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| CATY > SEC Filings for CATY > Form 10-Q on 9-Nov-2012 | All Recent SEC Filings |
9-Nov-2012
Quarterly Report
The following discussion is given based on the assumption that the reader has access to and has read the Company's Annual Report on Form 10-K for the year ended December 31, 2011.
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 condensed 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.
Management of the Company considers the following to be critical accounting policies:
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. 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, 2011.
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, 2011.
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, 2011.
Accounting for goodwill and goodwill impairment involves significant judgments and assumptions by management, which have a material impact on the amount of goodwill 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, 2011.
Accounting for other real estate owned involves significant judgments and assumptions by management, which have a material impact on the value of other real estate owned and noninterest expense recorded in the financial statements. The judgments and assumptions used by management are described under the heading "Valuation of Other Real Estate Owned" in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.
Highlights
· Improved profitability - Third quarter net income was $30.4 million, an increase of $4.3 million, or 16.4%, compared to net income of $26.1 million in the same quarter a year ago.
· Decrease in non-performing assets - Non-performing assets decreased $145.0 million, or 48.2%, to $155.6 million at September 30, 2012, from $300.6 million at December 31, 2011, and decreased $42.4 million, or 21.4%, from $198.0 million at June 30, 2012.
Quarterly Statement of Operations Review
Net Income
Net income available to common stockholders for the quarter ended September 30, 2012, was $26.2 million, an increase of $4.2 million, or 19.4%, compared to a net income available to common stockholders of $22.0 million for the same quarter a year ago. Diluted earnings per share available to common stockholders for the quarter ended September 30, 2012, was $0.33 compared to $0.28 for the same quarter a year ago due primarily to decreases in the provision for credit losses, decreases in other real estate owned ("OREO") expenses, decreases in prepayment penalties on the repayment of Federal Home Loan Bank ("FHLB") advances and securities sold under agreements to repurchase, and decreases in operations expenses of affordable housing investments, which were partially offset by decreases in gains on sales of loans, increases in litigation settlement expenses, increases in salaries and employee benefits, and increases in income tax expense.
Return on average stockholders' equity was 7.62% and return on average assets was 1.14% for the quarter ended September 30, 2012, compared to a return on average stockholders' equity of 6.91% and a return on average assets of 0.98% for the same quarter a year ago.
Financial Performance
Third Quarter
2012 2011
Net income (in millions) $ 30.4 $ 26.1
Net income available to common stockholders (in millions) $ 26.2 $ 22.0
Basic earnings per common share $ 0.33 $ 0.28
Diluted earnings per common share $ 0.33 $ 0.28
Return on average assets 1.14 % 0.98 %
Return on average total stockholders' equity 7.62 % 6.91 %
Efficiency ratio 49.82 % 49.48 %
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Net Interest Income Before Provision for Credit Losses
Net interest income before provision for credit losses decreased $536,000, or 0.7%, to $80.4 million during the third quarter of 2012 compared to $81.0 million during the same quarter a year ago. The decrease was due primarily to the decreases in yield and volume on investment securities and decreases in yield on loans offset by decreases in rates paid on time certificates of deposit, the prepayment of FHLB advances, and maturities of securities sold under agreements to repurchase.
The net interest margin, on a fully taxable-equivalent basis, was 3.26% for the third quarter of 2012, an increase of 2 basis points from 3.24% for the second quarter of 2012, and a decrease of 6 basis points from 3.32% for the third quarter of 2011. The decrease in yields on investment securities and loans offset by decrease in the rate on interest bearing deposits and the prepayment of FHLB advances and decreases in securities sold under agreements to repurchase caused the decrease in the net interest margin from the same quarter a year ago.
