UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
|
For
the
quarterly period ended March
31, 2007
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For
the
transition period from ___________________________ to
___________________________
Commission
file number 0-18630
CATHAY
GENERAL BANCORP
|
(Exact
name of registrant as specified in its
charter)
|
Delaware
|
|
95-4274680
|
(State
of other jurisdiction of incorporation
|
|
(I.R.S.
Employer
|
or
organization)
|
|
Identification
No.)
|
|
|
|
777
North Broadway, Los Angeles, California
|
|
90012
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
|
|
Registrant's
telephone number, including area code:
|
|
(213)
625-4700 |
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes R No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer R |
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No R
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, 51,177,824 shares outstanding as of April 30,
2007.
CATHAY
GENERAL BANCORP AND SUBSIDIARIES
1ST
QUARTER 2007 REPORT ON FORM 10-Q
TABLE
OF CONTENTS
PART
I -
|
FINANCIAL
INFORMATION |
4
|
|
|
|
|
|
Item 1.
|
FINANCIAL
STATEMENTS (Unaudited) |
4 |
|
|
NOTES
TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) |
7 |
|
Item
2. |
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS |
17
|
|
Item 3. |
QUANTITATIVE
AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
36
|
|
Item 4. |
CONTROLS
AND
PROCEDURES |
37
|
|
|
|
|
PART II
- |
OTHER
INFORMATION |
37
|
|
|
|
|
|
Item 1. |
LEGAL
PROCEEDINGS |
37
|
|
Item 1A. |
RISK
FACTORS |
38
|
|
Item 2. |
UNREGISTERED
SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS |
38
|
|
Item 3. |
DEFAULTS
UPON SENIOR
SECURITIES |
39
|
|
Item 4. |
SUBMISSION
OF
MATTERS TO A VOTE OF SECURITY HOLDERS |
39
|
|
Item 5. |
OTHER
INFORMATION |
39
|
|
Item 6. |
EXHIBITS |
39
|
|
|
|
|
SIGNATURES
|
40
|
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. These forward-looking statements may include, but are not
limited to, such words as "believes," "expects," "anticipates," "intends,"
"plans," "estimates," "may," "will," "should," "could," "predicts," "potential,"
"continue," or the negative of such terms and other comparable terminology
or
similar expressions. Forward-looking statements are not guarantees. They involve
known and unknown risks, uncertainties, and other factors that may cause the
actual results, performance, or achievements of the Bancorp to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. Such risks and uncertainties and
other factors include, but are not limited to adverse developments or conditions
related to or arising from:
· |
expansion
into new market areas;
|
· |
acquisitions
of other banks, if any;
|
· |
fluctuations
in interest rates;
|
· |
earthquake
or other natural disasters;
|
· |
deterioration
in asset or credit quality;
|
· |
legislative
and regulatory developments;
|
· |
changes
in business strategy; and
|
· |
general
economic or business conditions in California and other regions where
the
Bank has operations.
|
These
and
other factors are further described in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2006 (at Part I - Item 1A, in particular),
its
reports and registration statements filed with the Securities and Exchange
Commission (“SEC”), and other filings it makes in the future 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, we
caution readers not to place undue reliance on any forward-looking statements,
which speak as of the date of this report. The Company has no intention and
undertakes no obligation to update any forward-looking statement or to publicly
announce the results of any revision of any forward-looking statement to reflect
future developments or events.
The
Company’s filings with the SEC are available to the public from commercial
document retrieval services and at the website maintained by the SEC at
http://www.sec.gov,
or by
requests directed to Cathay General Bancorp, 777 North Broadway, Los Angeles,
California 90012, Attn: Investor Relations (213) 625-4749.
