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CATY > SEC Filings for CATY > Form 10-Q on 7-Nov-2013All Recent SEC Filings

Show all filings for CATHAY GENERAL BANCORP

Form 10-Q for CATHAY GENERAL BANCORP


7-Nov-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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, 2012.

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 in "Allowance for Credit Losses" under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.

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 in "Investment Securities" under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.


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 in "Income Taxes" under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.

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 in "Goodwill and Goodwill Impairment" under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.

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 in "Valuation of Other Real Estate Owned (OREO)" under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies" in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.

Highlights

? Redemption on September 30, 2013, of the remaining $129 million of the Company's preferred stock issued under the U.S. Treasury's TARP Capital Purchase Program.

? Net recoveries of loans were $3.6 million in the third quarter of 2013, compared to net charge-offs of $7.7 million the same quarter a year ago and net recoveries of $939,000 in the second quarter of 2013.

Quarterly Statement of Operations Review

Net Income

Net income available to common stockholders for the quarter ended September 30, 2013, was $30.0 million, an increase of $3.8 million, or 14.5%, compared to a net income available to common stockholders of $26.2 million for the same quarter a year ago. Diluted earnings per share available to common stockholders for the quarter ended September 30, 2013, was $0.38 compared to $0.33 for the same quarter a year ago due primarily to decreases in litigation expenses, the reversal for credit losses, increases in net interest income, increases in wealth management commissions and decreases in other real estate owned ("OREO") expenses offset by increases in salaries and employee benefits and costs associated with debt redemption.

Return on average stockholders' equity was 8.37% and return on average assets was 1.22% for the quarter ended September 30, 2013, compared to a return on average stockholders' equity of 7.62% and a return on average assets of 1.14% for the same quarter a year ago.


Financial Performance



                                                           Third Quarter
                                                         2013        2012
Net income (million)                                    $  32.5     $  30.4
Net income available to common stockholders (million)   $  30.0     $  26.2
Basic earnings per common share                         $  0.38     $  0.33
Diluted earnings per common share                       $  0.38     $  0.33
Return on average assets                                   1.22 %      1.14 %
Return on average total stockholders' equity               8.37 %      7.62 %
Efficiency ratio                                          51.01 %     49.82 %

Net Interest Income Before Provision for Credit Losses

Net interest income before provision for credit losses increased $2.2 million, or 2.7%, to $82.6 million during the third quarter of 2013 compared to $80.4 million during the same quarter a year ago. The increase was due primarily to the decrease in interest expense from time deposits and securities sold under agreements to repurchase offset by the decrease in interest income from investment securities.

The net interest margin, on a fully taxable-equivalent basis, was 3.35% for the third quarter of 2013, compared to 3.30% for the second quarter of 2013, and 3.26% for the third quarter of 2012. The decrease in the interest expense on time deposits and securities sold under agreements to repurchase offset by decreases in earnings on investment securities and loans contributed to the increase in the net interest margin compared to the third quarter of 2012.

For the third quarter of 2013, the yield on average interest-earning assets was 4.15%, on a fully taxable-equivalent basis, the cost of funds on average interest-bearing liabilities was 1.05%, and the cost of interest bearing deposits was 0.64%. In comparison, 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%. 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, increased 13 basis points to 3.10% for the quarter ended September 30, 2013, from 2.97% for the same quarter a year ago, primarily for the reasons discussed above.


The following table sets forth information concerning average interest-earning assets, average interest-bearing liabilities, and the average yields and rates paid on those assets and liabilities for the three months ended September 30, 2013, and 2012. Average outstanding amounts included in the table are daily averages.

                               Interest-Earning Assets and Interest-Bearing Liabilities
                                                       Three months ended September 30,
                                             2013                                             2012
                                          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         $  2,213,240     $  21,733              3.90 %   $  1,996,906     $  21,057              4.20 %
Residential mortgage
loans                       1,440,198        16,650              4.62        1,241,308        15,059              4.85
Commercial mortgage
loans                       3,895,436        49,941              5.09        3,684,719        51,217              5.53
Real estate
construction loans            164,639         2,481              5.98          184,629         2,596              5.59
Other loans and leases         18,654            33              0.70           15,007            95              2.52
Total loans and leases
(1)                         7,732,167        90,838              4.66        7,122,569        90,024              5.03
Taxable securities          1,869,101        10,868              2.31        2,188,205        15,157              2.76
Tax-exempt securities
(3)                                 -             -                 -          131,024         1,594              4.84
Federal Home Loan Bank
stock                          30,938           449              5.76           46,702            57              0.49
Interest bearing
deposits                      160,985           307              0.76          394,830           471              0.47
Federal funds sold and
securities purchased
under agreements to
resell                              -             -                 -            6,413             2              0.12
Total interest-earning
assets                      9,793,191       102,462              4.15        9,889,743       107,305              4.32
Non-interest earning
assets:
Cash and due from
banks                         136,315                                          138,581
Other non-earning
assets                        783,043                                          810,595
Total non-interest
earning assets                919,358                                          949,176
Less: Allowance for
loan losses                  (180,693 )                                       (192,192 )
Deferred loan fees            (12,365 )                                         (8,859 )
Total assets             $ 10,519,491                                     $ 10,637,868

