
3,215,870
7,710,521
7,383,225
950,000
1,250,000
126,200
146,200
19,190
18,713
171,136
171,136
23,084
41,271
63,682
54,040
9,063,813
9,064,585
-
-
128,178
254,580
831
830
770,847
768,925
(15,073
)
465
771,928
721,993
(125,736
)
(125,736
)
1,530,975
1,621,057
8,447
8,447
1,539,422
1,629,504
$
10,603,235
$
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/(LOSS)
(Unaudited)
Three months ended June 30, Six months ended June 30, 2013 2012 2013 2012 (In thousands, except share and per share data) Loans receivable, including loan fees Investment securities- taxable Investment securities- nontaxable Federal Home Loan Bank stock Federal funds sold and securities purchased under agreements to resell Deposits with banks Total interest and dividend income Time deposits of $100,000 or more Other deposits Securities sold under agreements to repurchase Advances from Federal Home Loan Bank Long-term debt Total interest expense Net interest income before provision for credit losses Provision/(credit) for loan losses Net interest income after provision/(credit) for loan losses Securities gains, net Letters of credit commissions Depository service fees Other operating income Total non-interest income Salaries and employee benefits Occupancy expense Computer and equipment expense Professional services expense FDIC and State assessments Marketing expense Other real estate owned (income)/expense Operations of affordable housing investments, net Amortization of core deposit intangibles Costs associated with debt redemption Other operating expense Total non-interest expense Income before income tax expense Income tax expense Net income Less: net income attributable to noncontrolling interest Net income attributable to Cathay General Bancorp Dividends on preferred stock and noncash charge from repayment Net income attributable to common stockholders Other comprehensive (loss)/income, net of tax Unrealized holding (loss)/gain arising during the period Less: reclassification adjustments included in net income Total other comprehensive (loss)/gain, net of tax Total comprehensive (loss)/income Net income per common share: Basic Diluted Cash dividends paid per common share Average common shares outstanding Basic Diluted
Interest and Dividend Income
$
87,879
$
88,761
$
176,719
$
179,462
12,332
17,166
24,118
34,889
28
1,039
995
2,091
342
67
592
133
-
11
-
16
281
537
489
1,125
100,862
107,581
202,913
217,716
Interest Expense
6,822
8,642
13,579
18,182
2,993
3,868
5,759
7,784
9,984
14,598
21,376
29,253
145
69
225
122
924
1,284
1,848
2,604
20,868
28,461
42,787
57,945
79,994
79,120
160,126
159,771
-
(5,000
)
-
(9,000
)
79,994
84,120
160,126
168,771
Non-Interest Income
12,177
2,374
18,469
4,589
1,449
1,619
2,910
3,145
1,485
1,383
2,959
2,772
5,250
4,476
10,904
8,177
20,361
9,852
35,242
18,683
Non-interest Expense
21,588
20,097
44,441
39,975
3,510
3,489
7,154
7,073
2,366
2,391
5,042
4,854
6,854
5,209
12,671
9,951
1,981
1,971
3,719
4,460
1,169
1,483
1,606
2,889
(264
)
7,061
359
11,754
2,023
1,951
3,718
3,911
1,338
1,404
2,734
2,861
10,051
-
15,696
2,750
3,100
2,286
5,704
4,735
53,716
47,342
102,844
95,213
46,639
46,630
92,524
92,241
16,573
16,619
33,460
33,166
30,066
30,011
59,064
59,075
150
150
301
301
29,916
29,861
58,763
58,774
(2,067
)
(4,121
)
(7,251
)
(8,238
)
27,849
25,740
51,512
50,536
(31,492
)
2,225
(4,833
)
7,704
7,058
1,376
10,705
2,660
(38,550
)
849
(15,538
)
5,044
$
(8,634
)
$
30,710
$
43,225
$
63,818
$
0.35
$
0.33
$
0.65
$
0.64
$
0.35
$
0.33
$
0.65
$
0.64
$
0.01
$
0.01
$
0.02
$
0.02
78,869,089
78,710,279
78,832,530
78,694,462
78,899,906
78,712,172
78,857,758
78,701,152
See accompanying notes to unaudited condensed consolidated financial statements.
