UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 30, 2009
OR
For the transition period from to
Commission file number 0-18630
CATHAY GENERAL BANCORP
(Exact name of registrant as specified in its charter)
(State of other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
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 x 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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
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, 49,575,813 shares outstanding as of July 31, 2009.
CATHAY GENERAL BANCORP AND SUBSIDIARIES
2ND QUARTER 2009 REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
PART II – OTHER INFORMATION
SIGNATURES
2
Forward-Looking Statements
In this quarterly Report on Form 10-Q, the term “Bancorp” refers to Cathay General Bancorp and the term “Bank” refers to Cathay Bank. The terms “Company,” “we,” “us,” and “our” refer to Bancorp and the Bank collectively. The statements in this report include forward-looking statements within the meaning of the applicable provisions of the Private Securities Litigation Reform Act of 1995 regarding management’s beliefs, projections, and assumptions concerning future results and events. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements in these provisions. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including statements about anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, growth plans, acquisition and divestiture opportunities, business prospects, strategic alternatives, business strategies, financial expectations, regulatory and competitive outlook, investment and expenditure plans, financing needs and availability and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as “aims,” “anticipates,” “believes,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “plans,” “projects,” “seeks,” “shall”, “should,” “will,” “predicts,” “potential,” “continue,” 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:
significant volatility and deterioration in the credit and financial markets; and adverse changes in general economic conditions;
the effects of the Emergency Economic Stabilization Act, the American Recovery and Reinvestment Act, and the Troubled Asset Relief Program (TARP) and any changes or amendments thereto;
deterioration in asset or credit quality;
the availability of capital;
the impact of any goodwill impairment that may be determined;
acquisitions of other banks, if any;
fluctuations in interest rates;
the soundness of other financial institutions;
expansion into new market areas;
earthquakes, wildfires, or other natural disasters;
competitive pressures;
changes in laws, regulations, and accounting rules, or their interpretations; any legislative, judicial, or regulatory actions and developments against us; and
general economic or business conditions in California and other regions where the Bank has operations, including, but not limited to, adverse changes in economic conditions resulting from a prolonged economic downturn.
These and other factors are further described in Cathay General Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2008 (at Item 1A in particular), other reports and registration
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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. Cathay General Bancorp has no intention and undertakes 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.
Cathay General 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.
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ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
Cash and due from banks
Federal funds sold
Cash and cash equivalents
Short-term investments
Securities purchased under agreements to resell
Securities available-for-sale (amortized cost of $3,179,360 in 2009 and $3,043,566 in 2008)
Trading securities
Loans
Less: Allowance for loan losses
Unamortized deferred loan fees
Loans, net
Federal Home Loan Bank stock
Other real estate owned, net
Investments in affordable housing partnerships, net
Premises and equipment, net
Customers’ liability on acceptances
Accrued interest receivable
Goodwill
Other intangible assets
Other assets
Total assets
Deposits
Non-interest-bearing demand deposits
Interest-bearing accounts:
NOW accounts
Money market accounts
Saving accounts
Time deposits under $100,000
Time deposits of $100,000 or more
Total deposits
Federal funds purchased
Securities sold under agreements to repurchase
Advances from the Federal Home Loan Bank
Other borrowings from financial institutions
Other borrowings for affordable housing investments
Long-term debt
Acceptances outstanding
Other liabilities
Total liabilities
Commitments and contigencies
Stockholders’ equity
Preferred stock, 10,000,000 shares authorized, 258,000 issued and outstanding in 2009 and in 2008
Common stock, $0.01 par value; 100,000,000 shares authorized, 53,780,633 issued and 49,573,068 outstanding at June 30, 2009 and 53,715,815 issued and 49,508,250 outstanding at December 31, 2008
Additional paid-in-capital
Accumulated other comprehensive (loss)/income, net
Retained earnings
Treasury stock, at cost (4,207,565 shares in 2009 and in 2008)
Total Cathay General Bancorp stockholders’ equity
Noncontrolling Interest
Total equity
Total liabilities and equity
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
5
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)/INCOME
INTEREST AND DIVIDEND INCOME
Loan receivable, including loan fees
Investment securities- taxable
Investment securities- nontaxable
Agency preferred stock
Federal funds sold and securities purchased under agreements to resell
Deposits with banks
Total interest and dividend income
INTEREST EXPENSE
Other deposits
Advances from Federal Home Loan Bank
Short-term borrowings
Total interest expense
Net interest income before provision for credit losses
Provision for credit losses
Net interest income after provision for credit losses
NON-INTEREST INCOME
Securities gains, net
Letters of credit commissions
Depository service fees
Other operating income
Total non-interest income
NON-INTEREST EXPENSE
Salaries and employee benefits
Occupancy expense
Computer and equipment expense
Professional services expense
FDIC and State assessments
Marketing expense
Other real estate owned expense
Operations of affordable housing investments , net
Amortization of core deposit intangibles
Other operating expense
Total non-interest expense
(Loss)/income before income tax (benefit)/expense
Income tax (benefit)/expense
Net (loss)/income
Less: net income attributable to noncontrolling interest
Net (loss)/income attributable to Cathay General Bancorp
Dividends on preferred stock
Net (loss)/income available to common stockholders
Other comprehensive loss , net of tax
Unrealized holding losses arising during the period
Less: reclassification adjustments included in net income
Total other comprehensive loss, net of tax
Total comprehensive (loss)/income
Net (loss)/income per common share:
Basic
Diluted
Cash dividends paid per common share
Basic average common shares outstanding
Diluted average common shares outstanding
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for losses on other real estate owned
Deferred tax benefit
Depreciation
Net gains on sale of other real estate owned
Net gains on sale of loans held for sale
Proceeds from sale of loans held for sale
Originations of loans held for sale
Increase in trading securities, net
FHLB Stock Dividends
Write-downs on venture capital investments
Write-downs on impaired securities
Gain on sales and calls of securities
Decrease in fair value of warrants
Amortization of security premiums, net
Amortization of intangibles
Excess tax short-fall from share-based payment arrangements
Stock based compensation expense
Gain on sale of premises and equipment
Decrease in accrued interest receivable
Decrease in income tax payable
Increase in other assets, net
Increase in other liabilities
Net cash provided by operating activities
Cash Flows from Investing Activities
Increase in short-term investments
Decrease in long-term investment
Decrease in securities purchased under agreements to resell
Purchase of investment securities available-for-sale
Proceeds from maturity and call of investment securities available-for-sale
Proceeds from sale of investment securities available-for-sale
Purchase of mortgage-backed securities available-for-sale
Proceeds from repayment and sale of mortgage-backed securities available-for-sale
Redemption of Federal Home Loan Bank stock
Net decrease/(increase) in loans
Purchase of premises and equipment
Proceeds from sales of premises and equipment
Proceeds from sale of other real estate owned
Net increase in investment in affordable housing
Net cash used in investing activities
Cash Flows from Financing Activities
Net increase in demand deposits, NOW accounts, money market and saving deposits
Net increase/(decrease) in time deposits
Net (decrease)/increase in federal funds purchased and securities sold under agreement to repurchase
Repayment of Federal Home Loan Bank borrowings
Cash dividends
Dividend paid and Accretion of Discount on Preferred Stock
Proceeds from other borrowings
Repayment of other borrowings
Proceeds from shares issued to Dividend Reinvestment Plan
Proceeds from exercise of stock options
Net cash provided by financing activities
Decrease in cash and cash equivalents
Cash and cash equivalents, beginning of the period
Cash and cash equivalents, end of the period
Supplemental disclosure of cash flow information
Cash paid during the period:
Interest
Income taxes
Non-cash investing and financing activities:
Net change in unrealized holding loss on securities available-for-sale, net of tax
Adjustment to initially apply EITF 06-4
Adjustment to initially apply SFAS No. 160
Transfers to other real estate owned
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Business
Cathay General Bancorp (the “Bancorp”) is the holding company for Cathay Bank (the “Bank”), 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, 2009, the Bank operates 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 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. Acquisitions and Investments
We continue to look for opportunities to expand the Bank’s branch network by seeking new branch locations and/or by acquiring other financial institutions to diversify our customer base in order to compete for new deposits and loans, and to be able to serve our customers more effectively.
For each acquisition, we develop an integration plan for the consolidated company that addressed, among other things, requirements for staffing, systems platforms, branch locations and other facilities. The established plans are evaluated regularly during the integration process and modified as required. Merger and integration expenses are summarized in the following primary categories: (i) severance and employee-related charges; (ii) system conversion and integration costs, including contract termination charges; (iii) asset write-downs, lease termination costs for abandoned space and other facilities-related costs; and (iv) other charges. Other charges include investment banking fees, legal fees, other professional fees relating to due diligence activities and expenses associated with preparation of securities filings, as appropriate. These costs are included in the allocation of the purchase price at the acquisition date based on our formal integration plans.
As of June 30, 2009, goodwill was $319.5 million compared to $319.6 million at December 31, 2008. Merger-related lease liability was $394,000 at June 30, 2009 and $424,000 at December 31, 2008.
3. 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, 2009. For further information, refer to the audited consolidated financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2008.
8
The preparation of the 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 estimate subject to change relates to the allowance for loan losses, goodwill impairment, and other-than-temporary impairment.
4. Recent Accounting Pronouncements
SFAS No. 141, “Business Combinations (Revised 2007).” SFAS 141R replaces SFAS 141, “Business Combinations,” and applies to all transactions and other events in which one entity obtains control over one or more other businesses. SFAS 141R requires an acquirer, upon initially obtaining control of another entity, to recognize the assets, liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition date. Contingent consideration is required to be recognized and measured at fair value on the date of acquisition rather than at a later date when the amount of that consideration may be determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation process required under SFAS 141 whereby the cost of an acquisition was allocated to the individual assets acquired and liabilities assumed based on their estimated fair value. SFAS 141R requires acquirers to expense acquisition-related costs as incurred rather than allocating such costs to the assets acquired and liabilities assumed, as was previously the case under SFAS 141. Under SFAS 141R, the requirements of SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities,” would have to be met in order to accrue for a restructuring plan in purchase accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a non-contractual contingency that is not likely to materialize, in which case, nothing should be recognized in purchase accounting and, instead, that contingency would be subject to the probable and estimable recognition criteria of SFAS 5, “Accounting for Contingencies.” SFAS 141R is expected to have a significant impact on the Company’s accounting for business combinations closing on or after January 1, 2009.
In April 2009, the FASB issued Staff Position (FSP) 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased when compared with normal market activity for the asset or liability and identifying transactions that are not orderly. In those circumstances, further analysis and significant adjustment to the transaction or quoted prices may be necessary to estimate fair value. This FSP reaffirms fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. SFAS 157-4 was effective for the Company on June 15, 2009. The adoption of SFAS 157 did not have a material impact on the Company’s consolidated financial statements. See Note 16- “Fair Value Measurements” for more information.
SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB Statement No. 51.” SFAS 160 amends Accounting Research Bulletin (ARB) No. 51, “Consolidated
9
Financial Statements,” to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 clarifies that a non-controlling interest in a subsidiary, which is sometimes referred to as minority interest, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. The Company adopted SFAS 160 effective as of January 1, 2009, and reclassified non-controlling interest of $8.5 million from other liabilities to equity.
In March 2008, the FASB issued Statement No. 161,“Disclosure about Derivative Instruments and Hedging Activities- an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretation, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 was effective for the Company on November 15, 2008. The adoption of SFAS 161 did not have a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued Statement No. 107-1, “Interim Disclosure about Fair Value of Financial Instruments.” SFAS 107-1 requires publicly traded companies to disclose the fair value of financial instruments within the scope SFAS 107 in interim financial statements, in addition to annual statements. Publicly traded companies also shall disclose the methods and significant assumptions used to estimate the fair value of financial instruments and shall describe changes in methods and significant assumptions, if any, during the period. SFAS 107-1 was effective for the Company on June 15, 2009. The adoption of SFAS 107-1 did not have a significant impact on the Company’s financial statements.
In April 2009, the FASB also issued Statement No. 115-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” SFAS 115-2 changes the requirements for recognizing other-than-temporary impairment (OTTI) for debt securities. SFAS 115-2 requires an entity to assess whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. If either of these conditions is met, an entity must recognize an OTTI. OTTI is separated into the amount of the total impairment related to credit losses and the amount of the total impairment related to all other factors. An entity determines the impairment related to credit losses by comparing the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. OTTI related to the credit loss is then recognized in earnings. OTTI related to all other factors is recognized in other comprehensive income. OTTI not related to the credit loss for a held-to-maturity security should be recognized separately in a new category of other comprehensive income and amortized over the remaining life of the debt security as an increase in the carrying value of the security only when the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its remaining amortized cost basis. SFAS 115-2 expands and increases the frequency of existing disclosures about OTTI for debt and equity securities. The Company adopted SFAS 115-2 effective as of June 15, 2009. No cumulative effect on this adoption of SFAS 115-2 was recorded because the Company had not previously recorded any other-than-temporary impairment related to the credit loss associated with available-for-sale debt securities that the Company owned. The adoption of SFAS 115-2 did not have a material impact on the Company’s consolidated financial statements.
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In May 2009, the FASB issued Statement No. 165, “Subsequent Events.” SFAS 165 applies to the accounting for and disclosure of subsequent events, but will not result in significant changes in practice. Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. There are two types of subsequent events- recognized subsequent events and non-recognized subsequent events. An entity shall recognize in the financial statements the effects of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, a recognized subsequent event. An entity shall not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance but arose after that date, a non-recognized subsequent event. SFAS 165 is effective for annual financial statements covering the first fiscal year ending after June 15, 2009. Adoption of SFAS 165 did not have a significant impact on the Company’s consolidated financial statements. The Company has evaluated subsequent events through August 7, 2009, the date these consolidated financial statements were issued.
In June 2009, the FASB issued Statement No. 166, “Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140.” SFAS 166 removes the concept of a qualifying special-purpose entity and the provisions for guaranteed mortgage securitizations in earlier FASB pronouncements. A transferor should account for the transfer as a sale only if it transfers an entire financial asset and surrenders control over the entire transferred assets in accordance with the conditions in SFAS 166. SFAS limits the circumstances in which a financial asset should be derecognized. SFAS 166 is effective for annual financial statements covering the first fiscal year ending after November 15, 2009. The Company does not expect a material impact on its consolidated financial statements from adoption of SFAS 166.
Statement No. 167, “Amendments to FASB Interpretation No. 46(R)” was also issued in June 2009. SFAS 167 eliminates the quantitative approach previously required under FIN 46(R) for determining whether an entity is a variable interest entity. SFAS 167 requires an entity to perform an ongoing assessments to determine whether an entity is the primarily beneficiary of a variable interest entity. The ongoing assessments identify the power to direct the activities of a variable interest entity, the obligation to absorb losses of the entity and the right to receive benefits from the entity that could potentially be significant to the variable interest entity. SFAS 167 is effective for annual financial statements covering the first fiscal year ending after November 15, 2009. The Company does not expect a material impact on its consolidated financial statements from adoption of SFAS 167.
In June 2009, the FASB issued Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”, a replacement of FASB Statement No. 162. SFAS 168 is to establish the FASB Accounting Standards Codification (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. New standards issued after the Codification’s release will serve to update the Codification and will be referred to as Accounting Standards Updates (“ASUs”). SFAS 168 will be effective September 15, 2009. Financial statements for interim and annual periods ended after September 15, 2009, shall use Codification references, not legacy GAAP references. The Company does not expect a material impact on its consolidated financial statements from adoption of SFAS 168.
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5. Earnings/losses per Share
Basic earnings per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock that then shared in earnings. Potential dilution is excluded from computation of diluted per-share amounts when a net loss from operation exists.
Outstanding stock options with anti-dilutive effect were not included in the computation of diluted earnings per share. The following table sets forth basic and diluted earnings per share calculations and the average shares of stock options with anti-dilutive effect:
(Dollars in thousands, except share and per share data)
Weighted-average shares:
Basic weighted-average number of common shares outstanding
Dilutive effect of weighted-average outstanding common shares equivalents
Stock Options
Restricted Stock
Diluted weighted-average number of common shares outstanding
Average shares of stock options and warrants with anti-dilutive effect
(losses)/Earnings per share:
6. Stock-Based Compensation
In 1998, the Board adopted the Cathay Bancorp, Inc. Equity Incentive Plan. Under the Equity Incentive Plan, as amended in September, 2003, directors and eligible employees may be granted incentive or non-statutory stock options and/or restricted stock units, or awarded non-vested stock, for up to 7,000,000 shares of the Company’s common stock on a split adjusted basis. In May 2005, the shareholders of the Company approved the 2005 Incentive Plan which provides that 3,131,854 shares of the Company’s common stock may be granted as incentive or non-statutory stock options, or as restricted stock, or as restricted stock units. In conjunction with the approval of the 2005 Incentive Plan, the Bancorp agreed to cease granting awards under the Equity Incentive Plan. As of June 30, 2009, the only options granted by the Company under the 2005 Incentive Plan 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 options granted to the Chief Executive Officer of the Company for 100,000 shares granted on February 21,
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2008, of which 50% were vested on February 21, 2009, and the remaining 50% would vest on February 21, 2010. If such options expire or terminate without having been exercised, any shares not purchased will again be available for future grants or awards. Stock options are typically granted in the first quarter of the year. There were no options granted during the first six months of 2009. In February 21, 2008, the Company granted options of 689,200 shares and restricted stock units of 82,291 shares to selected bank officers and non-employee directors. The Company expects to issue new shares to satisfy stock option exercises and the vesting of restricted stock units.
Stock-based compensation expense for stock options is calculated based on the fair value of the award at the grant date for those options expected to vest, and is recognized as an expense over the vesting period of the grant. The Company uses the Black-Scholes option pricing model to estimate the value of granted options. This model takes into account the option exercise price, the expected life, the current price of the underlying stock, the expected volatility of the Company’s stock, expected dividends on the stock and a risk-free interest rate. The Company estimates the expected volatility based on the Company’s historical stock prices for the period corresponding to the expected life of the stock options. Based on SAB 107 and SAB 110, the Company has estimated the expected life of the options based on the average of the contractual period and the vesting period and has consistently applied the simplified method to all options granted starting from 2005. Option compensation expense totaled $1.3 million for the three months ended June 30, 2009, and $1.8 million for the three months ended June 30, 2008. For the six months ended June 30, option compensation expense totaled $2.6 million for 2009 and $3.4 million for 2008. Stock-based compensation is recognized ratably over the requisite service period for all awards. Unrecognized stock-based compensation expense related to stock options totaled $7.5 million at June 30, 2009, and is expected to be recognized over the next 2.2 years.
The weighted average per share fair value on the date of grant of the options granted was $6.86 during the first quarter of 2008. There were no options granted in the first six months of 2009. The Company estimated the expected life of the options based on the average of the contractual period and the vesting period. The fair value of stock options has been determined using the Black-Scholes option pricing model with the following assumptions:
Expected life- number of years
Risk-free interest rate
Volatility
Dividend yield
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No stock options were exercised during the second quarter of 2009 and during the second quarter of 2008. Cash received from exercises of stock options totaled $14,000 from the exercise of stock options on 1,280 shares during the six months ended June 30, 2009, and $356,000 from the exercise of 18,906 shares during the six months ended June 30, 2008. The fair value of stock options vested during the second quarter of 2009 was $100,000 compared to $108,000 for the second quarter of 2008. The table below summarizes stock option activity for the periods indicated:
Balance at December 31, 2008
Granted
Forfeited
Exercised
Balance at March 31, 2009
Balance at June 30, 2009
Exercisable at June 30, 2009
At June 30, 2009, 1,587,228 shares were available under the Company’s 2005 Incentive Plan for future grants.
In addition to stock options above, in February 2008, the Company also granted restricted stock units on 82,291 shares of the Company’s common stock to its eligible employees. On the date of granting of these restricted stock units, the closing price of the Company’s stock was $23.37 per share. Such restricted stock units have a maximum term of five years and vest in approximately 20% annual increments subject to employees’ continued employment with the Company. On February 21, 2009, restricted stock units of 15,828 shares were vested at the closing price of $8.94 per share. Among the 15,828 restricted stock units, 2,865 shares were cancelled immediately for employees who elected to satisfy income tax withholding amounts through cancellation of restricted stock units. Common stock shares of 12,963 were issued and outstanding as of February 21, 2009. The following table presents information relating to the restricted stock units grant as of June 30, 2009:
Vested
Cancelled or forfeited
The compensation expense recorded related to the restricted stock units above was $82,000 for the three months ended June 30, 2009, and $82,000 for the three months ended June 30, 2008. For the six months ended June 30, compensation expense recorded was $163,000 in 2009 and $109,000 in 2008. Unrecognized stock-based compensation expense related to restricted stock units was $1.2 million at June 30, 2009, and is expected to be recognized over the next 3.6 years.
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Prior to 2006, the Company presented the entire amount of the tax benefit on options exercised as operating activities in the consolidated statements of cash flows. After adoption of SFAS No. 123R in January 2006, the Company reports only the benefits of tax deductions in excess of grant-date fair value as cash flows from operating activity and financing activity. The following table summarizes the tax benefit (short-fall) from share-based payment arrangements:
(Dollars in thousands)
Short-fall of tax deductions in excess of grant-date fair value
Benefit of tax deductions on grant-date fair value
Total benefit of tax deductions
7. Securities Purchased Under Agreements to Resell
Securities purchased under agreements to resell are usually collateralized by U.S. government agency and mortgage-backed securities. The counter-parties to these agreements are nationally recognized investment banking firms that meet credit requirements of the Company and with whom a master repurchase agreement has been duly executed. As of December 31, 2008, the Company had four resale agreements of $201.0 million outstanding at an annualized weighted average interest rate of 5.39%. During the first quarter of 2009, one resale agreement of $51.0 million matured in January 2009 and three long-term resale agreements of $150.0 million were called in February 2009. As of June 30, 2009, the Company has no resale agreements outstanding.