Interest bearing
liabilities:
Interest bearing
demand accounts          $    647,037     $     262              0.16     $    535,708     $     207              0.15
Money market accounts       1,234,091         1,818              0.58        1,041,986         1,440              0.55
Savings accounts              471,849            86              0.07          464,091            92              0.08
Time deposits               4,069,612         8,206              0.80        4,129,075         9,492              0.91
Total interest-bearing
deposits                    6,422,589        10,372              0.64        6,170,860        11,231              0.72

Securities sold under
agreements to
repurchase                    855,435         8,402              3.90        1,358,152        13,734              4.02
Other borrowings               82,822           150              0.72           40,030            74              0.74
Long-term debt                171,136           930              2.16          171,136         1,291              3.00
Total interest-bearing
liabilities                 7,531,982        19,854              1.05        7,740,178        26,330              1.35
Non-interest bearing
liabilities:
Demand deposits             1,353,451                                        1,209,253
Other liabilities              86,452                                           95,741
Total equity                1,547,606                                        1,592,696
Total liabilities and
equity                   $ 10,519,491                                     $ 10,637,868
Net interest spread
(4)                                                              3.10 %                                           2.97 %
Net interest income
(4)                                       $  82,608                                        $  80,975
Net interest margin
(4)                                                              3.35 %                                           3.26 %

(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,
                                                            2013-2012
                                                      Increase (Decrease) in
                                                   Net Interest Income Due to:
                                       Changes in            Changes in            Total
(Dollars in thousands)                   Volume                 Rate               Change

Interest-earning assets:
Loans and leases                               7,497                (6,683 )              814
Taxable securities                            (2,026 )              (2,263 )           (4,289 )
Tax-exempt securities (2)                     (1,594 )                   -             (1,594 )
Federal Home Loan Bank stock                     (25 )                 417                392
Deposits with other banks                       (360 )                 196               (164 )
Federal funds sold and securities
purchased under agreements to
resell                                            (2 )                   -                 (2 )
Total decrease in interest income              3,490                (8,333 )           (4,843 )

Interest-bearing liabilities:
Interest bearing demand accounts                  45                    10                 55
Money market accounts                            282                    96                378
Savings accounts                                   2                    (8 )               (6 )
Time deposits                                   (133 )              (1,153 )           (1,286 )
Securities sold under agreements
to repurchase                                 (4,917 )                (415 )           (5,332 )
Other borrowed funds                              78                    (2 )               76
Long-term debt                                     -                  (361 )             (361 )
Total decrease in interest expense            (4,643 )              (1,833 )           (6,476 )
Changes in net interest income       $         8,133       $        (6,500 )   $        1,633

(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 Credit Losses

Provision for credit losses was a credit of $3.0 million for the third quarter of 2013 compared to no provision for credit losses in the third quarter of 2012. The provision for credit losses was based on the review of the adequacy of the allowance for loan losses at September 30, 2013, and reflected the net recoveries during the third quarter of 2013 of $3.6 million. The provision or reversal 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:

                                            Three months ended September 30,             Nine months ended September 30,
                                              2013                     2012                2013                  2012
                                                                          (In thousands)
Charge-offs:
Commercial loans                        $             200         $         7,387     $         4,580       $        14,479
Construction loans- residential                         -                       -                   -                   391
Construction loans- other                               -                      39                   -                   774
Real estate loans (1)                                 554                   1,441               2,873                12,351
Real estate- land loans                                 -                       2               1,318                   101
Installment and other loans                             -                       -                   -                    25
Total charge-offs                                     754                   8,869               8,771                28,121
Recoveries:
Commercial loans                                      436                     331               2,015                 1,230
Construction loans- residential                     1,046                     449               1,200                 3,712
Construction loans- other                             190                      28               1,056                 1,913
Real estate loans (1)                               1,225                     317               4,229                 6,784
Real estate- land loans                             1,447                      12               2,101                 1,178
Installment and other loans                             -                       -                  11                     3
Total recoveries                                    4,344                   1,137              10,612                14,820
Net (recoveries)/charge-offs            $          (3,590 )       $         7,732     $        (1,841 )     $        13,301

(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 $16.7 million for the third quarter of 2013, an increase of $1.1 million, or 7.0%, compared to $15.6 million for the third quarter of 2012. The increase in non-interest income in the third quarter of 2013 was primarily due to an increase of $630,000 in commissions from wealth management and an increase of $267,000 in other loan fees.

Non-Interest Expense

Non-interest expense increased $2.9 million, or 5.9%, to $50.7 million in the third quarter of 2013 compared to $47.8 million in the same quarter a year ago. The efficiency ratio was 51.01% in the third quarter of 2013 compared to 49.82% for the same quarter a year ago.