CATHAY GENERAL BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Six months ended June 30 |
||||||||
|
2013 |
2012 |
|||||||
|
(In thousands) |
||||||||
|
Cash Flows from Operating Activities |
||||||||
|
Net income |
$ | 59,064 | $ | 59,075 | ||||
|
Adjustments to reconcile net income to net cash provided by/(used in) operating activities: |
||||||||
|
Credit for loan losses |
- | (9,000 | ) | |||||
|
Provision/(credit) for losses on other real estate owned |
(894 | ) | 7,487 | |||||
|
Deferred tax (asset)/liability |
(16,523 | ) | 99 | |||||
|
Depreciation |
3,105 | 2,954 | ||||||
|
Net losses on sale and transfer of other real estate owned |
(554 | ) | 732 | |||||
|
Net gains on sale of loans |
(834 | ) | (613 | ) | ||||
|
Proceeds from sales of loans |
38,648 | 57,690 | ||||||
|
Originations of loans held-for-sale |
(37,814 | ) | (57,051 | ) | ||||
|
Net change in trading securities |
(113 | ) | (99,893 | ) | ||||
|
Write-downs on venture capital investments |
211 | 187 | ||||||
|
Gain on sales and calls of securities |
(18,469 | ) | (4,589 | ) | ||||
|
Amortization/accretion of security premiums/discounts, net |
2,333 | 2,543 | ||||||
|
Amortization of other intangible assets |
2,797 | 2,930 | ||||||
|
Excess tax short-fall from share-based payment arrangements |
80 | 565 | ||||||
|
Stock based compensation and stock issued to officers as compensation |
1,867 | 1,262 | ||||||
|
Net change in accrued interest receivable and other assets |
35,849 | 46,924 | ||||||
|
Net change in other liabilities |
5,025 | (3,228 | ) | |||||
|
Net cash provided by operating activities |
73,778 | 8,074 | ||||||
|
Cash Flows from Investing Activities |
||||||||
|
Decrease/(increase) in short-term investments |
272,142 | (218,680 | ) | |||||
|
Increase in securities purchased under agreements to resell |
- | (10,000 | ) | |||||
|
Purchase of investment securities available-for-sale |
(776,453 | ) | (597,499 | ) | ||||
|
Proceeds from sale of investment securities available-for-sale |
553,674 | 220,597 | ||||||
|
Proceeds from repayments, maturities and calls of investment securities available-for-sale |
208,074 | 516,890 | ||||||
|
Proceeds from repayments, maturities and calls of investment securities held-to-maturity |
50,973 | 131,961 | ||||||
|
Redemptions of Federal Home Loan Bank stock |
8,354 | 5,023 | ||||||
|
Net decrease in loans |
(274,907 | ) | (926 | ) | ||||
|
Purchase of premises and equipment |
(2,631 | ) | (1,615 | ) | ||||
|
Proceeds from sale of other real estate owned |
6,631 | 21,698 | ||||||
|
Net increase in investment in affordable housing |
(3,441 | ) | (1,427 | ) | ||||
|
Net cash provided by investing activities |
42,416 | 66,022 | ||||||
|
Cash Flows from Financing Activities |
||||||||
|
Net increase in deposits |
326,597 | 155,248 | ||||||
|
Net decrease in federal funds purchased and securities sold under agreements to repurchase |
(300,000 | ) | - | |||||
|
Advances from Federal Home Loan Bank |
643,478 | 260,000 | ||||||
|
Repayment of Federal Home Loan Bank borrowings |
(663,000 | ) | (463,800 | ) | ||||
|
Cash dividends paid |
(6,231 | ) | (8,024 | ) | ||||
|
Redemption of series B preferred stock |
(129,000 | ) | - | |||||
|
Repayment of other borrowings |
- | (880 | ) | |||||
|
Proceeds from shares issued under Dividend Reinvestment Plan |
136 | 134 | ||||||
|
Proceeds from exercise of stock options |
- | 647 | ||||||
|
Excess tax short-fall from share-based payment arrangements |
(80 | ) | (565 | ) | ||||
|
Net cash used in financing activities |
(128,100 | ) | (57,240 | ) | ||||
|
(Decrease)/increase in cash and cash equivalents |
(11,906 | ) | 16,856 | |||||
|
Cash and cash equivalents, beginning of the period |
144,909 | 117,888 | ||||||
|
Cash and cash equivalents, end of the period |
$ | 133,003 | $ | 134,744 | ||||
|
Supplemental disclosure of cash flow information |
||||||||
|
Cash paid during the period: |
||||||||
|
Interest |
$ | 44,472 | $ | 58,516 | ||||
|