PART
I - FINANCIAL INFORMATION
Item
1. FINANCIAL STATEMENTS
(Unaudited)
CATHAY
GENERAL BANCORP AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
March
31, 2007
|
|
December
31, 2006
|
|
%
change
|
|
|
(In
thousands, except share and per share data)
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash
and due from banks
|
$
|
93,191
|
|
$
|
114,798
|
|
|
(19
|
)
|
Federal
funds sold
|
|
3,912
|
|
|
18,000
|
|
|
(78
|
)
|
Cash
and cash equivalents
|
|
97,103
|
|
|
132,798
|
|
|
(27
|
)
|
Short-term
investments
|
|
15,525
|
|
|
16,379
|
|
|
(5
|
)
|
Securities
purchased under agreements to resell
|
|
150,000
|
|
|
-
|
|
|
100
|
|
Long-term
certificates of deposit
|
|
50,000
|
|
|
-
|
|
|
100
|
|
Securities
available-for-sale (amortized cost of $1,873,558 in 2007 and
$1,543,667 in
2006)
|
|
1,860,194
|
|
|
1,522,223
|
|
|
22
|
|
Trading
securities
|
|
5,316
|
|
|
5,309
|
|
|
0
|
|
Loans
|
|
5,896,715
|
|
|
5,747,546
|
|
|
3
|
|
Less:
Allowance for loan losses
|
|
(65,317
|
)
|
|
(64,689
|
)
|
|
1
|
|
Unamortized
deferred loan fees, net
|
|
(11,354
|
)
|
|
(11,984
|
)
|
|
(5
|
)
|
Loans,
net
|
|
5,820,044
|
|
|
5,670,873
|
|
|
3
|
|
Federal
Home Loan Bank stock
|
|
50,094
|
|
|
34,348
|
|
|
46
|
|
Other
real estate owned, net
|
|
4,511
|
|
|
5,259
|
|
|
(14
|
)
|
Affordable
housing investments, net
|
|
85,623
|
|
|
87,289
|
|
|
(2
|
)
|
Premises
and equipment, net
|
|
75,352
|
|
|
72,934
|
|
|
3
|
|
Customers’
liability on acceptances
|
|
24,987
|
|
|
27,040
|
|
|
(8
|
)
|
Accrued
interest receivable
|
|
44,605
|
|
|
39,267
|
|
|
14
|
|
Goodwill
|
|
320,500
|
|
|
316,752
|
|
|
1
|
|
Other
intangible assets, net
|
|
41,610
|
|
|
42,987
|
|
|
(3
|
)
|
Other
assets
|
|
43,315
|
|
|
53,050
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
8,688,779
|
|
$
|
8,026,508
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing
demand deposits
|
$
|
778,965
|
|
$
|
781,492
|
|
|
(0
|
)
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
|
NOW
deposits
|
|
236,601
|
|
|
239,589
|
|
|
(1
|
)
|
Money
market deposits
|
|
677,406
|
|
|
657,689
|
|
|
3
|
|
Savings
deposits
|
|
351,432
|
|
|
358,827
|
|
|
(2
|
)
|
Time
deposits under $100,000
|
|
1,032,774
|
|
|
1,007,637
|
|
|
2
|
|
Time
deposits of $100,000 or more
|
|
2,647,562
|
|
|
2,630,072
|
|
|
1
|
|
Total
deposits
|
|
5,724,740
|
|
|
5,675,306
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased
|
|
13,000
|
|
|
50,000
|
|
|
(74
|
)
|
Securities
sold under agreement to repurchase
|
|
738,300
|
|
|
400,000
|
|
|
85
|
|
Advances
from the Federal Home Loan Bank
|
|
974,680
|
|
|
714,680
|
|
|
36
|
|
Other
borrowings from financial institutions
|
|
10,000
|
|
|
10,000
|
|
|
-
|
|
Other
borrowings for affordable housing investments
|
|
19,777
|
|
|
19,981
|
|
|
(1
|
)
|
Long-term
debt
|
|
150,517
|
|
|
104,125
|
|
|
45
|
|
Acceptances
outstanding
|
|
24,987
|
|
|
27,040
|
|
|
(8
|
)
|
Minority
interest in consolidated subsidiary
|
|
8,500
|
|
|
8,500
|
|
|
-
|
|
Other
liabilities
|
|
85,640
|
|
|
73,802
|
|
|
16
|
|
Total
liabilities
|
|
7,750,141
|
|
|
7,083,434
|
|
|
9
|
|
Commitments
and contingencies
|
|
-
|
|
|
-
|
|
|
-
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; 10,000,000 shares authorized, none
issued
|
|
-
|
|
|
-
|
|
|
-
|
|
Common
stock, $0.01 par value, 100,000,000 shares authorized, 53,410,621
issued
and 51,154,356 outstanding at March 31, 2007 and 53,309,317
issued and
51,930,955 outstanding at December 31, 2006
|
|
534
|
|
|
533
|
|
|
0
|
|
Additional
paid-in-capital
|
|
471,650
|
|
|
467,591
|
|
|
1
|
|
Accumulated
other comprehensive loss, net
|
|
(7,745
|
)
|
|
(12,428
|
)
|
|
(38
|
)
|
Retained
earnings
|
|
537,455
|
|
|
520,689
|
|
|
3
|
|
Treasury
stock, at cost (2,256,265 shares at March 31, 2007 and 1,378,362
shares at
December 31, 2006)
|
|