For the third quarter of 2012, the yield on average interest-earning assets was 4.32%, on a fully taxable-equivalent basis, the cost of funds on average interest-bearing liabilities was 1.35%, and the cost of interest bearing deposits was 0.72%. In comparison, for the third quarter of 2011, the yield on average interest-earning assets was 4.68%, on a fully taxable-equivalent basis, the cost of funds on average interest-bearing liabilities was 1.66%, and the cost of interest bearing deposits was 0.99%. 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 5 basis points to 2.97% for the quarter ended September 30, 2012, from 3.02% for the same quarter a year ago, primarily for the reasons discussed above.
Average daily balances for the three months ended September 30, 2012, and September 30, 2011, 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 September 30,
2012 2011
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate (1)(2) Balance Expense Rate (1)(2)
Interest earning
assets:
Commercial loans $ 1,996,906 $ 21,057 4.20 % $ 1,734,406 $ 18,985 4.34 %
Residential mortgage
loans 1,241,308 15,059 4.85 1,165,889 14,801 5.08
Commercial mortgage
loans 3,684,719 51,217 5.53 3,759,783 55,207 5.83
Real estate
construction loans 184,629 2,596 5.59 303,671 3,498 4.57
Other loans and leases 15,007 95 2.52 17,633 99 2.23
Total loans and leases
(1) 7,122,569 90,024 5.03 6,981,382 92,590 5.26
Taxable securities 2,188,205 15,157 2.76 2,308,509 20,303 3.49
Tax-exempt securities
(3) 131,024 1,594 4.84 134,735 1,621 4.77
Federal Home Loan Bank
stock 46,702 57 0.49 57,439 38 0.26
Interest bearing
deposits 394,830 471 0.47 64,897 360 2.20
Federal funds sold &
securities purchased
under agreements to
resell 6,413 2 0.12 207,174 33 0.06
Total interest-earning
assets 9,889,743 107,305 4.32 9,754,136 114,945 4.68
Non-interest earning
assets:
Cash and due from
banks 138,581 214,540
Other non-earning
assets 810,595 866,057
Total non-interest
earning assets 949,176 1,080,597
Less: Allowance for
loan losses (192,192 ) (231,486 )
Deferred loan fees (8,859 ) (7,881 )
Total assets $ 10,637,868 $ 10,595,366
Interest bearing
liabilities:
Interest bearing
demand accounts $ 535,708 $ 207 0.15 $ 431,016 $ 185 0.17
Money market accounts 1,041,986 1,440 0.55 948,678 1,698 0.71
Savings accounts 464,091 92 0.08 454,780 112 0.10
Time deposits 4,129,075 9,492 0.91 4,306,331 13,278 1.22
Total interest-bearing
deposits 6,170,860 11,231 0.72 6,140,805 15,273 0.99
Securities sold under
agreements to
repurchase 1,358,152 13,734 4.02 1,411,332 14,840 4.17
Other borrowings 40,030 74 0.74 283,996 2,105 2.94
Long-term debt 171,136 1,291 3.00 171,136 1,208 2.80
Total interest-bearing
liabilities 7,740,178 26,330 1.35 8,007,269 33,426 1.66
Non-interest bearing
liabilities:
Demand deposits 1,209,253 1,013,859
Other liabilities 95,741 69,082
Total equity 1,592,696 1,505,156
Total liabilities and
equity $ 10,637,868 $ 10,595,366
Net interest spread
(4) 2.97 % 3.02 %
Net interest income
(4) $ 80,975 $ 81,519
Net interest margin
(4) 3.26 % 3.32 %
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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 September 30,
2012-2011
Increase (Decrease) in
Net Interest Income Due to:
Changes in
(Dollars in thousands) Volume Changes in Rate Total Change
Interest-earning assets:
Loans and leases 1,748 (4,314 ) (2,566 )
Taxable securities (1,022 ) (4,124 ) (5,146 )
Tax-exempt securities (2) (48 ) 21 (27 )
Federal Home Loan Bank stock (8 ) 27 19
Deposits with other banks 581 (470 ) 111
Federal funds sold and securities purchased
under agreements to resell (47 ) 16 (31 )
Total decrease in interest income 1,204 (8,844 ) (7,640 )
Interest-bearing liabilities:
Interest bearing demand accounts 41 (19 ) 22
Money market accounts 152 (410 ) (258 )
Savings accounts 2 (22 ) (20 )
Time deposits (531 ) (3,255 ) (3,786 )
Securities sold under agreements to repurchase (568 ) (538 ) (1,106 )
Other borrowed funds (1,084 ) (947 ) (2,031 )
Long-term debts - 83 83
Total decrease in interest expense (1,988 ) (5,108 ) (7,096 )
Changes in net interest income $ 3,192 $ (3,736 ) $ (544 )
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(1) Changes in interest income and interest expense attributable to changes in both volume and rate have beenallocated 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 securitiesheld has been adjusted to a fully taxable-equivalent basis using a statutory Federal income tax rate of 35%.