For those securities obtained under the resale agreements, the collateral is either held by a third party custodian or by the counter-party and is segregated under written agreements that recognize the Company’s interest in the securities. Interest income associated with securities purchased under resale agreements was zero for the second quarter of 2009 and $1.3 million for the first six months of 2009 and $2.8 million for the second quarter of 2008 and $9.2 million for the first six months of 2008.
8. Securities
The following tables summarize the composition, amortized cost, gross unrealized gains, gross unrealized losses, and fair value of securities available-for-sale, as of June 30, 2009, and December 31, 2008:
U.S. Treasury entities
U.S. government sponsored entities
State and municipal securities
Mortgage-backed securities
Collateralized mortgage obligations
Asset-backed securities
Corporate bonds
Preferred stock of government sponsored entities
Other equity securities
Total
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U.S. treasury securities
Realized gains or losses on sales of securities available-for-sale are recorded using the specific identification method.
The amortized cost and fair value of debt securities available-for-sale at December 31, 2008, 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.
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)
Proceeds from sales, calls, and repayments of securities available-for-sale were $2.9 billion during the first six month on 2009 compared to $1.6 billion during the same period a year ago, and were $1.2 billion during the second quarter of 2009 compared to $960.4 million during the same quarter a year ago. Gains of $49.5 million and no losses were realized on sales and calls of securities available-for-sale for the first six months of 2009 compared with $8.2 million in gains and $5.8 million in losses realized for the same period a year ago. Gains of $26.9 million and no losses were realized on sales and calls of securities available-for-sale for the second quarter of 2009 compared with $8.2 million in gains and $5.8 million in losses realized for the same quarter a year ago.
Between 2002 and 2004, the Company purchased a number of mortgage-backed securities and collateralized mortgage obligations comprised of interests in non-agency guaranteed residential mortgages. At June 30, 2009, the remaining par value was $14.5 million for these mortgage-backed securities with unrealized losses of $2.3 million and $133.3 million for collateralized mortgage obligations with unrealized losses of $5.4 million. The remaining par value of these securities totaled $147.8 million which represents 4.7% of the fair value of the Company’s securities available-for-sale and 1.3% of the Company’s total assets. At June 30, 2009, the unrealized loss for these securities totaled $7.7 million which represented 5.2% of the par amount of these non-agency guaranteed residential mortgages and resulted from increases in credit spreads subsequent to the date that these
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securities were purchased. Based on the Company’s analysis at June 30, 2009, there was no “other-than-temporary” impairment in these securities due to the low loan to value ratio for the loans underlying these securities, the credit support provided by junior tranches of these securitizations, and the continued AAA rating for all but four issues of these securities. The Company’s analysis also indicated the continued full ultimate collection of principal and interest for the four issues that were no longer rated AAA.
The Company’s unrealized loss on investments in corporate bonds relates to two investments in bonds of financial institutions in the amounts of $10 million and $250,000, all of which were investment grade at the date of acquisition and as of June 30, 2009. 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 investment. Therefore, it is expected that these debentures would not be settled at a price less than the amortized cost of the investment.
SFAS 115-2 changes the requirements for recognizing other-than-temporary impairment (OTTI) for debt securities. SFAS 115-2 requires an entity to assess whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The Company has no intent to sell and will not be required to sell available-for-sale securities that decline below their cost before their anticipated recovery. At June 30, 2009, there was no other-than-temporary impairment related to credit losses to be recognized in earnings. Other-than-temporary impairment related to all other factors was recognized in other comprehensive income.
The temporarily impaired securities represent 68.2% of the fair value of securities available-for-sale as of June 30, 2009. Unrealized losses for securities with unrealized losses for less than twelve months represent 0.9%, and securities with unrealized losses for twelve months or more represent 6.3% of the historical cost of these securities and generally resulted from increases in interest rates subsequent to the date that these securities were purchased. All of these securities are investment grade as of June 30, 2009. At June 30, 2009, 48 issues of securities had unrealized losses for 12 months or longer and 55 issues of securities had unrealized losses of less than 12 months. The table below shows the fair value, unrealized losses, and number of issuances as of June 30, 2009, of the temporarily impaired securities in the Company’s available-for-sale securities portfolio:
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Temporarily Impaired Securities as of June 30, 2009
Description of securities
Non-agency mortgage-backed securities
Equity securities
On June 19, 2009, the Company securitized $13.9 million real estate mortgage loans through Federal Home Loan Mortgage Corporation (“FHLMC”) and recognized mortgage servicing assets of $139,000 for the servicing rights it retained. On June 26, 2009, the Company sold all of the resulting securities of $13.9 million and recognized gains on sale of securities of $492,000. Prior to June 2009, the Company had no securitization transactions.
9. Investments in Affordable Housing
The Company has invested in certain limited partnerships that were formed to develop and operate housing for lower-income tenants throughout the United States. The Company’s investments in these partnerships were $99.7 million at June 30, 2009, and $103.6 million at December 31, 2008. At June 30, 2009 and December 31, 2008, six of the limited partnerships in which the Company has an equity interest were determined to be variable interest entities for which the Company is the primary beneficiary. The consolidation of these limited partnerships in the Company’s consolidated financial statements increased total assets and liabilities by $23.1 million at June 30, 2009, and by $22.8 million at December 31, 2008. Other borrowings for affordable housing limited partnerships were $19.4 million at June 30, 2009 and $19.5 million at December 31, 2008; recourse is limited to the assets of the limited partnerships. Unfunded commitments for affordable housing limited partnerships of $13.2 million as of June 30, 2009, and $22.1 million as of December 31, 2008 were recorded under other liabilities.
10. Commitments and Contingencies
In the normal course of business, the Company becomes a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of loans, or through commercial or standby letters of credit, and financial guarantees. These instruments represent varying degrees of exposure to risk in excess of the amounts included in the accompanying condensed consolidated balance sheets. The contractual or notional amount of these instruments indicates a level of activity associated with a particular class of financial instrument and is not a reflection of the level of expected losses, if any.
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The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The following table summarizes the outstanding commitments as of the dates indicated:
(In thousands)
Commitments to extend credit
Standby letters of credit
Other letters of credit
Bill of lading guarantees
As of June 30, 2009, $13.2 million unfunded commitments for affordable housing investments were recorded under other liabilities compared to $22.1 million at December 31, 2008.
Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the commitment agreement. These commitments generally have fixed expiration dates and the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the borrower. Letters of credit, including standby letters of credit and bill of lading guarantees, are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing these types of instruments is essentially the same as that involved in making loans to customers.
11. Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase were $1.6 billion with a weighted average rate of 4.07% at June 30, 2009, compared to $1.6 billion with a weighted average rate of 3.95% at December 31, 2008. Seventeen floating-to-fixed rate agreements totaling $900.0 million are with initial floating rates for a period of time ranging from six months to one year, with the floating rates ranging from the three-month LIBOR minus 100 basis points to the three-month LIBOR minus 340 basis points. Thereafter, the rates are fixed for the remainder of the term, with interest rates ranging from 4.29% to 5.07%. After the initial floating rate term, the counterparties have the right to terminate the transaction at par at the fixed rate reset date and quarterly thereafter. Thirteen fixed-to-floating rate agreements totaling $650.0 million are with initial fixed rates ranging from 1.00% and 3.50% with initial fixed rate terms ranging from six months to eighteen months. For the remainder of the seven year term, the rates float at 8% minus the three-month LIBOR rate with a maximum rate ranging from 3.25% to 3.75% and minimum rate of 0.0%. After the initial fixed rate term, the counterparties have the right to terminate the transaction at par at the floating rate reset date and quarterly thereafter. In addition, there were $7.0 million in short-term securities sold under agreements to repurchase that mature in July 2009.
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At June 30, 2009, included in long-term transactions are twenty-eight repurchase agreements totaling $1.5 billion that were callable but which had not been called. Eleven fixed-to-floating rate repurchase agreements of $50.0 million each have variable interest rates currently at a range from 3.50% to 3.75% maximum rate until their final maturities in the second half of 2014 for $450 million and in January 2015 for $100 million. Four floating-to-fixed rate repurchase agreements of $50.0 million each have fixed interest rates ranging from 4.89% to 5.07%, until their final maturities in January 2017. Ten floating-to-fixed rate repurchase agreements totaled $550.0 million have fixed interest rates ranging from 4.29% to 4.78%, until their final maturities in 2014. Two floating-to-fixed rate repurchase agreements of $50.0 million each have fixed interest rates at 4.75% and 4.79%, until their final maturities in 2011. One floating-to-fixed rate repurchase agreement of $50.0 million has fixed interest rate at 4.83% until its final maturity in 2012.
These transactions are accounted for as collateralized financing transactions and recorded at the amounts at which the securities were sold. The Company may have to provide additional collateral for the repurchase agreements, as necessary. The underlying collateral pledged for the repurchase agreements consists of U.S. Treasury securities, U.S. government agency security debt, and mortgage-backed securities with a fair value of $1.8 billion as of June 30, 2009, and $1.7 billion as of December 31, 2008.
12. Advances from the Federal Home Loan Bank
Total advances from the FHLB of San Francisco decreased $520.0 million to $929.4 million at June 30, 2009 from $1.45 billion at December 31, 2008. Non-puttable advances totaled $229.4 million with a weighted rate of 4.76% and puttable advances totaled $700.0 million with a weighted average rate of 4.42% at June 30, 2009. The FHLB has the right to terminate the puttable transaction at par at each three-month anniversary after the first puttable date. As of June 30, 2009, all puttable FHLB advances were puttable but none had been put.
13. Subordinated Note and Junior Subordinated Debt
On September 29, 2006, the Bank issued $50.0 million in subordinated debt in a private placement transaction. The debt has a maturity term of 10 years, is unsecured and bears interest at a rate of three month LIBOR plus 110 basis points, payable on a quarterly basis. At June 30, 2009, the per annum interest rate on the subordinated debt was 1.70% compared to 2.56% at December 31, 2008. The subordinated debt was issued through the Bank and qualifies as Tier 2 capital for regulatory reporting purposes and is included in long-term debt in the accompanying condensed consolidated balance sheets.
The Bancorp established three special purpose trusts in 2003 and two in 2007 for the purpose of issuing trust preferred securities to outside investors (Capital Securities). The trusts exist for the purpose of issuing the Capital Securities and investing the proceeds thereof, together with proceeds from the purchase of the common stock of the trusts by the Bancorp, in junior subordinated notes issued by the Bancorp. The five special purpose trusts are considered variable interest entities under FIN 46R. Because the Bancorp is not the primary beneficiary of the trusts, the financial statements of the trusts are not included in the consolidated financial statements of the Company. At June 30, 2009, junior subordinated debt securities totaled $121.1 million with a weighted average interest rate of 2.78%
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compared to $121.1 million with a weighted average rate of 4.02% at December 31, 2008. The junior subordinated debt securities have a stated maturity term of 30 years and are currently included in the Tier 1 capital of the Bancorp for regulatory capital purposes.
