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| CATY > SEC Filings for CATY > Form 10-Q on 8-May-2009 | All Recent SEC Filings |
8-May-2009
Quarterly Report
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").
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
• First quarter net income was $10.2 million compared to a net loss of $2.9 million for the fourth quarter of 2008, and compared to net income of $27.3 million in the same quarter a year ago. First quarter net income available to common stockholders of $6.2 million, which was after the deduction of $4.0 million for dividends on preferred stock, compared to net loss available to common stockholders of $4.0 million for the fourth quarter of 2008.
• Diluted earnings per share was $0.12 for the first quarter, compared to diluted loss per share of $0.08 in the fourth quarter of 2008, and compared to diluted earnings per share of $0.55 in the same quarter a year ago.
• Total capital ratio was 14.34% at March 31, 2009, compared to 13.94% at December 31, 2008, and compared to 10.88% at March 31, 2008.
• Total allowance for credit losses at March 31, 2009 strengthened to 1.87% of total loans with a provision for credit losses of $47.0 million compared to $62.9 million in the fourth quarter of 2008, and compared to $7.5 million the same quarter a year ago.
Income Statement Review
Net Income
Net income for the first quarter of 2009 was $10.2 million and net income available to common stockholders was $6.2 million, or $0.12 per diluted share, compared to net income of $27.3 million and net income available to common stockholders of $27.3 million, or $0.55 per diluted share for the same quarter a year ago. Return on average assets was 0.37% and return on average stockholders' equity was 3.21% for the first quarter of 2009 compared with a return on average assets of 1.07% and a return on average stockholders' equity of 10.99% for the first quarter of 2008.
Financial Performance
Three months ended March 31,
2009 2008
Net income $ 10.2 million $ 27.3 million
Net income available to common stockholders $ 6.2 million $ 27.3 million
Basic earnings per share $ 0.12 $ 0.55
Diluted earnings per share $ 0.12 $ 0.55
Return on average assets 0.37 % 1.07 %
Return on average total stockholders' equity 3.21 % 10.99 %
Efficiency ratio 38.26 % 39.11 %
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Net Interest Income Before Provision for Credit Losses
Net interest income before provision for credit losses decreased to $70.4 million during the first quarter of 2009, a decline of $4.8 million, or 6.3%, compared to the $75.2 million during the same quarter a year ago. The decrease was due primarily to a larger decline in earning asset yields compared to rates paid for deposits and borrowings.
The net interest margin, on a fully taxable-equivalent basis, was 2.69% for the first quarter of 2009. The net interest margin decreased 16 basis points from 2.85% in the fourth quarter of 2008 and decreased 47 basis points from 3.16% in the first quarter of 2008. The decrease in net interest income from the prior year primarily resulted from the increase in the borrowing rate on our long term repurchase agreements and smaller decreases in rates paid on core deposits 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 first quarter of 2009, the yield on average interest-earning assets was 5.26% on a fully taxable-equivalent basis, and the cost of funds on average interest-bearing liabilities equaled 2.98%. In comparison, for the first quarter of 2008, the yield on average interest-earning assets was 6.46% and cost of funds on average interest-bearing liabilities equaled 3.80%. 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 38 basis points to 2.28% for the first quarter ended March 31, 2009, from 2.66% for the same quarter a year ago, primarily due to the reasons discussed above.
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
Three months ended March 31, 2009 2008
Interest Average Interest Average
Taxable-equivalent basis Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate (1)(2) Balance Expense Rate (1)(2)
Interest Earning Assets
Commercial loans $ 1,598,804 $ 18,753 4.76 % $ 1,484,044 $ 24,259 6.57 %
Residential mortgage 795,752 10,621 5.34 674,909 10,097 5.98
Commercial mortgage 4,126,739 64,439 6.33 3,809,473 67,172 7.09
Real estate construction loans 916,495 9,974 4.41 810,071 15,165 7.53
Other loans and leases 21,302 207 3.94 26,102 332 5.12
Total loans and leases (1) 7,459,092 103,994 5.65 6,804,599 117,025 6.92
Taxable securities 2,970,700 32,194 4.40 2,250,823 28,506 5.09
Tax-exempt securities (3) 22,845 379 6.73 69,668 1,549 8.94
Federal Home Loan Bank Stock 71,791 - - 65,753 753 4.61
Interest bearing deposits 24,998 58 0.94 24,885 454 7.34
Federal funds sold & securities
purchased under agreements to resell 80,700 1,302 6.54 419,675 6,480 6.21
Total interest-earning assets 10,630,126 137,927 5.26 9,635,403 154,767 6.46
Non-interest earning assets
Cash and due from banks 100,919 85,002
Other non-earning assets 764,864 658,758
Total non-interest earning assets 865,783 743,760
Less: Allowance for loan losses (134,616 ) (66,305 )
Deferred loan fees (9,531 ) (10,563 )
Total assets $ 11,351,762 $ 10,302,295
Interest bearing liabilities:
Interest bearing demand accounts $ 259,535 $ 254 0.40 $ 237,611 $ 485 0.82
Money market accounts 759,930 2,957 1.58 701,552 3,841 2.20
Savings accounts 311,145 171 0.22 330,504 445 0.54
Time deposits 4,961,130 35,970 2.94 4,180,871 44,332 4.26
Total interest-bearing deposits 6,291,740 39,352 2.54 5,450,538 49,103 3.62
Federal funds purchased 16,933 11 0.26 43,341 382 3.54
Securities sold under agreements to
repurchase 1,580,989 15,936 4.09 1,559,336 14,625 3.77
Other borrowings 1,117,844 10,565 3.83 1,156,238 12,151 4.23
Long-term debt 171,136 1,505 3.57 171,136 2,849 6.70
Total interest-bearing liabilities 9,178,642 67,369 2.98 8,380,589 79,110 3.80
Non-interest bearing liabilities
Demand deposits 734,883 780,579
Other liabilities 137,505 142,210
Stockholders' equity 1,300,732 998,917
Total liabilities and stockholders'
equity $ 11,351,762 $ 10,302,295
Net interest spread (4) 2.28 % 2.66 %
Net interest income (4) $ 70,558 $ 75,657
Net interest margin (4) 2.69 % 3.16 %
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(1) Yields and amounts of interest earned include loan fees. Non-accrual loans are included in the average balance.