Provision for Credit Losses
There was no change in the provision for credit losses for the third quarter of 2012 compared to a credit of $5.0 million for the second quarter of 2012 and a charge of $9.0 million in the third quarter of 2011. The provision for credit losses was based on the review of the adequacy of the allowance for loan losses at September 30, 2012. The provision for credit losses represents the charge against or benefit toward 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, including unfunded commitments. The following table summarizes the charge-offs and recoveries for the periods indicated:
For the three months ended For the nine months ended
September 30, September 30,
2012 2011 2012 2011
(In thousands)
Charge-offs:
Commercial loans $ 7,387 $ 1,219 $ 14,479 $ 11,215
Construction loans- residential - 10,923 391 18,349
Construction loans- other 39 12,616 774 16,045
Real estate loans (1) 1,441 5,560 12,351 24,119
Real estate- land loans 2 522 101 1,008
Installment and other loans - - 25 -
Total charge-offs 8,869 30,840 28,121 70,736
Recoveries:
Commercial loans 331 513 1,230 1,568
Construction loans- residential 449 6 3,712 3,667
Construction loans- other 28 402 1,913 629
Real estate loans (1) 317 426 6,784 2,665
Real estate- land loans 12 25 1,178 618
Installment and other loans - - 3 -
Total recoveries 1,137 1,372 14,820 9,147
Net charge-offs $ 7,732 $ 29,468 $ 13,301 $ 61,589
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(1) Real estate loans include commercial mortgage loans, residential mortgage loans and equity lines.
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 $15.6 million for the third quarter of 2012, a decrease of $1.2 million, or 7.2%, compared to $16.8 million for the third quarter of 2011. The decrease in non-interest income in the third quarter of 2012 was primarily due to decreases of $1.6 million from gains on sale of loans offset by a $513,000 increase in revenue from trading securities.
Non-Interest Expense
Non-interest expense decreased $539,000, or 1.1%, to $47.8 million in the third quarter of 2012 compared to $48.4 million in the same quarter a year ago. The efficiency ratio was 49.82% in the third quarter of 2012 compared to 49.48% for the same quarter a year ago.
OREO expenses decreased $4.3 million to $1.8 million in the third quarter of 2012 compared to $6.1 million in the same quarter a year ago primarily due to decreases in provisions for OREO write-downs, higher OREO gains, and decreases in OREO expenses. Operations expense on affordable housing investments also decreased $1.6 million in the third quarter of 2012 compared to the same quarter a year ago primarily due to gains realized from sales of properties owned by an affordable housing limited partnership. Prepayment penalties decreased by $1.1 million, or 24.0%, in the third quarter of 2012 compared to the same quarter a year ago. FDIC and State assessments decreased $548,000, or 20.7%, to $2.1 million in the third quarter of 2012 from $2.6 million for the same quarter a year ago.