14. Income Taxes and Implementation of FASB Interpretation No. 48
The income tax benefit totaled $20.9 million, or effective tax benefit rate of 59.6% for the first six months of 2009 compared to income tax expense of $22.8 million, or effective tax rate of 32.7%, for the same period a year ago. Income tax benefit/expense results in effective tax rates that differ from the statutory Federal income tax rate for the periods indicated as follows:
Tax provision at Federal statutory rate
State income taxes, net of Federal income tax benefit
Interest on obligations of state and political subdivisions, which are exempt from Federal taxation
Low income housing tax credit
Other, net
Total income tax (benefit)/expense
As previously disclosed, on December 31, 2003, the California Franchise Tax Board (FTB) announced its intent to list certain transactions that in its view constitute potentially abusive tax shelters. Included in the transactions subject to this listing were transactions utilizing regulated investment companies (RICs) and real estate investment trusts (REITs). While the Company continues to believe that the tax benefits recorded in 2000, 2001, and 2002 with respect to its regulated investment company were appropriate and fully defensible under California law, the Company participated in Option 2 of the Voluntary Compliance Initiative of the Franchise Tax Board, and paid all California taxes and interest on these disputed 2000 through 2002 tax benefits, and at the same time filed a claim for refund for these years while avoiding certain potential penalties. The Company expects to resolve the California tax audits of its 2000 through 2002 tax years without any additional accruals.
In May 2009, the Company filed amended California tax returns for tax years 2003 through 2007. The Company paid California income tax of $5.5 million and interest of $1.2 million, substantially all of which had previously been recorded as unrecognized tax benefits.
The Company recognizes accrued interest and penalties relating to unrecognized tax benefits as an income tax provision expense. The Company had approximately $1.4 million of accrued interest and penalties as of June 30, 2009 and $1.9 million of accrued interest and penalties as of December 31, 2008.
The Company’s tax returns are open for audits by the Internal Revenue Service back to 2005 and by the Franchise Tax Board of the State of California back to 2000. The Company is currently under audit by the California Franchise Tax Board for the years 2000 to 2004.
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15. Stock Repurchase Program
On November 2007, the Company announced that its Board of Directors had approved a new stock repurchase program to buy back up to an aggregate of one million shares of the Company’s common stock. No shares were purchased in 2008 and during the first six months of 2009. At June 30, 2009, 622,500 shares remain under the Company’s November 2007 repurchase program.
16. Fair Value Measurements
SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The Company adopted SFAS No. 157 on January 1, 2008, and determined the fair values of our financial instruments based on the three-level fair value hierarchy established in SFAS 157. The three-level inputs to measure the fair value of assets and liabilities are as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable prices in active markets for similar assets or liabilities; prices for identical or similar assets or liabilities in markets that are not active; directly observable market inputs for substantially the full term of the asset and liability; market inputs that are not directly observable but are derived from or corroborated by observable market data.
Level 3 - Unobservable inputs based on the Company’s own judgments about the assumptions that a market participant would use.
The Company uses the following methodologies to measure the fair value of its financial assets on a recurring basis:
Securities available for sale. For certain actively traded agency preferred stocks and U.S. Treasury securities, the Company measures the fair value based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement. The Company also measures securities by using quoted market prices for similar securities or dealer quotes, a Level 2 measurement. This category generally includes U.S. Government agency securities, state and municipal securities, mortgage-backed securities (“MBS”), commercial MBS, collateralized mortgage obligations, asset-backed securities and corporate bonds.
Trading securities. The Company measures the fair value of trading securities based on quoted market prices in active exchange markets at the reporting date, a Level 1 measurement.
Impaired loans. The Company does not record loans at fair value on a recurring basis. However, from time to time, nonrecurring fair value adjustments to collateral dependent impaired loans are recorded based on either current appraised value of the collateral, a Level 2 measurement, or management’s judgment and estimation of value reported on old appraisals which are then adjusted based on recent market trends, a Level 3 measurement.
Other real estate owned. Real estate acquired in the settlement of loans is initially recorded at fair value, less estimated costs to sell. The Company records other real estate owned at fair value on a non-recurring basis. However, from time to time, nonrecurring fair value adjustments to other real estate owned are recorded based on current appraised value of the property, a Level 2 measurement, or management’s judgment and estimation based on reported appraisal value, a Level 3 measurement.
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Equity investment. The Company records equity investment at fair value on a nonrecurring basis. However, from time to time, nonrecurring fair value adjustments to equity investment are recorded based on quoted market prices in active exchange market at the reporting date, a Level 1 measurement.
Warrants. The Company measures the fair value of warrants based on unobservable inputs based on assumption and management judgment, a Level 3 measurement.
Foreign Exchange Contracts. The Company measures the fair value of foreign exchange contracts based on dealer quotes on a recurring basis, a Level 2 measurement.
The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring and non-recurring basis at June 30, 2009:
Assets
On a Recurring Basis
Securities available-for-sale
Total securities available-for-sale
Warrants
Foreign exchange contracts
On a Non-recurring Basis
Impaired loans
Other real estate owned (1)
Equity investment
Liabilities
The Company measured the fair value of its warrants on a recurring basis using significant unobservable inputs. The fair value of warrants was $124,000 at June 30, 2009, compared to $122,000 at December 31, 2008. The fair value adjustment of $2,000 was included in other operating income in 2009.
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17. Fair Value of Financial Instruments
The Company uses following methods and assumptions to estimate the fair value of each class of financial instruments.
Cash and Cash Equivalents. For cash and cash equivalents, the carrying amount was assumed to be a reasonable estimate of fair value.
Short-term Investments. For short-term investments, the carrying amount was assumed to be a reasonable estimate of fair value.
Securities purchased under agreements to resell The fair value of the agreements to resell is based on dealer quotes.
Securities. For securities including securities held-to-maturity, available-for-sale and for trading, fair values were based on quoted market prices at the reporting date. If a quoted market price was not available, fair value was estimated using quoted market prices for similar securities or dealer quotes.
Loans. Fair values were estimated for portfolios of loans with similar financial characteristics. Each loan category was further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories.
The fair value of performing loans was calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan.
The entire allowance for credit losses was applied to classified loans including non-accruals. Accordingly, they are considered to be carried at fair value as the allowance for credit losses represents the estimated discount for credit risk for the applicable loans.
Deposit Liabilities. The fair value of demand deposits, savings accounts, and certain money market deposits was assumed to be the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit was estimated using the rates currently offered for deposits with similar remaining maturities.
Securities Sold under Agreements to Repurchase. The fair value of the repurchase agreements is based on dealer quotes.
Advances from Federal Home Loan Bank. The fair value of the advances is based on quotes from the FHLB to settle the advances.
Other Borrowings. This category includes federal funds purchased, revolving line of credit, and other short-term borrowings. The fair value of other borrowings is based on current market rates for borrowings with similar remaining maturities.
Subordinated Debt. The fair value of subordinated debt is estimated based on the current spreads to LIBOR for subordinated debt.
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Junior Subordinated Notes. The fair value of the Junior Subordinated Notes is estimated based on the current spreads to LIBOR for junior subordinated notes.
Off-Balance-Sheet Financial Instruments. The fair value of commitments to extend credit, standby letters of credit, and financial guarantees written were estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counter-parties. The fair value of guarantees and letters of credit was based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counter-parties at the reporting date.
Fair value estimates were made at specific points in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank’s financial instruments, fair value estimates were based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates were subjective in nature and involved uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair Value of Financial Instruments
Financial Assets
Investment in Federal Home Loan Bank Stock
Financial Liabilities
Securities sold under agreement to repurchase
Other borrowings
Off-Balance Sheet Financial Instruments
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18. Goodwill and Goodwill Impairment
The Company’s policy is to assess goodwill for impairment at the reporting unit level on an annual basis or between annual assessments if a triggering event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. Accounting standards require management to estimate the fair value of each reporting unit in making the assessment of impairment at least annually.
As a result of ongoing volatility in the financial services industry, the Company’s market capitalization decreased to a level below book value as of June 30, 2009. The Company engaged an independent valuation firm to compute the fair value estimates of each reporting unit as part of its impairment assessment. The independent valuation utilized two separate valuation methodologies and applied a weighted average to each methodology in order to determine fair value for each reporting unit.
The impairment testing process conducted by the Company begins by assigning net assets and goodwill to its three reporting units- Commercial Lending, Retail Banking, and East Coast Operations. The Company then completes “step one” of the impairment test by comparing the fair value of each reporting unit (as determined based on the discussion below) with the recorded book value (or “carrying amount”) of its net assets, with goodwill included in the computation of the carrying amount. If the fair value of a reporting unit exceeds its carrying amount, goodwill of that reporting unit is not considered impaired, and “step two” of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, step two of the impairment test is performed to determine the amount of impairment. Step two of the impairment test compares the carrying amount of the reporting unit’s goodwill to the “implied fair value” of that goodwill. The implied fair value of goodwill is computed by assuming all assets and liabilities of the reporting unit would be adjusted to the current fair value, with the offset as an adjustment to goodwill. This adjusted goodwill balance is the implied fair value used in step two. An impairment charge is recognized for the amount by which the carrying amount of goodwill exceeds its implied fair value. In connection with obtaining the independent valuation, management provided certain data and information that was utilized by the third party in its determination of fair value. This information included forecasted earnings of the Company at the reporting unit level. Management believes that this information is a critical assumption underlying the estimate of fair value.
The valuation as of June 30, 2009, indicated that the fair value for the Retail Banking and East Coast Operations, the only two reporting units with allocated goodwill, exceeded their carrying amounts. Consequently, no goodwill impairment charge was recorded as of June 30, 2009. While management uses the best information available to estimate future performance for each reporting unit, future adjustments to management’s projections may be necessary if conditions differ substantially from the assumptions used in making the estimates.
The following discussion is given based on the assumption that the reader has access to and has read the Annual Report on Form 10-K for the year ended December 31, 2008, of Cathay General Bancorp (“Bancorp”) and its wholly-owned subsidiary Cathay Bank (the “Bank” and, together, the “Company” or “we”, “us,” or “our”).
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Critical Accounting Policies
The discussion and analysis of the Company’s unaudited condensed consolidated balance sheets and results of operations are based upon its unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Accounting for the allowance for credit losses involves significant judgments and assumptions by management, which have a material impact on the carrying value of net loans; management considers this accounting policy to be a critical accounting policy. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances as described under the heading “Accounting for the Allowance for Loan Losses” in the Company’s annual report on Form 10-K for the year ended December 31, 2008.