Income taxes paid/(refund) |
$ | 28,212 | $ | (2,717 | ) | |||
|
Non-cash investing and financing activities: |
||||||||
|
Net change in unrealized holding (loss)/gain on securities available-for-sale, net of tax |
$ | (15,538 | ) | $ | 5,044 | |||
|
Transfers investment securities to available-for-sale from held-to-maturity |
$ | 722,466 | $ | - | ||||
|
Transfers to other real estate owned from loans held for investment |
$ | 8,016 | $ | 13,216 | ||||
|
Loans transferred from held for investment to held for sale, net |
$ | - | $ | 15,986 | ||||
|
Loans to facilitate the sale of other real estate owned |
$ | 75 | $ | 1,523 | ||||
|
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 June 30, 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 Nevada, 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 16 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 June 30, Six months ended June 30, (Dollars in thousands, except share and per share data) 2013 2012 2013 2012 Net income attributable to Cathay General Bancorp Dividends on preferred stock and noncash charge from repayment Net income available to common stockholders Weighted-average shares: Basic weighted-average number of common shares outstanding Dilutive effect of weighted-average outstanding common share equivalents Restricted stock units Diluted weighted-average number of common shares outstanding Average stock options and warrants with anti-dilutive effect Earnings per common share: Basic Diluted
$
29,916
$
29,861
$
58,763
$
58,774
(2,067
)
(4,121
)
(7,251
)
(8,238
)
$
27,849
$
25,740
$
51,512
$
50,536
78,869,089
78,710,279
78,832,530
78,694,462
30,817
1,893
25,228
6,690
78,899,906
78,712,172
78,857,758
78,701,152
5,597,123
6,092,332
5,613,875
6,159,778
$
0.35
$
0.33
$
0.65
$
0.64
$
0.35
$
0.33
$
0.65
$
0.64
5. Stock-Based Compensation
Under the Company’s equity incentive plans, directors and eligible employees may be granted incentive or non-statutory stock options and/or restricted stock units, or awarded non-vested stock. As of June 30, 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 six months of 2013 or during 2012.
Option compensation expense was zero for the three months ended June 30, 2013, and $194,000 for the three months ended June 30, 2012. For the six months ended June 30, option compensation expense totaled $129,000 for 2013 and $387,000 for 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 June 30, 2013.
No stock options were exercised in the first six months of 2013 compared to 39,784 shares issued on the exercise of stock options in the first six months 2012. Cash received totaled $647,000 and the aggregate intrinsic value totaled $34,000 from the exercise of stock options during the first six months ended June 30, 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 | $ | - | ||||||||||
|
Exercised |
- | - | ||||||||||||||
|
Forfeited |
(2,980 | ) | 30.79 | |||||||||||||
|
Balance, June 30, 2013 |
3,654,310 | $ | 30.28 | 1.9 | $ | - | ||||||||||
|
Exercisable, June 30, 2013 |
3,654,310 | $ | 30.28 | 1.9 | $ | - | ||||||||||
At June 30, 2013, 2,654,098 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 and for 6,729 shares on April 15, 2013, at the closing price of $18.91. 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 June 30, 2013:
|
Units |
||||
|
Balance at December 31, 2012 |
256,616 | |||
|
Granted |
21,145 | |||
|
Forfeited |
- | |||
|
Vested |
(66,539 | ) | ||
|
Balance at June 30, 2013 |
211,222 | |||
The compensation expense related to the restricted stock units was $492,000 for the three months ended June 30, 2013, compared to $409,000 for the three months ended June 30, 2012. For the six months ended June 30, compensation expense recorded related to the restricted stock units was $1.1 million in 2013 and $762,000 in 2012. Unrecognized stock-based compensation expense related to restricted stock units was $2.0 million at June 30, 2013, and is expected to be recognized over the next 1.3 years.