(2) Calculated by dividing net interest income by average outstanding interest-earning assets
(3) The average yield has been adjusted to a fully taxable-equivalent basis for certain securities of states and political subdivisions and other securities held using a statutory Federal income tax rate of 35%
(4) Net interest income, net interest spread, and net interest margin on interest-earning assets have been adjusted to a fully taxable-equivalent basis using a statutory Federal income tax rate of 35%
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)
Three months ended March 31,
2009-2008
Increase (Decrease) in
Net Interest Income Due to:
Changes in Changes in
(Dollars in thousands) Volume Rate Total Change
Interest-Earning Assets:
Loans and leases 10,328 (23,359 ) (13,031 )
Taxable securities 8,084 (4,396 ) 3,688
Tax-exempt securities (2) (855 ) (315 ) (1,170 )
Federal Home Loan Bank Stock 64 (817 ) (753 )
Deposits with other banks 2 (398 ) (396 )
Federal funds sold and securities purchased
under agreements to resell (5,511 ) 333 (5,178 )
Total increase in interest income 12,112 (28,952 ) (16,840 )
Interest-Bearing Liabilities:
Interest bearing demand accounts 41 (272 ) (231 )
Money market accounts 296 (1,180 ) (884 )
Savings accounts (25 ) (249 ) (274 )
Time deposits 7,253 (15,615 ) (8,362 )
Federal funds purchased (147 ) (224 ) (371 )
Securities sold under agreements to
repurchase 187 1,124 1,311
Other borrowed funds (417 ) (1,169 ) (1,586 )
Long-term debts - (1,344 ) (1,344 )
Total increase in interest expense 7,188 (18,929 ) (11,741 )
Changes in net interest income $ 4,924 $ (10,023 ) $ (5,099 )
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(1) Changes in interest income and interest expense attributable to changes in both volume and rate have been allocated proportionately to changes due to volume and changes due to rate.
(2) The amount of interest earned on certain securities of states and political subdivisions and other securities held has been adjusted to a fully taxable-equivalent basis, using a statutory federal income tax rate of 35%.
Provision for Loan Losses
The provision for credit losses was $47.0 million for the first quarter of 2009 compared to $7.5 million for the first quarter of 2008 and compared to $62.9 million in the fourth quarter of 2008. The provision for credit losses was based on the review of the adequacy of the allowance for credit losses at March 31, 2009. The provision for credit losses represents the charge or credit against current earnings 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 quarters as indicated:
For the three months ended
March 31,
(In thousands) 2009 2008
Charge-offs:
Commercial loans $ 11,078 $ 251
Construction loans 23,400 4,130
Real estate loans 1,361 175
Real estate- land loans 2,377 339
Total charge-offs 38,216 4,895
Recoveries:
Commercial loans 198 187
Installment and other loans - 4
Total recoveries 198 191
Net Charge-offs $ 38,018 $ 4,704
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Total charge-offs for the first quarter of 2009 included $14.4 million of charge-offs on ten residential construction loan borrowers in California, $5.0 million charge-off on two office building construction loans in California, a $1.3 million charge-off on a residential construction loan in Nevada, a $1.3 million charge-off on a residential construction loan in Texas, and $11.1 million of charge-offs on twenty six commercial loan borrowers. Net loan charge-offs increased from $30.5 million in the fourth quarter of 2008 to $38.0 million in the first quarter of 2009 and compared to $4.7 million in the first quarter of last year as a result of the continuing weak economy and the decline in residential housing values.
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 $27.7 million for the first quarter of 2009, an increase of $21.2 million compared to the non-interest income of $6.5 million for the first 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 $22.5 million. Offsetting the increase were a $947,000 decrease in venture capital income, included in other operating income, primarily due to write-downs on venture capital investments.