(63,256
|
)
|
|
(33,311
|
)
|
|
90
|
|
Total
stockholders’ equity
|
|
938,638
|
|
|
943,074
|
|
|
(0
|
)
|
Total
liabilities and stockholders’ equity
|
$
|
8,688,779
|
|
$
|
8,026,508
|
|
|
8
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements
|
|
|
|
|
|
|
|
|
|
CATHAY
GENERAL BANCORP AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
|
|
Three
months ended March 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands, except share and per share data)
|
|
INTEREST
AND DIVIDEND INCOME
|
|
|
|
|
|
Loan
receivable, including loan fees
|
|
$
|
114,179
|
|
$
|
90,086
|
|
Securities
available-for-sale - taxable
|
|
|
21,815
|
|
|
13,146
|
|
Securities
available-for-sale - nontaxable
|
|
|
599
|
|
|
722
|
|
Federal
Home Loan Bank stock
|
|
|
509
|
|
|
348
|
|
Agency
preferred stock
|
|
|
164
|
|
|
209
|
|
Federal
funds sold and securities
|
|
|
|
|
|
|
|
purchased
under agreements to resell
|
|
|
3,802
|
|
|
28
|
|
Deposits
with banks
|
|
|
786
|
|
|
67
|
|
Total
interest and dividend income
|
|
|
141,854
|
|
|
104,606
|
|
INTEREST
EXPENSE
|
|
|
|
|
|
|
|
Time
deposits of $100,000 or more
|
|
|
31,152
|
|
|
21,438
|
|
Other
deposits
|
|
|
17,987
|
|
|
9,893
|
|
Securities
sold under agreements to repurchase
|
|
|
5,717
|
|
|
2,513
|
|
Advances
from Federal Home Loan Bank
|
|
|
11,781
|
|
|
3,799
|
|
Long-term
debt
|
|
|
1,976
|
|
|
1,041
|
|
Short-term
borrowings
|
|
|
489
|
|
|
781
|
|
Total
interest expense
|
|
|
69,102
|
|
|
39,465
|
|
Net
interest income before provision for loan losses
|
|
|
72,752
|
|
|
65,141
|
|
Provision
for loan losses
|
|
|
1,000
|
|
|
1,500
|
|
Net
interest income after provision for loan losses
|
|
|
71,752
|
|
|
63,641
|
|
NON-INTEREST
INCOME
|
|
|
|
|
|
|
|
Securities
gains, net
|
|
|
191
|
|
|
27
|
|
Letters
of credit commissions
|
|
|
1,292
|
|
|
1,069
|
|
Depository
service fees
|
|
|
1,346
|
|
|
1,255
|
|
Other
operating income
|
|
|
3,055
|
|
|
2,724
|
|
Total
non-interest income
|
|
|
5,884
|
|
|
5,075
|
|
NON-INTEREST
EXPENSE
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
16,977
|
|
|
14,040
|
|
Occupancy
expense
|
|
|
2,768
|
|
|
2,080
|
|
Computer
and equipment expense
|
|
|
2,225
|
|
|
1,610
|
|
Professional
services expense
|
|
|
1,728
|
|
|
1,641
|
|
FDIC
and State assessments
|
|
|
259
|
|
|
249
|
|
Marketing
expense
|
|
|
901
|
|
|
695
|
|
Other
real estate owned expense
|
|
|
244
|
|
|
85
|
|
Operations
of affordable housing investments, net
|
|
|
944
|
|
|
1,299
|
|
Amortization
of core deposit intangibles
|
|
|
1,765
|
|
|
1,401
|
|
Other
operating expense
|
|
|
2,418
|
|
|
2,226
|
|
Total
non-interest expense
|
|
|
30,229
|
|
|
25,326
|
|
Income
before income tax expense
|
|
|
47,407
|
|
|
43,390
|
|
Income
tax expense
|
|
|
17,441
|
|
|
16,054
|
|
Net
income
|
|
|
29,966
|
|
|
27,336
|
|
Other
comprehensive gain (loss), net of tax
|
|
|
|
|
|
|
|
Unrealized
holding gains (losses) arising during the period
|
|
|
4,500
|
|
|
(6,864
|
)
|
Less:
reclassification adjustments included in net income
|
|
|
(183
|
)
|
|
(25
|
)
|
Total
other comprehensive gain (loss), net of tax
|
|
|
4,683
|
|
|
(6,839
|
)
|
Total
comprehensive income
|
|
$
|
34,649
|
|
$
|
20,497
|
|
Net
income per common share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.58
|
|
$
|
0.54
|
|
Diluted
|
|
$
|
0.57
|
|
$
|
0.54
|
|
Cash
dividends paid per common share
|
|
$
|
0.09
|
|
$
|
0.09
|
|
Basic
average common shares outstanding
|
|
|
51,684,754
|
|
|
50,226,768
|
|
Diluted
average common shares outstanding
|
|
|
52,295,229
|
|
|
50,797,859
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
|
CATHAY
GENERAL BANCORP AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three
Months Ended March 31
|
|
|
|
2007
|
|
2006
|
|
|
|
(In
thousands)
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