The following table summarizes the tax short-fall from share-based payment arrangements:
|
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
|
(Dollars in thousands) |
2013 |
2012 |
2013 |
2012 |
||||||||||||
|
Short-fall of tax deductions in excess of grant-date fair value |
$ | (11 | ) | $ | - | $ | (80 | ) | $ | (565 | ) | |||||
|
Benefit of tax deductions on grant-date fair value |
11 | - | 607 | 663 | ||||||||||||
|
Total benefit of tax deductions |
$ | - | $ | - | $ | 527 | $ | 98 | ||||||||
6. Investment Securities
Investment securities were $2.0 billion at June 30, 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 June 30, 2013, and December 31, 2012:
June 30, 2013 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In thousands) Securities Available-for-Sale U.S. treasury securities Mortgage-backed securities Collateralized mortgage obligations Asset-backed securities Corporate debt securities Mutual funds Preferred stock of government sponsored entities Total securities available-for-sale Total investment securities
$
409,849
$
192
$
6
$
410,035
1,430,373
20,153
45,178
1,405,348
7,438
295
65
7,668
132
1
-
133
189,951
415
7,540
182,826
6,000
-
161
5,839
569
5,887
-
6,456
$
2,044,312
$
26,943
$
52,950
$
2,018,305
$
2,044,312
$
26,943
$
52,950
$
2,018,305
December 31, 2012 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (In thousands) Securities Held-to-Maturity State and municipal securities Mortgage-backed securities Corporate debt securities Total securities held-to-maturity Securities Available-for-Sale U.S. treasury securities Mortgage-backed securities Collateralized mortgage obligations Asset-backed securities Corporate debt securities Mutual funds Preferred stock of government sponsored entities Trust preferred securities Total securities available-for-sale Total investment securities
$
129,037
$
9,268
$
-
$
138,305
634,757
40,801
-
675,558
9,974
69
-
10,043
$
773,768
$
50,138
$
-
$
823,906
$
509,748
$
228
$
5
$
509,971
404,505
12,194
5
416,694
9,772
430
34
10,168
145
-
4
141
349,973
106
14,102
335,977
6,000
79
-
6,079
569
1,766
-
2,335
9,964
151
-
10,115
$
1,290,676
$
14,954
$
14,150
$
1,291,480
$
2,064,444
$
65,092
$
14,150
$
2,115,386
The amortized cost and fair value of investment securities at June 30, 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 Due after one year through five years Due after five years through ten years Due after ten years (1) Total
$
309,963
$
310,155
185,177
183,982
152,342
149,019
1,396,830
1,375,149
$
2,044,312
$
2,018,305
(1) Equity securities are reported in this category
Proceeds from sales of mortgage-backed securities were $113.6 million and repayments, maturities and calls of mortgage-backed securities were $179.0 million during the first six months of 2013 compared to proceeds from sales of $179.5 million and repayments, maturities, and calls of $178.1 million during the same period a year ago. Proceeds from sales of other investment securities were $440.1 million during the first six months of 2013 compared to $41.1 million during the same period year ago. Proceeds from maturity and calls of other investment securities were $80.1 million during the first six months of 2013 compared to $470.8 million during the same period ago. Gains of $18.5 million and no losses of were realized on sales and calls of investment securities during the first six months of 2013 compared to gains of $5.2 million and losses of $608,000 realized for the same period a year ago.
The unrealized loss on investments in corporate bonds relates to the Company’s investment in 15 issues of bonds of financial institutions, all of which were investment grade at the date of acquisition and as of June 30, 2013. The unrealized losses for these now floating rate securities 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 June 30, 2013.
The temporarily impaired securities represent 58.0% of the fair value of investment securities as of June 30, 2013. Unrealized losses for securities with unrealized losses for less than twelve months represent 4.3%, and securities with unrealized losses for twelve months or more represent 4.6%, of the historical cost of these securities. Unrealized losses on these securities generally resulted from increases in interest rates or spreads subsequent to the date that these securities were purchased.