Accounting for investment securities involves significant judgments and assumptions by management, which have a material impact on the carrying value of securities and the recognition of any “other-than-temporary” impairment to our investment securities. The judgments and assumptions used by management are described under the heading “Investment Securities” in the Company’s annual report on Form 10-K for the year ended December 31, 2008.
Accounting for income taxes involves significant judgments and assumptions by management, which have a material impact on the amount of taxes currently payable and the income tax expense recorded in the financial statements. The judgments and assumptions used by management are described under the heading “Income Taxes” in the Company’s annual report on Form 10-K for the year ended December 31, 2008.
Accounting for goodwill and goodwill impairment involves significant judgments and assumptions by management, which have a material impact on the amount of goodwill recorded and noninterest expense recorded in the financial statements. The judgments and assumptions used by management are described under the heading “Goodwill and goodwill impairment” in the Company’s annual report on Form 10-K for the year ended December 31, 2008.
HIGHLIGHTS
Second quarter net loss was $24.7 million compared to a net income of $10.2 million for the first quarter of 2009, and compared to net income of $19.2 million in the same quarter a year ago. Second quarter net loss attributable to common stockholders was $28.8 million, which was after the deduction of $4.1 million for dividends on preferred stock, compared to net income available to common stockholders of $6.2 million for the first quarter of 2009.
Loss per share was $0.58 for the second quarter, compared to diluted earnings per share of $0.12 in the first quarter of 2009, and compared to diluted earnings per share of $0.39 in the same quarter a year ago.
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Total allowance for credit losses to total loans at June 30, 2009 strengthened to 2.42% from 1.87% at March 31, 2009, with a provision for credit losses of $93.0 million compared to $47.0 million in the first quarter of 2009, and compared to $20.5 million the same quarter a year ago.
Capital ratios remain strong with a total capital ratio of 14.09% which is substantially higher than the 10% total capital ratio for well-capitalized status.
Results indicated the Company and the Bank would remain well capitalized for regulatory purposes under a simulated stress test economic scenario.
Income Statement Review
Net Income
Net loss for the second quarter of 2009 was $24.7 million and net loss to common stockholders was $28.8 million, or $0.58 per share, compared to net income of $19.2 million and net income available to common stockholders of $19.2 million, or $0.39 per diluted share for the same quarter a year ago. Return on average assets was negative 0.87% and return on average stockholders’ equity was negative 7.66% for the second quarter of 2009 compared with a return on average assets of 0.73% and a return on average stockholders’ equity of 7.66% for the second quarter of 2008.
Financial Performance
(Loss)/basic earnings per share
(Loss)/ diluted earnings per share
Return on average assets
Return on average total stockholders’ equity
Efficiency ratio
Net Interest Income Before Provision for Credit Losses
Net interest income before provision for credit losses decreased to $66.0 million during the second quarter of 2009, a decline of $6.1 million, or 8.5%, compared to the $72.1 million during the same quarter a year ago. The decrease was due primarily to the larger decline in earning asset yields compared to rates paid for securities sold under agreements to repurchase and other borrowings.
The net interest margin, on a fully taxable-equivalent basis, was 2.49% for the second quarter of 2009. The net interest margin decreased 20 basis points from 2.69% in the first quarter of 2009, of which 14 basis points was due to higher levels of nonaccrual loans, and decreased 45 basis points from 2.94% in the second quarter of 2008. The decrease in net interest income from the prior year primarily resulted from increases in non-accrual loans and the increase in the borrowing rate on our long term repurchase agreements and other borrowed funds compared to the decreases in the prime rate. The majority of our variable rate loans contain interest rate floors, which help limit the impact of the recent decreases of the prime interest rate.
For the second quarter of 2009, the yield on average interest-earning assets was 4.88% on a fully taxable-equivalent basis, the cost of funds on average interest-bearing liabilities equaled 2.75%, and
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the cost of interest bearing deposits was 2.18%. In comparison, for the second quarter of 2008, the yield on average interest-earning assets was 5.86%, cost of funds on average interest-bearing liabilities equaled 3.34%, and the cost of interest bearing deposits was 3.03%. The interest spread, defined as the difference between the yield on average interest-earning assets and the cost of funds on average interest-bearing liabilities, decreased 39 basis points to 2.13% for the second quarter ended June 30, 2009, from 2.52% for the same quarter a year ago, primarily due to the reasons discussed above.
The cost of deposits, including demand deposits, decreased 32 basis points to 1.95% in the second quarter of 2009 compared to 2.27% in the first quarter of 2009 due primarily to growth in core deposits and decreased 72 basis points from 2.67% in the same quarter a year ago due partly to decrease in market rates and partly to growth in core deposits.
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Average daily balances, together with the total dollar amounts, on a taxable-equivalent basis, of interest income and interest expense, and the weighted-average interest rate and net interest margin are as follows:
Interest-Earning Assets and Interest-Bearing Liabilities
Taxable-equivalent basis
Interest Earning Assets
Commercial loans
Residential mortgage
Commercial mortgage
Real estate construction loans
Other loans and leases
Total loans and leases (1)
Taxable securities
Tax-exempt securities (3)
Federal Home Loan Bank Stock
Interest bearing deposits
Federal funds sold & securities purchased under agreements to resell
Total interest-earning assets
Non-interest earning assets
Other non-earning assets
Total non-interest earning assets
Deferred loan fees
Interest bearing liabilities:
Interest bearing demand accounts
Savings accounts
Time deposits
Total interest-bearing deposits
Total interest-bearing liabilities
Non-interest bearing liabilities
Demand deposits
Net interest spread (4)
Net interest income (4)
Net interest margin (4)
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The following table summarizes the changes in interest income and interest expense attributable to changes in volume and changes in interest rates:
Taxable-Equivalent Net Interest Income — Changes Due to Rate and Volume(1)
Interest-Earning Assets:
Loans and leases
Tax-exempt securities (2)
Deposits with other banks
Total increase in interest income
Interest-Bearing Liabilities:
Other borrowed funds
Long-term debts
Total increase in interest expense
Changes in net interest income
Provision for Loan Losses
The provision for credit losses was $93.0 million for the second quarter of 2009 compared to $47.0 million for the first quarter of 2009 and compared to $20.5 million in the second quarter of 2008. During the second quarter of 2009, in light of the continued deterioration in the economy and the increases in nonaccrual loans and chargeoffs, we shortened the period used in the migration analysis from five years to four years to better reflect the impact of the most recent chargeoffs, we increased the general allowance to reflect the higher loan delinquency trends, the weaker national and local economy and the increased difficulty in assigning loan grades, and we also applied the environmental factors described above to loans rated Minimally Acceptable, Special Mention and Substandard. The provision for credit losses was based on the review of the adequacy of the allowance for loan losses at June 30, 2009. The provision for credit losses represents the charge against current operations that is determined by management, through a credit review process, as the amount needed to establish an allowance that management believes to be sufficient to absorb credit losses inherent in the Company’s loan portfolio. The following table summarizes the charge-offs and recoveries for the periods as indicated:
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Charge-offs:
Construction loans- residential
Construction loans- other
Real estate loans
Real estate- land loans
Installment and other loans
Total charge-offs
Recoveries:
Total recoveries
Net Charge-offs
Total charge-offs of $56.3 million for the second quarter of 2009 included $18.7 million of charge-offs on fourteen multi-family residential construction loans, $9.2 million of charge-offs on four single family residential construction loans, $2.9 million of charge-offs on commercial property construction loans, $10.6 million of charge-offs on commercial real estate loans, $11.1 million on commercial loans, $2.4 million charge-offs on residential mortgage loans, and $1.4 million of charge-offs on land loans. Net loan charge-offs increased from $38.0 million in the first quarter of 2009 to $56.0 million in the second quarter of 2009 and compared to $2.5 million in the second quarter of last year as a result of the continuing weak economy.
Non-Interest Income
Non-interest income, which includes revenues from depository service fees, letters of credit commissions, securities gains (losses), gains (losses) on loan sales, wire transfer fees, and other sources of fee income, was $32.4 million for the second quarter of 2009, an increase of $23.2 million compared to the non-interest income of $9.2 million for the second quarter of 2008. The increase in non-interest income was primarily due to increases in net gains on sale of available-for-sale securities of $24.6 million. Offsetting the increase were primarily a $1.2 million decrease in gains from foreign currency and exchange transactions and a $343,000 decrease in letters of credit commissions.
Non-Interest Expense
Non-interest expense increased $20.4 million, or 60.7%, to $54.0 million in the second quarter of 2009 compared to $33.6 million in the same quarter a year ago. The efficiency ratio was 54.87% in the second quarter of 2009 compared to 41.34% for the same period a year ago due to increases in other real estate owned (“OREO”) expense and Federal Deposit Insurance Corporation (“FDIC”) and State assessments.
OREO expense increased $13.2 million to $13.9 million in the second quarter of 2009 from $641,000 in the same quarter a year ago primarily due to a $13.9 million provision for OREO write-down and a $591,000 increase in OREO expense offset by a $1.2 million gain on the sale of OREO.
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FDIC and State assessments increased $6.6 million to $8.1 million in the second quarter of 2009 from $1.5 million in the same quarter a year ago of which $5.2 million was from the special assessment based on total assets as of June 30, 2009. Occupancy expense increased $764,000 primarily due to increases in depreciation expense of $770,000 primarily related to our new administrative offices at 9650 Flair Drive, El Monte which opened in January 2009, which were partially offset by lower rental expense of $218,000. Professional service expense increased $265,000, or 8.6%, primarily due to increases in legal expenses and collection expenses. Expense from operations of affordable housing investments increased $454,000 to $2.2 million compared to $1.7 million in the same quarter a year ago as a result of additional investments in affordable housing projects. Other operating expenses increased $880,000 primarily due to a $983,000 charge for closure of two branches.
Offsetting the above described increases were decreases of $1.3 million in salaries and employee benefits and decreases of $392,000 in marketing expense. Salaries and employee benefits decreased primarily due to a $650,000 decrease in bonus accruals and a $492,000 decrease in option compensation expense.
Income Taxes
The effective tax rate was 28.9% for the second quarter of 2008 and 27.9% for the full year 2008. The income tax benefit for the second quarter of 2009 resulted from the pretax loss for the quarter and the utilization of low income housing tax credits.
Year-to-Date Income Statement Review
Net loss was $14.4 million, a $60.9 million, or 131%, decrease compared to net income of $46.5 million for the same period a year ago. Loss attributable to common stockholders per share was $0.46 compared to $0.94 earnings attributable to common stockholders per diluted share for the same period a year ago due primarily to increases in the provision for loan losses, lower net interest income and higher provision for OREO write-downs. The net interest margin for the six months ended June 30, 2009, decreased 46 basis points to 2.59% compared to 3.05% for the same period a year ago.
Return on average stockholders’ equity was negative 2.25% and return on average assets was negative 0.26% for the six months ended June 30, 2009, compared to a return on average stockholders’ equity of 9.32% and a return on average assets of 0.90% for the same period of 2008. The efficiency ratio for the six months ended June 30, 2009 was 46.58% compared to 40.13% for the same period a year ago.