Net
income
|
|
$ |
29,966
|
|
$
|
27,336
|
|
Adjustments
to reconcile net income to net cash provided by operting
activities:
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
1,000
|
|
|
1,500
|
|
Provision
for losses on other real estate owned
|
|
|
210
|
|
|
-
|
|
Deferred
tax liability (benefit)
|
|
|
3,411
|
|
|
(1,189
|
)
|
Depreciation
|
|
|
1,091
|
|
|
771
|
|
Net
gains on sale of other real estate owned
|
|
|
(7
|
)
|
|
-
|
|
Net
gains on sale of loans held for sale
|
|
|
(61
|
)
|
|
(28
|
)
|
Proceeds
from sale of loans held for sale
|
|
|
888
|
|
|
343
|
|
Originations
of loans held for sale
|
|
|
(813
|
)
|
|
(314
|
)
|
Write-downs
on venture capital investments
|
|
|
418
|
|
|
418
|
|
(Gain)/loss
on sales and calls of securities
|
|
|
(183
|
)
|
|
4
|
|
Decrease
/ (increase) in fair value of warrants
|
|
|
28
|
|
|
(855
|
)
|
Other
non-cash interest
|
|
|
117
|
|
|
294
|
|
Amortization
of security premiums, net
|
|
|
569
|
|
|
830
|
|
Amortization
of intangibles
|
|
|
1,797
|
|
|
1,429
|
|
Excess
tax benefit from stock options
|
|
|
(420
|
)
|
|
(242
|
)
|
Stock
based compensation expense
|
|
|
2,033
|
|
|
1,755
|
|
Gain
on sale of premises and equipment
|
|
|
24
|
|
|
-
|
|
(Decrease)/increase
in deferred loan fees, net
|
|
|
(1,528
|
)
|
|
806
|
|
Increase
in accrued interest receivable
|
|
|
(5,067
|
)
|
|
(1,602
|
)
|
Decrease/(increase)
in other assets, net
|
|
|
676
|
|
|
(6,812
|
)
|
Increase
in other liabilities
|
|
|
8,985
|
|
|
25,416
|
|
Net
cash provided by operating activities
|
|
|
43,134
|
|
|
49,860
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
Decrease
in short-term investment
|
|
|
854
|
|
|
-
|
|
Increase
in long-term investment
|
|
|
(50,000
|
)
|
|
-
|
|
Increase
in securities purchased under agreements to resell
|
|
|
(150,000
|
)
|
|
-
|
|
Purchase
of investment securities available-for-sale
|
|
|
(559,976
|
)
|
|
(166,997
|
)
|
Proceeds
from maturity and call of investment securities available-for-sale
|
|
|
121,038
|
|
|
3,066
|
|
Proceeds
from sale of investment securities available-for-sale
|
|
|
86,175
|
|
|
-
|
|
Proceeds
from repayment and sale of mortgage-backed securities available-for-sale
|
|
|
36,798
|
|
|
42,515
|
|
Exercise
of warrants to acquire common stock
|
|
|
-
|
|
|
(2,209
|
)
|
Proceeds
from sale of common stock acquired from exercise of warrants
|
|
|
-
|
|
|
3,679
|
|
Purchase
of Federal Home Loan Bank stock
|
|
|
(15,248
|
)
|
|
-
|
|
Net
increase in loans
|
|
|
(111,096
|
)
|
|
(360,602
|
)
|
Purchase
of premises and equipment
|
|
|
(3,111
|
)
|
|
(452
|
)
|
Proceeds
from sales of premises and equipment
|
|
|
10
|
|
|
-
|
|
Proceeds
from sale of other real estate owned
|
|
|
918
|
|
|
-
|
|
Net
increase in investment in affordable housing
|
|
|
(3,581
|
)
|
|
(544
|
)
|
Acquisition
of United Heritage Bank, net of cash acquired
|
|
|
(3,655
|
)
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(650,874
|
)
|
|
(481,544
|
)
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
Net
(decrease)/increase in demand deposits, NOW accounts, money market
and
saving deposits
|
|
|
(8,177
|
)
|
|
17,305
|
|
Net
increase in time deposits
|
|
|
3,445
|
|
|
90,809
|
|
Net
increase in federal funds purchased and securities sold under agreement
to
repurchase
|
|
|
301,300
|
|
|
141,000
|
|
Advances
from Federal Home Loan Bank
|
|
|
1,108,000
|
|
|
802,050
|
|
Repayment
of Federal Home Loan Bank borrowings
|
|
|
(848,000
|
)
|
|
(607,050
|
)
|
Cash
dividends
|
|
|
(4,676
|
)
|
|
(4,518
|
)
|
Issuance
of long-term debt
|
|
|
45,000
|
|
|
-
|
|
Proceeds
from shares issued to Dividend Reinvestment Plan
|
|
|
576
|
|
|
731
|
|
Proceeds
from exercise of stock options
|
|
|
1,031
|
|
|
748
|
|
Excess
tax benefits from share-based payment arrangements
|
|
|
420
|
|
|
242
|
|