At June 30, 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 June 30, 2013, and December 31, 2012:
|
June 30, 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 |
||||||||||||||||||||||||
|
U.S. treasury securities |
$ | 99,918 | $ | 6 | $ | - | $ | - | $ | 99,918 | $ | 6 | ||||||||||||
|
Mortgage-backed securities |
901,227 | 45,174 | 160 | 2 | 901,387 | 45,176 | ||||||||||||||||||
|
Mortgage-backed securities-Non-agency |
94 | 2 | - | - | 94 | 2 | ||||||||||||||||||
|
Collateralized mortgage obligations |
67 | 2 | 332 | 63 | 399 | 65 | ||||||||||||||||||
|
Corporate debt securities |
9,758 | 242 | 152,702 | 7,298 | 162,460 | 7,540 | ||||||||||||||||||
|
Mutual funds |
5,839 | 161 | - | - | 5,839 | 161 | ||||||||||||||||||
|
Total securities available-for-sale |
$ | 1,016,903 | $ | 45,587 | $ | 153,194 | $ | 7,363 | $ | 1,170,097 | $ | 52,950 | ||||||||||||
|
Total investment securities |
$ | 1,016,903 | $ | 45,587 | $ | 153,194 | $ | 7,363 | $ | 1,170,097 | $ | 52,950 | ||||||||||||
|
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 $1.12 billion at June 30, 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; Las Vegas, Nevada, and Hong Kong. The Company has no specific industry concentration, and generally its loans are collateralized with real property or other pledged collateral of the borrowers. Loans are generally expected to be paid off from the operating profits of the borrowers, refinancing by another lender, or through sale by the borrowers of the secured collateral.
The components of loans in the condensed consolidated balance sheets as of June 30, 2013, and December 31, 2012, were as follows:
June 30, 2013 December 31, 2012 (In thousands) Type of Loans: Commercial loans Residential mortgage loans Commercial mortgage loans Equity lines Real estate construction loans Installment and other loans Gross loans Less: Allowance for loan losses Unamortized deferred loan fees Total loans, net
$
2,210,761
$
2,127,107
1,224,692
1,146,230
3,909,559
3,768,452
182,855
193,852
153,663
180,950
12,843
12,556
7,694,373
7,429,147
(179,733
)
(183,322
)
(11,685
)
(10,238
)
$
7,502,955
$
7,235,587
At June 30, 2013, recorded investment in impaired loans totaled $211.1 million and was comprised of non-accrual loans of $95.6 million, and accruing troubled debt restructured (“TDR”) loans of $115.5 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 TDRs of $144.7 million. For impaired loans, the amounts previously charged off represent 23.7% at June 30, 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:
Average Recorded Investment Interest Income Recognized For the three months ended June 30, For the six months ended June 30, For the three months ended June 30, For the six months ended June 30, 2013 2012 2013 2012 2013 2012 2013 2012 (In thousands) Commercial loans Real estate construction loans Commercial mortgage loans Residential mortgage and equity lines Total
Impaired Loans
$
20,196
$
29,970
$
21,156
$
37,556
$
89
$
32
$
200
$
62
40,108
45,775
41,082
56,115
66
111
132
221
141,285
179,835
151,713
182,351
1,501
1,849
2,863
3,115
18,050
19,177
17,924
18,446
107
38
215
76
$
219,639
$
274,757
$
231,875
$
294,468
$
1,763
$
2,030
$
3,410
$
3,474
The following table presents impaired loans and the related allowance for credit losses as of the dates indicated:
Impaired Loans June 30, 2013 December 31, 2012 Unpaid Principal Balance Recorded Investment Allowance Unpaid Principal Balance Recorded Investment Allowance (In thousands) With no allocated allowance Commercial loans Real estate construction loans Commercial mortgage loans Residential mortgage and equity lines
$
17,027
$
13,335
$
-
$
29,359
$
18,963
$
-
28,983
16,652
-
9,304
7,277
-
134,815
105,193
-
189,871
152,957
-
3,624
3,615