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The average daily balances, together with the total dollar amounts, on a taxable-equivalent basis, of interest income and interest expense, and the weighted-average interest rates, the net interest spread and the net interest margins are as follows:
Junior subordinated notes
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Balance Sheet Review
Total assets decreased by $186.5 million, or 1.6%, to $11.4 billion at June 30, 2009, from $11.6 billion at December 31, 2008. The decrease in total assets was represented primarily by decreases in loans of $218.1 million, or 2.9% offset by increases in securities available-for-sale of $75.6 million, or 2.5%.
Securities
Total securities were $3.2 billion, or 27.7%, of total assets at June 30, 2009, compared with $3.1 billion, or 26.6%, of total assets at December 31, 2008. The increase of $75.6 million was primarily due to purchase of U.S government sponsored agency securities and mortgage-backed securities.
The net unrealized losses on securities available-for-sale, which represents the difference between fair value and amortized cost, totaled $20.0 million at June 30, 2009, compared to net unrealized gains of $40.3 million at year-end 2008. Net unrealized gains/losses in the securities available-for-sale are included in accumulated other comprehensive income or loss, net of tax, as part of total stockholders’ equity.
The average taxable-equivalent yield on securities available-for-sale decreased 85 basis points to 3.87% for the three months ended June 30, 2009, compared with 4.72% for the same period a year ago, as securities were sold, matured, prepaid, or were called and proceeds were reinvested at lower interest rates.
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The following table summarizes the scheduled maturities by security type of securities available-for-sale, as of June 30, 2009:
Mortgage-backed securities (1)
Collateralized mortgage obligations (1)
Asset-backed securities (1)
Preferred stock of government sponsored entities (2)
Other equity securities (2)
Between 2002 and 2004, the Company purchased a number of mortgage-backed securities and collateralized mortgage obligations comprised of interests in non-agency guaranteed residential mortgages. At June 30, 2009, the remaining par value was $14.5 million for these mortgage-backed securities with unrealized losses of $2.3 million and $133.3 million for collateralized mortgage obligations with unrealized losses of $5.4 million. The remaining par value of these securities totaled $147.8 million which represents 4.7% of the fair value of the Company’s securities available-for-sale and 1.3% of the Company’s total assets. At June 30, 2009, the unrealized loss for these securities totaled $7.7 million which represented 5.2% of the par amount of these non-agency guaranteed residential mortgages and resulted from increases in credit spreads subsequent to the date that these securities were purchased. Based on the Company’s analysis at June 30, 2009, there was no “other-than-temporary” impairment in these securities due to the low loan to value ratio for the loans underlying these securities, the credit support provided by junior tranches of these securitizations, and the continued AAA rating for all but four issues of these securities. The Company’s analysis also indicated the continued full ultimate collection of principal and interest for the four issues that were no longer rated AAA.
SFAS 115-2 changes the requirements for recognizing other-than-temporary impairment (OTTI) for debt securities. SFAS 115-2 requires an entity to assess whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The Company has no intent to sell and will not be required to sell available-for-sale securities that decline below their cost before their anticipated recovery. At June 30, 2009, there was no impairment related to credit losses to be recognized in earnings.
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On June 19, 2009, the Company securitized $13.9 million of real estate mortgage loans through Federal Home Loan Mortgage Corporation (“FHLMC”) and recognized mortgage servicing assets of $139,000 for the servicing rights it retained. On June 26, 2009, the Company sold all of the resulting securities of $13.9 million and recognized gains on sale of securities of $492,000. Prior to June 2009, the Company had no securitization transactions.
Total gross loans decreased $218.1 million, or 2.9%, to $7.3 billion as of June 30, 2009, from $7.5 billion as of December 31, 2008, primarily due to decreases in commercial loans of $157.5 million and construction loans of $87.3 million. As a result of a weak economy, declines in trade finance caused decreases in commercial loans in the first six months of 2009.
Commercial loans decreased $157.5 million, or 9.7%, to $1.5 billion at June 30, 2009, compared to $1.6 billion at year-end 2008. At June 30, 2009, commercial mortgage loans represented approximately 56.9% of the Bank’s gross loans compared to 55.3% at year-end 2008.
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The following table sets forth the classification of loans by type, mix, and percentage change as of the dates indicated:
Type of Loans
Commercial
Equity lines
Real estate construction
Installment
Other
Gross loans and leases
Allowance for loan losses
Total loans and leases, net
Asset Quality Review
Non-performing Assets
Non-performing assets to gross loans and other real estate owned was 6.47% at June 30, 2009, compared to 3.34% at December 31, 2008. Total non-performing assets increased $221.9 million, or 88.1%, to $473.7 million at June 30, 2009, compared with $251.8 million at December 31, 2008, primarily due to a $201.9 million, or 111%, increase in non-accrual loans.
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The following table sets forth the breakdown of non-performing assets by category as of the dates indicated:
Non-performing assets
Accruing loans past due 90 days or more
Non-accrual loans:
Construction -residential
Construction -non-residential
Land
Commercial real estate,excluding land
Total non-accrual loans:
Total non-performing loans
Other real estate owned and other assets
Total non-performing assets
Performing troubled debt restructurings
Allowance for off-balance sheet credit commitments
Allowance for credit losses
Total gross loans outstanding, at period-end
Non-performing assets as a percentage of gross loans and OREO
Allowance for loan losses to non-performing loans, at period-end
Allowance for loan losses to gross loans, at period-end
Allowance for credit losses to non-performing loans, at period-end
Allowance for credit losses to gross loans, at period-end
Non-accrual Loans
At June 30, 2009, total non-accrual loans of $383.1 million increased $201.9 million, or 111% from $181.2 million at December 31, 2008. At June 30, 2009, non-accrual loans were comprised of thirty-six construction loans totaling $178.1 million, fifty-four commercial real estate loans totaling $133.2 million, twenty-three land loans totaling $27.1 million, forty-five commercial loans totaling $34.8 million, and thirty-eight residential mortgage loans totaling $9.9 million.
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The following table presents non-accrual loans by type of collateral securing the loans, as of the dates indicated:
Type of Collateral
Single/ multi-family residence
Commercial real estate
Personal property (UCC)
Other/TCD
Unsecured
The following table presents non-accrual loans by type of businesses in which the borrowers are engaged, as of the dates indicated:
Type of Business
Real estate development
Wholesale/Retail
Food/Restaurant
Import/Export
Included in nonaccrual commercial real estate loans is a loan with an outstanding balance of $47.6 million to a borrower who filed for bankruptcy in March 2009. Included in nonaccrual residential construction loans are six residential condominium construction loans totaling $64.5 million where the borrower continues to be involved in the marketing of the units or in the completion of the project.
Other Real Estate Owned
At June 30, 2009, net carrying value of other real estate owned increased $9.8 million, or 16.1%, to $70.8 million from $61.0 million at December 31, 2008. At June 30, 2009, $37.7 million of OREO was located in California, $26.8 million of OREO was located in Texas, $4.0 million of OREO was in Nevada, and $2.4 million in all other states. At June 30, 2009, OREO by type was comprised of residential properties of $17.5 million, or 24.8%, retail stores and shopping centers of $18.4 million, or 26.0%, residential-zoned land of $23.7 million, or 33.4%, residential construction of $9.8 million, or 13.8%, and a hotel of $1.4 million, or 2%.
Troubled Debt Restructurings
A troubled debt restructuring (“TDR”) is a formal restructure 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 reduction in the stated interest rate, reduction in the loan balance or accrued interest, or extension of the maturity date.
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Troubled debt restructurings, excluding those on non-accrual status, were comprised of five loans totaling $23.7 million at June 30, 2009, an increase of $22.8 million, compared to three loans totaling $924,000 at December 31, 2008. A land loan of $22.2 million in Nevada was restructured during the second quarter of 2009 to a below market interest rate and is included in the troubled debt restructured loans total.
Impaired Loans
A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement based on current circumstances and events. The assessment for impairment occurs when and while such loans are on non-accrual, or the loan has been restructured. Those loans less than our defined selection criteria, generally the loan amount less than $100,000, are treated as a homogeneous portfolio. If loans meeting the defined criteria are not collateral dependent, we measure the impairment based on the present value of the expected future cash flows discounted at the loan’s effective interest rate. If loans meeting the defined criteria are collateral dependent, we measure the impairment by using the loan’s observable market price or the fair value of the collateral. If the measurement of the impaired loan is less than the recorded amount of the loan, we then recognize impairment by creating or adjusting an existing valuation allowance with a corresponding charge to the provision for loan losses.
The Company identified impaired loans with a recorded investment of $405.3 million at June 30, 2009, compared with $181.2 million at year-end 2008, an increase of $224.1 million, or 124%. The Company considers all non-accrual loans to be impaired. The following table presents impaired loans and the related allowance, as of the dates indicated:
Balance of impaired loans with no allocated allowance
Balance of impaired loans with an allocated allowance
Total recorded investment in impaired loans
Amount of the allowance allocated to impaired loans
Loan Concentration
Most of the Company’s business activity is with customers located in the predominantly Asian areas of Southern and Northern California; New York City, New York; Dallas and Houston, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; and Edison, New Jersey. 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.
There were no loan concentrations to multiple borrowers in similar activities which exceeded 10% of total loans as of June 30, 2009, and as of December 31, 2008.
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Allowance for Credit Losses
The Bank maintains the allowance for credit losses at a level that is considered to be equal to the estimated and known risks in the loan portfolio and off-balance sheet unfunded credit commitments. Allowance for credit losses is comprised of allowance for loan losses and reserve for off-balance sheet unfunded credit commitments. With this risk management objective, the Bank’s management has an established monitoring system that is designed to identify impaired and potential problem loans, and to permit periodic evaluation of impairment and the adequacy level of the allowance for credit losses in a timely manner.
In addition, our Board of Directors has established a written credit policy that includes a credit review and control system which it believes should be effective in ensuring that the Bank maintains an adequate allowance for credit losses. The Board of Directors provides oversight for the allowance evaluation process, including quarterly evaluations, and determines whether the allowance is adequate to absorb losses in the credit portfolio. The determination of the amount of the allowance for credit losses and the provision for credit losses 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. Additions to the allowance for credit losses are made by charges to the provision for credit losses. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Bank’s control, including the performance of the Bank’s loan portfolio, the economy, changes in interest rates, and the view of the regulatory authorities toward loan classifications. Identified credit exposures that are determined to be uncollectible are charged against the allowance for credit losses. Recoveries of previously charged off amounts, if any, are credited to the allowance for credit losses. A weakening of the economy or other factors that adversely affect asset quality could result in an increase in the number of delinquencies, bankruptcies, or defaults, and a higher level of non-performing assets, net charge-offs, and provision for credit losses in future periods.