Purchase
of treasury stock
|
|
|
(26,874
|
)
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
572,045
|
|
|
441,317
|
|
(Decrease)/Increase
in cash and cash equivalents
|
|
|
(35,695
|
)
|
|
9,633
|
|
Cash
and cash equivalents, beginning of the period
|
|
|
132,798
|
|
|
109,275
|
|
Cash
and cash equivalents, end of the year
|
|
$ |
97,103
|
|
$
|
118,908
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
Cash
paid during the period:
|
|
|
|
|
|
|
|
Interest
|
|
$ |
68,683
|
|
$
|
37,231
|
|
Income
taxes
|
|
$ |
3,462
|
|
$
|
4,887
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Net
change in unrealized holding gains (loss) on securities
available-for-sale, net of tax
|
|
$ |
4,683
|
|
$
|
(6,839
|
)
|
Cumulative
effect adjustment as result of adoption of FASB Interpretation
no.
48
|
|
|
|
|
|
|
|
Accounting
for Uncertainty in Income Taxes
|
|
$ |
(8,524
|
)
|
$
|
-
|
|
Transfers
to other real estate owned
|
|
$ |
373
|
|
$
|
3,087
|
|
See
Accompanying Notes to Unaudited Condensed Consolidated Financial
Statements.
|
CATHAY
GENERAL BANCORP AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1.
Business
Cathay
General Bancorp (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.,
(together the “Company” or “we”, “us,” or “our”). The Bancorp also owns 100% of
the common stock of four 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 March 31, 2007, the Bank operates twenty branches
in Southern California, ten branches in Northern California, three branches
in
Illinois, two branches in Washington State, nine branches in New York State,
one
branch in Massachusetts, one branch in Houston, Texas, one branch in New Jersey
and one loan production office in Dallas, Texas, plus representative offices
in
Taipei, Hong Kong, and Shanghai.
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. At
the
close of business on March 30, 2007, the Company completed the acquisition
of
New Jersey-based
United
Heritage Bank (“UHB”) for cash of $9.4 million. As of March 30, 2007, UHB had
$58.9 million in assets and $4.3 million in stockholders’ equity.
The
acquisition was accounted for using the purchase method of accounting in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141,
“Business Combinations.” The assets acquired and liabilities assumed were
recorded by the Company at their fair values as of March 31, 2007:
|
|
United
Heritage Bank
|
|
Assets
acquired:
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,745
|
|
Securities
available-for-sale
|
|
|
14,305
|
|
Loans,
net
|
|
|
38,036
|
|
Premises
and equipment, net
|
|
|
432
|
|
Goodwill
|
|
|
3,575
|
|
Core
deposit intangible
|
|
|
410
|
|
Other
assets
|
|
|
2,161
|
|
Total
assets acquired
|
|
|
64,664
|
|
Liabilities
assumed:
|
|
|
|
|
Deposits
|
|
|
54,166
|
|
Accrued
interest payable
|
|
|
9
|
|
Other
liabilities
|
|
|
1,089
|
|
Total
liabilities assumed
|
|
|
55,264
|
|
Net
assets acquired
|
|
$
|
9,400
|
|
Cash
paid
|
|
$
|
9,400
|
|
Fair
value of common stock issued
|
|
|
-
|
|
Total
consideration paid
|
|
$
|
9,400
|
|
No
loans
acquired as part of the acquisition of UHB were determined to be impaired and
therefore no loans were within the scope of Statement of Position (SOP) 03-3,
“Accounting for Certain Loans or Debt Securities Acquired in a Transfer”. In
addition, the estimated other costs related to the acquisition were recorded
as
a liability at closing when allocating the related purchase price. The purchase
price allocation is still preliminary and subject to final determination and
valuation of the fair value of assets acquired and liabilities assumed.
For
each
acquisition, we developed 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 were included in the allocation of the
purchase price at the acquisition date based on our formal integration
plans.