Non-Interest Expense
Non-interest expense increased $5.7 million, or 18.0%, to $37.5 million in the first quarter of 2009 compared to $31.8 million in the same quarter a year ago. The efficiency ratio was 38.26% in the first quarter of 2009 compared to 39.11% for the same period a year ago.
Federal Deposit Insurance Corporation ("FDIC") and State assessments increased to $2.9 million in the first quarter of 2009 from $291,000 in the same quarter a year ago. The FDIC has adopted amendments to its restoration plan for the Deposit Insurance Fund to implement changes to the risk-based assessment system and set assessment rates to provide that most banks will now pay initial base rates ranging from 12 cents per $100 to 16 cents per $100 on an annual basis, beginning on April 1, 2009. We anticipate that these additional assessments, along with any future assessments we may be required to pay, will result in an increase in our non-interest expense and could adversely impact our net income.
Other real estate owned ("OREO") expense increased $2.1 million primarily due to a $1.6 million provision for OREO write-down and a $518,000 increase in OREO operating expense in the first quarter of 2009 compared to the same quarter a year ago. Expense from operations of affordable housing investments increased $873,000 to $1.7 million compared to $0.8 million in the same quarter a year ago as a result of additional investments in affordable housing projects and a higher cash distribution in the same quarter a year ago. Occupancy expense increased $838,000 primarily due to increases in depreciation expense of $737,000 and relocation expenses of $153,000 related to our new administrative office at 9650 Flair Drive, El Monte, California, which opened in January 2009. Professional service expense increased $582,000, or 24.4%, due to increases in legal expenses, collection expenses, and information technology consulting expenses.
Offsetting the above described increases were decreases of $973,000 in salaries and employee benefits and decreases of $348,000 in computer and equipment expense. Salaries and employee benefits decreased primarily due to a $1.2 million decrease in bonus accruals and a $249,000 decrease in option compensation expense offset by a $476,000 decrease in deferred loan cost. Computer and equipment expense declined due primarily to a decrease of $366,000 in software license fees as a result of the Company's new data processing contract.
Income Taxes
The effective tax rate was 23.4% for the first quarter of 2009 compared to 35.4% for the same quarter a year ago and compared to 27.9% for the full year 2008. The decrease in the effective tax rate was primarily due to the lower pretax income in the first quarter of 2009 combined with an increase in low income housing tax credits in 2009.
Balance Sheet Review
Assets
Total assets decreased by $184.5 million, or 1.6%, to $11.4 billion at March 31, 2009, from $11.6 billion at December 31, 2008. The decrease in total assets was represented primarily by decreases in available- for-sale securities of $140.4 million, or 4.6%, and decreases in loans of $78.7 million, or 1.1%.
Securities
Total securities were $2.9 billion, or 25.8%, of total assets at March 31, 2009, compared with $3.1 billion, or 26.6%, of total assets at December 31, 2008.
The net unrealized gains on securities available-for-sale, which represents the difference between fair value and amortized cost, totaled $36.2 million at March 31, 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 80 basis points to 4.41% for the three months ended March 31, 2009, compared with 5.21% for the same period a year ago, as securities were sold, matured, prepaid, or were called and proceeds were reinvested at lower interest rates.
The following tables summarize the composition, amortized cost, gross unrealized gains, gross unrealized losses, and fair value of securities available-for-sale, as of March 31, 2009, and December 31, 2008:
March 31, 2009
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
(In thousands)
U.S. Treasury entities $ 5,487 $ 24 $ - $ 5,511
U.S. government sponsored entities 831,095 1,572 343 832,324
State and municipal securities 20,052 169 27 20,194
Mortgage-backed securities 1,869,948 47,478 3,869 1,913,557
Collateralized mortgage obligations 169,276 952 5,803 164,425
Asset-backed securities 413 - 93 320
Corporate bonds 10,246 - 3,882 6,364
Preferred stock of government sponsored entities 701 71 - 772
Total $ 2,907,218 $ 50,266 $ 14,017 $ 2,943,467
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December 31, 2008
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
(In thousands)
U.S. treasury securities $ 10,510 $ 35 $ - $ 10,545
U.S. government sponsored entities 764,341 1,641 - 765,982
State and municipal securities 23,059 214 37 23,236
Mortgage-backed securities 2,029,265 53,476 5,278 2,077,463
Collateralized mortgage obligations 179,939 462 7,523 172,878
Asset-backed securities 423 - 63 360
Corporate bonds 35,246 - 2,676 32,570
Preferred stock of government sponsored entities 783 - - 783
Total $ 3,043,566 $ 55,828 $ 15,577 $ 3,083,817
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The following table summarizes the scheduled maturities by security type of securities available-for-sale, as of March 31, 2009:
March 31, 2009
After One After Five
One Year Year to Years to Over Ten
or Less Five Years Ten Years Years Total
(In thousands)
. . .
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