The allowance for loan losses was $169.6 million and the allowance for off-balance sheet unfunded credit commitments was $5.8 million at June 30, 2009, and represented the amount that the Company believes to be sufficient to absorb credit losses inherent in the Company’s loan portfolio. The allowance for credit losses, the sum of allowance for loan losses and for off-balance sheet unfunded credit commitments, was $175.4 million at June 30, 2009, compared to $129.4 million at December 31, 2008, an increase of $46.0 million, or 35.5%. The allowance for credit losses represented 2.42% of period-end gross loans and 43.8% of non-performing loans at June 30, 2009. The comparable ratios were 1.73% of period-end gross loans and 68.9% of non-performing loans at December 31, 2008. The allowance for credit losses as a percentage to non-performing loans decreased to 43.8% at June 30, 2009, from 68.9% at December 31, 2008, and from 122.2% at June 30, 2008, primarily due to increases in non-performing loans to $400.0 million at June 30, 2009, from $187.9 million at December 31, 2008 and from $74.0 million at June 30, 2008. The following table sets forth information relating to the allowance for credit losses for the periods indicated:
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Allowance for Loan Losses
Balance at beginning of period
Transfers from (to) reserve for off-balance sheet credit commitments
Charge-offs :
Construction loans-residential
Construction loans-other
Real estate land loans
Installment loans and other loans
Balance at end of period
Reserve for off-balance sheet credit commitments
Provision (reversal) for credit losses/transfers
Average loans outstanding during period ended
Total non-performing loans, at period-end
Ratio of net charge-offs to average loans outstanding during the period
Provision for credit losses to average loans outstanding during the period
Allowance for credit losses to non-performing loans at period-end
Allowance for credit losses to gross loans at period-end
Our allowance for loan losses consists of the following:
Specific allowance: For impaired loans, we provide specific allowances based on an evaluation of impairment, and for each criticized loan, we allocate a portion of the general allowance to each loan based on a loss percentage assigned. The percentage assigned depends on a number of factors including loan classification, the current financial condition of the borrowers and guarantors, the prevailing value of the underlying collateral, charge-off history, management’s knowledge of the portfolio, and general economic conditions. During the third quarter of 2007, we revised our minimum loss rates for loans rated Special Mention and Substandard to incorporate the results of a classification migration model reflecting actual losses beginning in 2003. During the second quarter of 2009, we reviewed the updated classification migration results and increased the minimum loss rates for construction loans rated Minimally Acceptable, Special Mention and Substandard.
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General allowance: The unclassified portfolio is segmented on a group basis. Segmentation is determined by loan type and by identifying risk characteristics that are common to the groups of loans. The allowance is provided to each segmented group based on the group’s historical loan loss experience as well as environmental factors which include the trends in delinquency and non-accrual, and other significant factors, such as national and local economy, trends and conditions, strength of management and loan staff, underwriting standards, and the concentration of credit. Beginning in the third quarter of 2007, minimum loss rates have been assigned for loans graded Minimally Acceptable instead of grouping these loans with the unclassified portfolio. During the second quarter of 2009, in light of the continued deterioration in the economy and the increases in nonaccrual loans and chargeoffs, we shortened the period used in the migration analysis from five years to four years to better reflect the impact of the most recent chargeoffs, we increased the general allowance to reflect the higher loan delinquency trends, the weaker national and local economy and the increased difficulty in assigning loan grades, and we also applied the environmental factors described above to loans rated Minimally Acceptable, Special Mention and Substandard.
To determine the adequacy of the allowance in each of these two components, the Bank employs two primary methodologies, the classification migration methodology and the individual loan review analysis methodology. These methodologies support the basis for determining allocations between the various loan categories and the overall adequacy of the Bank’s allowance to provide for probable losses inherent in the loan portfolio. These methodologies are further supported by additional analysis of relevant factors such as the historical losses in the portfolio, trends in the non-performing/non-accrual loans, loan delinquencies, the volume of the portfolio, peer group comparisons, and federal regulatory policy for loan and lease losses. Other significant factors of portfolio analysis include changes in lending policies/underwriting standards, portfolio composition, and concentrations of credit, and trends in the national and local economy.
With these methodologies, a general allowance is for those loans internally classified and risk graded Pass, Minimally Acceptable, Special Mention, Substandard, Doubtful, or Loss based on historical losses in the portfolio. Additionally, the Bank’s management allocates a specific allowance for “Impaired Credits,” in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” The level of the general allowance is established to provide coverage for management’s estimate of the credit risk in the loan portfolio by various loan segments not covered by the specific allowance.
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The table set forth below reflects management’s allocation of the allowance for loan losses by loan category and the ratio of each loan category to the total average loans as of the dates indicated:
Type of Loans:
Residential mortgage loans
Commercial mortgage loans
Installment loans
Other loans
The increase in the allowance allocated to commercial loans from $44.5 million at year-end 2008 to $50.3 million is due to increase in commercial impaired loans and an increase in the environmental factors. At June 30, 2009, forty-five commercial loans totaling $34.8 million were on non-accrual status and $1.6 million of commercial loans was past due 90 days and still accruing interest. At December 31, 2008, thirty five commercial loans totaling $20.9 million were on non-accrual status and no commercial loans was past due 90 days and still accruing interest. Commercial loans comprised 8.6% of impaired loans, 9.1% of non-accrual loans, and 9.5% of loans over 90 days still on accrual status at June 30, 2009, compared to 11.5% of impaired loans, and 11.5% of non-accrual loans at December 31, 2008.
The allowance allocated to commercial mortgage loans increased from $35.1 million at December 31, 2008, to $73.2 million at June 30, 2009, was due to increases in loans risk graded Substandard, an increase in the environmental factors, and due in part to the deteriorating economy. The overall allowance for total commercial mortgage loans was 1.8% for the second quarter ended June 30, 2009, and 0.8% for the year ended December 31, 2008. At June 30, 2009, seventy-seven commercial mortgage loans totaling $160.2 million were on non-accrual status and two commercial mortgage loan of $12.5 million was past due 90 days and still accruing interest. At December 31, 2008, thirty commercial mortgage loans totaling $32.3 million were on non-accrual status and one commercial mortgage loan totaling $4.1 million was past due 90 days and still accruing interest. Commercial mortgage loans comprised 45.0% of impaired loans, 41.8% of non-accrual loans, and 73.6% of loans over 90 days still on accrual status at June 30, 2009, compared to 17.8% of impaired loans, 17.8% of non-accrual loans, and 60.9% of loans over 90 days still on accrual status at December 31, 2008.
The allowance allocated for construction loans decreased $0.1 million to $39.7 million, or 4.8%, of construction loans at June 30, 2009, compared to $39.8 million, or 4.3%, of construction loans at December 31, 2008, primarily due to charge-offs of impaired loans during the six months of 2009. At June 30, 2009, thirty-six construction loans totaling $178.1 million were on non-accrual status and a $2.9 million construction loan was past due 90 days and still accruing interest. Construction loans comprised 44.0% of impaired loans, 46.5% of non-accrual loans, and 16.8% percent of loans over 90 days still on accrual status at June 30, 2009, compared to 67.4% of impaired loans, 67.4% of non-accrual loans, and 39.1% of loans over 90 days still on accrual status at December 31, 2008.
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The allowance allocated to residential mortgage loans and equity lines increased $3.6 million, to $6.3 million at June 30, 2009, from $2.7 million at December 31, 2008, due to increases in loans risk graded Substandard due in part to the deteriorating economy.
Total deposits were $7.4 billion at June 30, 2009, an increase of $543.3 million, or 8.0%, from $6.8 billion at December 31, 2008, primarily due to increases of $258.0 million, or 39.1%, in money market accounts and increases of $494.6 million, or 15.3%, in time deposits of $100,000 or more offset by decreases of $287.8 million, or 17.5%, in time deposits under $100,000. Brokered deposits which are reported in time deposits under $100,000 declined $375.8 million, or 38.9%, to $589.6 million at June 30, 2009 from $965.4 million at December 31, 2008. Non-interest-bearing demand deposits, interest-bearing demand deposits, and savings deposits comprised 31.2% of total deposits at June 30, 2009, time deposit accounts of less than $100,000 comprised 18.4% of total deposits, while the remaining 50.4% was comprised of time deposit accounts of $100,000 or more.
The following table displays the deposit mix as of the dates indicated:
Non-interest-bearing demand
NOW
Money market
Savings
Borrowings
Borrowings include Federal funds purchased, securities sold under agreements to repurchase, funds obtained as advances from the Federal Home Loan Bank (“FHLB”) of San Francisco, and other borrowings from financial institutions.
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At June 30, 2009, included in long-term transactions are twenty-eight repurchase agreements totaling $1.5 billion that were callable but which had not been called. Eleven fixed-to-floating rate repurchase agreements of $50.0 million each have variable interest rates currently at a range from 3.50% to 3.75% maximum rate until their final maturities in the second half of 2014 for $450 million and in January 2015 for $100 million. Four floating-to-fixed rate repurchase agreements of $50.0 million each have fixed interest rates ranging from 4.89% to 5.07%, until their final maturities in January 2017. Ten floating-to-fixed rate repurchase agreements totaled $550.0 million have fixed interest rates ranging from 4.29% to 4.78%, until their final maturities in 2014. Two floating-to-fixed rate repurchase agreements of $50.0 million each have fixed interest rates at 4.75% and 4.79%, until their final maturities in 2011. One floating-to-fixed rate repurchase agreement of $50.0 million has a fixed interest rate at 4.83% until its final maturity in 2012.
These transactions are accounted for as collateralized financing transactions and recorded at the amounts at which the securities were sold. The Company may have to provide additional collateral for the repurchase agreements, as necessary. The underlying collateral pledged for the repurchase agreements consists of U.S. Treasury securities, U.S. government agency security debt, and mortgage-backed securities with a fair value of $1.7 billion as of June 30, 2009, and $1.7 billion as of December 31, 2008.
Total advances from the FHLB of San Francisco decreased $520.0 million to $929.4 million at June 30, 2009 from $1.45 billion at December 31, 2008. Non-puttable advances totaled $229.4 million with a weighted rate of 4.76% and puttable advances totaled $700.0 million with a weighted average rate of 4.42% at June 30, 2009. The FHLB has the right to terminate the puttable transaction at par at each three-month anniversary after the first puttable date. All puttable FHLB advances of $700.0 million were puttable as of June 30, 2009 but none had been put.
Long-term Debt
The Bancorp established three special purpose trusts in 2003 and two in 2007 for the purpose of issuing trust preferred securities to outside investors (Capital Securities). The trusts exist for the purpose of issuing the Capital Securities and investing the proceeds thereof, together with proceeds from the purchase of the common stock of the trusts by the Bancorp, in junior subordinated notes issued by the Bancorp. The five special purpose trusts are considered variable interest entities under FIN 46R. Because the Bancorp is not the primary beneficiary of the trusts, the financial statements of the trusts are not included in the consolidated financial statements of the Company. At June 30, 2009, junior subordinated debt securities totaled $121.1 million with a weighted average interest rate of 2.78% compared to $121.1 million with a weighted average rate of 4.02% at December 31, 2008. The junior subordinated debt securities have a stated maturity term of 30 years and are currently included in the Tier 1 capital of the Bancorp for regulatory capital purposes.