Goodwill
increased $3.7 million during the first quarter of 2007 primarily due to the
UHB
acquisition and also due to a $172,000 adjustment for the payment of contract
termination expenses net of tax that related to the New Asia Bancorp, Inc.
acquisition.
The
following table presents the activity in the merger-related liability account
that was allocated to the purchase price for the three months ended March 31,
2007:
|
|
Severance
and
|
|
Asset
|
|
Legal
and
|
|
Lease
|
|
|
|
(Dollar
in thousands)
|
|
Employee-related
|
|
Write-downs
|
|
Professional
Fees
|
|
Liability
|
|
Total
|
|
Balance
at December 31, 2006
|
|
$
|
31
|
|
$
|
-
|
|
$
|
5
|
|
$
|
778
|
|
$
|
814
|
|
United
Heritage Bank Acquisition
|
|
|
300
|
|
|
17
|
|
|
332
|
|
|
-
|
|
|
649
|
|
Non-cash
write-downs and other
|
|
|
-
|
|
|
(17
|
)
|
|
-
|
|
|
-
|
|
|
(17
|
)
|
Cash
outlays
|
|
|
(2
|
)
|
|
-
|
|
|
(237
|
)
|
|
(39
|
)
|
|
(278
|
)
|
Balance
at March 31, 2007
|
|
$
|
329
|
|
$
|
-
|
|
$
|
100
|
|
$
|
739
|
|
$
|
1,168
|
|
On
March
31, 2006, the Bank announced an agreement to buy a 20% stake in First Sino
Bank,
a Shanghai-based joint venture bank, for an estimated purchase price of $52.2
million. This investment was subject to regulatory approval from the China
Bank
Regulatory Commission in China and Cathay Bank's regulators in the United States
and other customary closing conditions. The agreement provided that it could
be
terminated by either party if all conditions to closing were not fulfilled
or
waived prior to September 30, 2006. By mutual agreement of the parties, this
closing date was extended to November 15, 2006. The parties have not further
extended this closing date and the agreement can therefore be terminated by
either party upon written notice.
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, 2007. 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, 2006.
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.
4.
Recent Accounting Pronouncements
SFAS
No. 155, "Accounting
for Certain Hybrid Financial Instruments - an amendment of FASB Statements
No.
133 and 140."
(“SFAS
155”) amends SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" and SFAS 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." SFAS 155 (i) permits
fair value remeasurement for any hybrid financial instrument that contains
an
embedded derivative that otherwise would require bifurcation, (ii) clarifies
which interest-only strips and principal-only strips are not subject to the
requirements of SFAS 133, (iii) establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation, (iv) clarifies that concentrations
of credit risk in the form of subordination are not embedded derivatives, and
(v) amends SFAS 140 to eliminate the prohibition on a qualifying special
purpose entity from holding a derivative financial instrument that pertains
to a
beneficial interest other than another derivative financial instrument.
SFAS 155 is effective for the Company on January 1, 2007. There was no
material impact on the Company's financial statements from adoption of this
standard.
SFAS
No. 156, "Accounting
for Servicing of Financial Assets - an amendment of FASB Statement
No. 140"
(“SFAF
156”) amends SFAS 140.
"Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities - a replacement of FASB Statement No. 125,"
by
requiring, in certain situations, an entity to recognize a servicing asset
or
servicing liability each time it undertakes an obligation to service a financial
asset by entering into a servicing contract. All separately recognized servicing
assets and servicing liabilities are required to be initially measured at fair
value. Subsequent measurement methods include the amortization method, whereby
servicing assets or servicing liabilities are amortized in proportion to and
over the period of estimated net servicing income or net servicing loss or
the
fair value method, whereby servicing assets or servicing liabilities are
measured at fair value at each reporting date and changes in fair value are
reported in earnings in the period in which they occur. If the amortization
method is used, an entity must assess servicing assets or servicing liabilities
for impairment or increased obligation based on the fair value at each reporting
date. SFAS 156 is effective for the Company on January 1, 2007. There
was no material impact on the Company’s consolidated financial statements from
adoption of this standard.
In
September 2006, the FASB issued Statement No. 157, “Fair Value Measurements”
(“SFAS 157”). SFAS 157 clarifies the definition of fair value, together with a
framework for measuring fair value, and expands disclosures about fair value
measurements. SFAS 157 emphasizes that fair value is a market-based measurement,
not an entity-specific measurement and requires a fair value measurement should
be determined based on the assumptions that market participants would use in
pricing the asset or liability. Market participant assumptions include
assumptions about the risk, the effect of a restriction on the sale or use
of an
asset, and the effect of a nonperformance risk for a liability. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company
has not completed its analysis to determine the impact on the Company’s
consolidated financial statements from adoption of SFAS 157.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits a
business entity to choose to measure financial instruments and certain other
items at fair value to mitigate volatility in reported earnings caused by
measuring financial instruments differently without having to apply complex
hedge accounting provisions. The fair value option may be applied instrument
by
instrument, is irrevocable and is applied only to entire instruments. Following
the initial fair value measurement date, a business entity shall report
unrealized gains and losses on financial instruments for which the fair value
option has been elected in earnings at each subsequent reporting date. SFAS
159
is effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company
has not completed its analysis to elect the fair value option on the Company’s
consolidated financial statements at the date of adoption of SFAS
159.