Offsetting the above decreases was an increase in the accrual for legal proceedings of $5.8 million. The Bank is the subject of a jury verdict awarding damages against it of $11.2 million relating to a construction loan made to the plaintiff in the lawsuit. The verdict is not final and is subject to further legal proceedings. The Bank has filed a cross complaint for the $19 million unpaid balance of the construction loan, as to which the Bank retained a 50% participation. Salaries and employee benefits increased $970,000, or 5.5%, in the third quarter of 2012 compared to the same quarter a year ago primarily due to the hiring of new employees. Professional services expense increased $427,000, or 8.8%, primarily due to increases in consulting expenses related to the upcoming core system conversion.
Income Taxes
The effective tax rate for the third quarter of 2012 was 36.8% compared to 35.2% in the third quarter of 2011. The effective tax rate includes the impact of the utilization of low income housing tax credits and the recognition of other tax credits.
Year-to-Date Statement of Operations Review
Net income attributable to common stockholders for the nine months ended September 30, 2012, was $76.8 million, an increase of $16.7 million, or 27.7%, compared to net income attributable to common stockholders of $60.1 million for the same period a year ago due primarily to decreases in the provision for loan losses, decreases in prepayment penalties on the repayment of FHLB advances and the prepayment of securities sold under an agreement to repurchase, decreases in gains on sale of securities, decreases in operation expenses of affordable housing investments, and decreases in FDIC and State assessments, which were partially offset by increases in income tax expenses, increases in litigation accrual expenses, increases in OREO expenses, and increases in salaries and incentive compensation expense. Diluted earnings per share was $0.98 compared to $0.76 per share for the same period a year ago. The net interest margin for the nine months ended September 30, 2012, increased 9 basis points to 3.28% compared to 3.19% for the same period a year ago.
Return on average stockholders' equity was 7.65% and return on average assets was 1.12% for the nine months ended September 30, 2012, compared to a return on average stockholders' equity of 6.59% and a return on average assets of 0.91% for the same period of 2011. The efficiency ratio for the nine months ended September 30, 2012, was 52.12% compared to 51.24% for the same period a year ago.
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:
Interest-Earning Assets and Interest-Bearing Liabilities
Nine months ended September 30,
2012 2011
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate (1)(2) Balance Expense Rate (1)(2)
Interest earning
assets:
Commercial loans $ 1,905,101 $ 60,181 4.22 % $ 1,593,893 $ 52,296 4.39 %
Residential mortgage
loans 1,207,048 44,855 4.95 1,126,253 42,630 5.05
Commercial mortgage
loans 3,690,115 156,204 5.65 3,847,865 166,228 5.78
Real estate
construction loans 200,836 7,952 5.29 340,749 11,447 4.49
Other loans and leases 16,874 294 2.33 17,873 339 2.54
Total loans and leases
(1) 7,019,974 269,486 5.13 6,926,633 272,940 5.27
Taxable securities 2,287,967 50,046 2.92 2,541,139 65,273 3.43
Tax-exempt securities
(3) 131,732 4,811 4.88 134,377 4,869 4.84
Federal Home Loan Bank
stock 49,499 190 0.51 60,402 134 0.30
Interest bearing
deposits 354,268 1,596 0.60 121,406 901 0.99
Federal funds sold &
securities purchased
under agreements to
resell 20,018 18 0.12 109,890 81 0.10
Total interest-earning
assets 9,863,458 326,147 4.42 9,893,847 344,198 4.65
Non-interest earning
assets:
Cash and due from
banks 124,037 153,108
Other non-earning
assets 827,091 869,877
Total non-interest
earning assets 951,128 1,022,985
Less: Allowance for
loan losses (197,638 ) (240,957 )
Deferred loan fees (8,289 ) (7,694 )
Total assets $ 10,608,659 $ 10,668,181
Interest bearing
liabilities:
Interest bearing
demand accounts $ 498,613 $ 568 0.15 $ 420,214 $ 589 0.19
Money market accounts 1,012,603 4,287 0.57 986,984 5,833 0.79
Savings accounts 444,882 275 0.08 408,776 390 0.13
Time deposits 4,278,222 32,067 1.00 4,327,742 41,174 1.27
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