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Off-Balance-Sheet Arrangements and Contractual Obligations
The following table summarizes the Company’s contractual obligations to make future payments as of June 30, 2009. Payments for deposits and borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts.
Contractual obligations:
Deposits with stated maturity dates
Securities sold under agreements to repurchase (1)
Advances from the Federal Home Loan Bank (2)
Operating leases
Total contractual obligations and other commitments
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Capital Resources
Total equity of $1.24 billion at June 30, 2009, decreased by $61.3 million, from $1.30 billion at December 31, 2008. The following table summarizes the activity in total equity:
Net loss
Proceeds from shares issued to the Dividend Reinvestment Plan
Tax short-fall from stock-based compensation expense
Share-based compensation
Changes in other comprehensive income
Preferred stock registration fees
Preferred stock dividends
Cash dividends paid to common stockholders
Net decrease in total equity
On November 2007, the Company announced that its Board of Directors had approved a new stock repurchase program to buy back up to an aggregate of one million shares of the Company’s common stock. No shares were purchased in 2008 and during the first three months of 2009. At June 30, 2009, 622,500 shares remain under the Company’s November 2007 repurchase program.
The Company declared a cash dividend of one cent per share for distribution on August 20, 2009 on 49,575,813 shares outstanding, 8 cents per share for distribution in May 2009 on 49,535,723 shares outstanding, and 10.5 cents per share for distribution in January 2009 on 49,508,250 shares outstanding. Total cash dividends paid in 2009, including the $0.5 million to be paid on August 20, 2009, amounted to $9.7 million. In light of continued troubled economic conditions, the Company will carefully review future dividends in light of the earnings of the most recent quarter and the regulatory guidance as to the payment of dividends.
Capital Adequacy Review
Management seeks to maintain the Company’s capital at a level sufficient to support future growth, protect depositors and stockholders, and comply with various regulatory requirements.
On September 29, 2006, the Bank issued $50.0 million in subordinated debt in a private placement transaction. This instrument matures on September 29, 2016. The subordinated debt was issued through the Bank and qualifies as Tier 2 capital for regulatory reporting purposes.
The Bancorp established five special purpose trusts for the purpose of issuing trust preferred securities to outside investors (Capital Securities). The trusts exist for the purpose of issuing the Capital Securities and investing the proceeds thereof, together with proceeds from the purchase of the common stock of the trusts by the Bancorp, in junior subordinated notes issued by the Bancorp. The junior subordinated debt of $121.1 million as of June 30, 2009, were included in the Tier 1 capital of the Bancorp for regulatory capital purposes.
Both the Bancorp’s and the Bank’s regulatory capital continued to exceed the regulatory minimum requirements as of June 30, 2009. In addition, the capital ratios of the Bank place it in the “well capitalized” category which is defined as institutions with a Tier 1 risk-based capital ratio equal to or greater than 6.0%, total risk-based ratio equal to or greater than 10.0%, and Tier 1 leverage capital ratio equal to or greater than 5.0%.
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The following table presents the Bancorp’s and the Bank’s capital and leverage ratios as of June 30, 2009, and December 31, 2008:
Tier 1 capital (to risk-weighted assets)
Tier 1 capital minimum requirement
Excess
Total capital (to risk-weighted assets)
Total capital minimum requirement
Tier 1 capital (to average assets) – Leverage ratio
Minimum leverage requirement
Risk-weighted assets
Total average assets (1)
During the second quarter, management followed the tenets of the Supervisory Capital Assessment Program (SCAP) and applied the “more adverse” stress test guidelines to our loan portfolio. The Company was not one of the banks subject to the SCAP stress test; however, management believed that it was prudent risk management to conduct a similar test on our loan portfolio. The loss assumptions we used in our stress test were similar to the indicative loss rates disclosed in the SCAP white paper and simulates an economic downturn scenario that is more severe than what we are currently experiencing. The results of our stress test indicated that the Company and the Bank would remain well capitalized for regulatory purposes under the SCAP’s economic scenario.
Liquidity
Liquidity is our ability to maintain sufficient cash flow to meet maturing financial obligations and customer credit needs, and to take advantage of investment opportunities as they are presented in the marketplace. Our principal sources of liquidity are growth in deposits, proceeds from the maturity or sale of securities and other financial instruments, repayments from securities and loans, federal funds purchased, securities sold under agreements to repurchase, and advances from the Federal Home Loan Bank (“FHLB”). At June 30, 2009, our liquidity ratio (defined as net cash plus short-term and marketable securities to net deposits and short-term liabilities) was at 17.4% compared to 23.4% same as year-end 2008.
To supplement its liquidity needs, the Bank maintains a total credit line of $95.0 million for federal funds with two correspondent banks, and master agreements with brokerage firms for the sale of securities subject to repurchase. The Bank is also a shareholder of the FHLB of San Francisco, enabling it to have access to lower cost FHLB financing when necessary. As of June 30, 2009, the
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Bank had an approved credit line with the FHLB of San Francisco totaling $1.5 billion. The total credit outstanding with the FHLB of San Francisco at June 30, 2009, was $929.4 million. These borrowings are secured by loans and securities. The Bank has pledged a portion of its commercial and real estate loans to the Federal Reserve Bank’s Discount Window under the Borrower-in-Custody program. At June 30, 2009, the borrowing capacity under the Borrower-in-Custody program was $514.1 million.
Liquidity can also be provided through the sale of liquid assets, which consist of federal funds sold, securities sold under agreements to repurchase, and unpledged investment securities available-for-sale. At June 30, 2009, investment securities available-for-sale at fair value and trading securities totaled $3.23 billion, with $2.35 billion pledged as collateral for borrowings and other commitments. The remaining $881.6 million was available as additional liquidity or to be pledged as collateral for additional borrowings.
Approximately 98.7% of the Company’s time deposits mature within one year or less as of June 30, 2009. Management anticipates that there may be some outflow of these deposits upon maturity due to the keen competition in the Bank’s marketplace. However, based on our historical runoff experience, we expect that the outflow will be minimal and can be replenished through our normal growth in deposits. Management believes the above-mentioned sources will provide adequate liquidity to the Bank to meet its daily operating needs.
The Bancorp obtains funding for its activities primarily through dividend income contributed by the Bank and proceeds from the issuance of securities, including proceeds from the issuance of its common stock pursuant to its Dividend Reinvestment Plan, the exercise of stock options and if required, the issuance of new common shares. In light of the uncertain economic times, the Bank has not paid a dividend to the Bancorp during the first half of 2009 and is not expected to pay a dividend to the Bancorp for the remainder of 2009. The business activities of the Bancorp consist primarily of the operation of the Bank with limited activities in other investments. Management believes the Bancorp’s cash on hand on June 30, 2009 of $22.9 million is sufficient to meet its operational needs for the next twelve months.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We use a net interest income simulation model to measure the extent of the differences in the behavior of the lending and funding rates to changing interest rates, so as to project future earnings or market values under alternative interest rate scenarios. Interest rate risk arises primarily through the Company’s traditional business activities of extending loans and accepting deposits. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences affect the spread between interest earned on assets and interest paid on liabilities. The net interest income simulation model is designed to measure the volatility of net interest income and net portfolio value, defined as net present value of assets and liabilities, under immediate rising or falling interest rate scenarios in 100 basis point increments.
Although the modeling is very helpful in managing interest rate risk, it does require significant assumptions for the projection of loan prepayment rates on mortgage related assets, loan volumes and pricing, and deposit and borrowing volume and pricing, that might prove inaccurate. Because these assumptions are inherently uncertain, the model cannot precisely estimate net interest income, or
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precisely predict the effect of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rates changes, the differences between actual experience and the assumed volume, changes in market conditions, and management strategies, among other factors. The Company monitors its interest rate sensitivity and attempts to reduce the risk of a significant decrease in net interest income caused by a change in interest rates.
We have established a tolerance level in our policy to define and limit interest income volatility to a change of plus or minus 15% when the hypothetical rate change is plus or minus 200 basis points. When the net interest rate simulation projects that our tolerance level will be met or exceeded, we seek corrective action after considering, among other things, market conditions, customer reaction, and the estimated impact on profitability. The Company’s simulation model also projects the net economic value of our portfolio of assets and liabilities. We have established a tolerance level in our policy to value the net economic value of our portfolio of assets and liabilities to a change of plus or minus 15% when the hypothetical rate change is plus or minus 200 basis points. At June 30, 2009, the market value of equity slightly exceeded management’s 15% limit for a hypothetical upward rate change of 200 basis points. Management intends to take steps over the remainder of the year to reduce this exposure.
The table below shows the estimated impact of changes in interest rate on net interest income and market value of equity as of June 30, 2009:
Change in Interest Rate (Basis Points)
+200
+100
-100
-200
ITEM 4. CONTROLS AND PROCEDURES.
The Company’s principal executive officer and principal financial officer have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13(a)-15(e) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) as of the end of the period covered by this quarterly report. Based upon their evaluation, the principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
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There has not been any change in our internal control over financial reporting that occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
The Bancorp’s wholly-owned subsidiary, Cathay Bank, is a party to ordinary routine litigation from time to time incidental to various aspects of its operations. Management is not aware of any litigation that is expected to have a material adverse impact on the Company’s consolidated financial condition, or the results of operations.
There is no material change from risk factors as previously disclosed in the registrant’s 2008 Annual Report on Form 10-K in response to Item 1A in Part I of Form 10-K.
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Month #1 (April 1, 2009 - April 30, 2009)
Month #2 (May 1, 2009 - May 31, 2009)
Month #3 (June 1, 2009 - June 30, 2009)
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On November 2007, the Company announced that its Board of Directors had approved a new stock repurchase program to buy back up to an aggregate of one million shares of the Company’s common stock. No shares were purchased during 2008 or the first six months of 2009. At June 30, 2009, 622,500 shares remain under the Company’s November 2007 repurchase program.
Not applicable.
The annual meeting of stockholders of Cathay General Bancorp was held on May 11, 2009. The proposals considered and the voting results are as follows:
Proposal 1: Election of three Class I directors to serve until the 2012 annual meeting of stockholders and their successions have been elected and qualified.
Michael M.Y. Chang
Anthony M. Tang
Thomas G. Tartaglia
Peter Wu
Other directors whose terms of office continued after the meeting:
Term ending in 2011 (Class III)
Term ending in 2010 (Class II)
Proposal 2: Ratification of the appointment of KPMG LLP as the independent registered public accountants for the fiscal year ended December 31, 2009.
Votes FOR
Proposal 3: To vote on an advisory (non-binding) proposal to approve executive compensation.
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Proposal 4: Stockholder proposal requesting that the Board of Directors take action to eliminate classification of terms of the Board.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Dunson K. Cheng
Chairman, President, and
Chief Executive Officer
/s/ Heng W. Chen
Executive Vice President and
Chief Financial Officer
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