5.
Derivative
Financial Instruments
As
of
March 31, 2007, the Company had no interest rate swaps.
The
Company has received rights to acquire stock in the form of warrants as an
adjunct to its high technology lending relationships. All warrants with cashless
exercise provision qualify as derivatives under SFAS No. 133. Those warrants
that qualify as derivatives are carried at fair value and are included in other
assets on the consolidated balance sheets with the change in fair value included
in current earnings.
In
April
2005, the Bank took in a total of $8.9 million in one year certificates of
deposit that pay a minimum interest of 0.5% plus additional interest tied to
60%
of the appreciation of four foreign currencies against the US dollar. Under
SFAS
No. 133, a certificate of deposit that pays interest based on changes in
exchange rates is a hybrid instrument with an embedded derivative that must
be
accounted for separately from the host contract (i.e. the certificate of
deposit). These foreign currency linked certificates of deposits matured in
April 2006. The
related embedded derivative also expired at the same time. The net impact on
the
consolidated statement of income related to these currency linked certificates
of deposit was a decrease to income of $27,000 for the three months ended March
31, 2006.
6.
Earnings
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.
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:
|
|
For
the three months ended March 31,
|
|
(Dollars
in thousands, except share and per share data)
|
|
2007
|
|
2006
|
|
Net
income
|
|
$
|
29,966
|
|
$
|
27,336
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares:
|
|
|
|
|
|
|
|
Basic
weighted-average number of common shares outstanding
|
|
|
51,684,754
|
|
|
50,226,768
|
|
Dilutive
effect of weighted-average outstanding common shares
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
604,514
|
|
|
563,281
|
|
Restricted
Stock
|
|
|
5,961
|
|
|
7,810
|
|
Diluted
weighted-average number of common shares outstanding
|
|
|
52,295,229
|
|
|
50,797,859
|
|
|
|
|
|
|
|
|
|
Average
shares of stock options with anti-dilutive effect
|
|
|
1,451,290
|
|
|
1,603,806
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.58
|
|
$
|
0.54
|
|
Diluted
|
|
$
|
0.57
|
|
$
|
0.54
|
|
7.
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, 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 stockholders 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
non-vested stock. In conjunction with the approval of the 2005 Incentive Plan,
the Bancorp agreed to cease granting awards under the Equity Incentive Plan.
As
of March 31, 2007, 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 for 245,060 shares granted on March 22, 2005 of which 30% vested
immediately, 10% vested on November 20, 2005 and an additional 20% would vest
on
November 20, 2006, 2007 and 2008, respectively, and 264,694 shares granted
on
May 22, 2005 of which 40% vested on November 20, 2005 and an additional 20%
would vest on November 20, 2006, 2007, and 2008, respectively. 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. The Company
has
postponed awarding stock options in 2007 because it is considering changes
to
its stock option program. The Company expects to issue new shares to satisfy
stock option exercises.
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. Option
compensation expense totaled $1.9 million for the three months ended March
31,
2007 and $1.7 million for the same quarter a year ago.
Stock-based compensation is recognized ratably over the requisite service period
for all awards. Unrecognized stock-based compensation expense related to stock
options totaled $18.6 million at March 31, 2007 and is expected to be recognized
over the next 3.0 years.
The
weighted average per share fair value on the date of grant of the options
granted was $13.45 during the first three months of 2006. There
was
no option granted for
the
first three months of 2007. 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:
|
|
Three
months ended
|
|
|
|
March
31, 2006
|
|
Expected
life- number of years
|
|
|
6.5
|
|
Risk-free
interest rate
|
|
|
4.38
|
%
|
Volatility
|
|
|
33.18
|
%
|
Dividend
yield
|
|
|
1.20
|
%
|
Cash
received from exercises of stock options totaled $1.0 million from 63,522
exercised shares during the three months ended March 31, 2007 and $748,000
from
39,916 exercised shares during the three months ended March 31,2006.