Prepayment penalties increased to $6.9 million in the third quarter of 2013 compared to $3.5 million in the same quarter a year ago. The Company prepaid securities sold under agreements to repurchase of $150.0 million in the third quarter of 2013 compared to $50.0 million in the same period a year ago. Salaries and employee benefits increased $4.3 million, or 23.3%, in the third quarter of 2013 compared to the same quarter a year ago primarily due to increases in bonus expenses, the hiring of new employees as well as an increase in the number of temporary employees assisting in the core system conversion. Offsetting the above increases were a $5.6 million decrease in litigation accrual expenses and a $1.3 million decrease in OREO expenses.


Income Taxes

The effective tax rate for the third quarter of 2013 was 36.9% compared to 36.8% in the third quarter of 2012. 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, 2013, was $81.6 million, an increase of $4.8 million, or 6.2%, compared to net income attributable to common stockholders of $76.8 million for the same period a year ago due primarily to increases in gains on sale of securities, decreases in OREO expenses, and increases in commissions from wealth management, offset by decreases in the reversal for credit losses, increases in prepayment penalties on the prepayment of securities sold under an agreement to repurchase, increases in salaries and incentive compensation expense, increases in consulting expense, and increases in legal and collection expense. Diluted earnings per share was $1.03 compared to $0.98 per share for the same period a year ago. The net interest margin for the nine months ended September 30, 2013, increased 5 basis points to 3.33% compared to 3.28% for the same period a year ago.

Return on average stockholders' equity was 7.78% and return on average assets was 1.16% for the nine months ended September 30, 2013, compared to a return on average stockholders' equity of 7.65% and a return on average assets of 1.12% for the same period of 2012. The efficiency ratio for the nine months ended September 30, 2013, was 52.09% compared to 52.12% for the same period a year ago.


The following table sets forth information concerning average interest-earning assets, average interest-bearing liabilities, and the average yields and rates paid on those assets and liabilities for the nine months ended September 30, 2013, and 2012. Average outstanding amounts included in the table are daily averages.

                              Interest-Earning Assets and Interest-Bearing Liabilities
                                                     Nine months ended September 30,
                                         2013                                              2012
                                       Interest         Average                          Interest         Average
(Dollars in            Average         Income/          Yield/           Average         Income/          Yield/
thousands)             Balance         Expense        Rate (1)(2)        Balance         Expense        Rate (1)(2)
Interest earning
assets:
Commercial loans     $  2,116,193     $   63,066              3.98 %   $  1,905,101     $   60,181              4.22 %
Residential
mortgage loans          1,395,749         48,806              4.66        1,207,048         44,855              4.95
Commercial
mortgage loans          3,829,366        148,627              5.19        3,690,115        156,204              5.65
Real estate
construction loans        167,282          6,953              5.56          200,836          7,952              5.29
Other loans and
leases                     15,849            105              0.89           16,874            294              2.33
Total loans and
leases (1)              7,524,439        267,557              4.75        7,019,974        269,486              5.13
Taxable securities      1,977,788         34,986              2.37        2,287,967         50,046              2.92
Tax-exempt
securities (3)             38,874          1,531              5.27          131,732          4,811              4.88
Federal Home Loan
Bank stock                 35,685          1,041              3.90           49,499            190              0.51
Interest bearing
deposits                  182,820            796              0.58          354,268          1,596              0.60
Federal funds sold
and securities
purchased under
agreements to
resell                          -              -                 -           20,018             18              0.12
Total
interest-earning
assets                  9,759,606        305,911              4.19        9,863,458        326,147              4.42
Non-interest
earning assets:
Cash and due from
banks                     144,992                                           124,037
Other non-earning
assets                    759,161                                           827,091
Total non-interest
earning assets            904,153                                           951,128
Less: Allowance
for loan losses          (181,206 )                                        (197,638 )
Deferred loan fees        (11,223 )                                          (8,289 )
Total assets         $ 10,471,330                                      $ 10,608,659

Interest bearing
liabilities:
Interest bearing
demand accounts      $    623,554     $      745              0.16     $    498,613     $      568              0.15
Money market
accounts                1,178,812          4,990              0.57        1,012,603          4,287              0.57
Savings accounts          483,715            275              0.08          444,882            275              0.08
Time deposits           3,975,160         23,700              0.80        4,278,222         32,067              1.00
Total
interest-bearing
deposits                6,261,241         29,710              0.63        6,234,320         37,197              0.80

Securities sold
under agreements
to repurchase           1,030,403         29,778              3.86        1,385,949         42,987              4.14
Other borrowings           67,613            375              0.74           36,518            196              0.72
Long-term debt            171,136          2,778              2.17          171,136          3,895              3.04
Total
interest-bearing
liabilities             7,530,393         62,641              1.11        7,827,923         84,275              1.44
Non-interest
bearing
liabilities:
Demand deposits         1,284,579                                         1,130,830
Other liabilities          79,486                                            86,113
Total equity            1,576,872                                         1,563,793
. . .
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