The
fair
value of stock options vested during the first quarter of 2007 was $5.1 million
compared to $4.4 million for the first quarter of 2006. Aggregate intrinsic
value for options exercised were $1.1 million during the three months ended
March 31, 2007 and $685,000 during the three months ended March 31, 2006. The
table below summarizes stock option activity for the quarters ended March 31,
2007:
|
|
|
|
|
|
Weighted-Average
|
|
Aggregate
|
|
|
|
|
|
Weighted-Average
|
|
Remaining
Contractual |
|
Intrinsic
|
|
|
|
Shares
|
|
Exercise
Price
|
|
Life
(in years)
|
|
Value
(in thousands)
|
|
Balance
at December 31, 2006
|
|
|
4,783,027
|
|
$
|
28.09
|
|
|
7.0
|
|
$
|
34,011
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(9,706
|
)
|
|
36.19
|
|
|
|
|
|
|
|
Exercised
|
|
|
(63,522
|
)
|
|
16.22
|
|
|
|
|
|
|
|
Balance
at March 31, 2007
|
|
|
4,709,799
|
|
$
|
28.24
|
|
|
6.8
|
|
$
|
31,114
|
|
Exercisable
at March 31, 2007
|
|
|
2,777,423
|
|
$
|
25.36
|
|
|
6.1
|
|
$
|
25,171
|
|
At
March
31, 2007, 2,218,765 shares were available under the Company’s 2005 Incentive
Plan for future grants. The
following table shows stock options outstanding and exercisable as of March
31,
2007, the corresponding exercise prices, and the weighted-average contractual
life remaining:
|
|
Outstanding
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
Remaining
Contractual
|
|
Exercisable
|
|
Exercise
Price
|
|
Shares
|
|
Life
(in Years)
|
|
Shares
|
|
$8.25
|
|
|
23,900
|
|
|
1.5
|
|
|
23,900
|
|
10.63
|
|
|
97,956
|
|
|
2.8
|
|
|
97,956
|
|
11.06
|
|
|
10,240
|
|
|
2.8
|
|
|
10,240
|
|
11.34
|
|
|
10,240
|
|
|
5.8
|
|
|
10,240
|
|
15.05
|
|
|
135,820
|
|
|
3.8
|
|
|
135,820
|
|
16.28
|
|
|
159,552
|
|
|
4.9
|
|
|
159,552
|
|
17.23
|
|
|
18,114
|
|
|
0.8
|
|
|
18,114
|
|
17.29
|
|
|
10,240
|
|
|
4.8
|
|
|
10,240
|
|
19.93
|
|
|
343,480
|
|
|
5.8
|
|
|
270,908
|
|
21.09
|
|
|
10,240
|
|
|
3.8
|
|
|
10,240
|
|
22.01
|
|
|
426,674
|
|
|
3.8
|
|
|
426,674
|
|
24.80
|
|
|
908,010
|
|
|
6.7
|
|
|
526,046
|
|
28.70
|
|
|
550,500
|
|
|
6.9
|
|
|
327,700
|
|
32.18
|
|
|
3,000
|
|
|
7.0
|
|
|
1,800
|
|
32.26
|
|
|
40,000
|
|
|
7.2
|
|
|
16,000
|
|
32.47
|
|
|
245,060
|
|
|
8.0
|
|
|
147,036
|
|
33.54
|
|
|
264,694
|
|
|
8.1
|
|
|
158,816
|
|
33.81
|
|
|
3,000
|
|
|
8.2
|
|
|
600
|
|
36.24
|
|
|
414,230
|
|
|
8.8
|
|
|
82,846
|
|
36.90
|
|
|
339,799
|
|
|
8.8
|
|
|
68,395
|
|
37.00
|
|
|
666,850
|
|
|
7.9
|
|
|
267,100
|
|
38.26
|
|
|
12,000
|
|
|
9.1
|
|
|
-
|
|
38.38
|
|
|
16,200
|
|
|
7.6
|
|
|
7,200
|
|
|
|
|
4,709,799
|
|
|
6.8
|
|
|
2,777,423
|
|
The
Company grants non-vested stock to its Chairman of the Board, President, and
Chief Executive Officer. The shares vest ratably over certain years if certain
annual performance criteria are met. The following table presents information
relating to the non-vested stock grants as of March 31, 2007:
|
|
Grant
date
|
|
Grant
date
|
|
|
|
January
25, 2006
|
|
January
31, 2007
|
|
Grant
shares
|
|
30,000
|
|
20,000
|
|
Vested
ratably over
|
|
3
years
|
|
2
years
|
|
Price
per share at grant
|
|
$
|
36.24
|
|
$
|
34.66
|
|
Vested
shares
|
|
|
10,000
|
|
|
-
|
|
Unvested
shares
|
|
|
20,000
|
|
|
20,000
|
|
The
stock
compensation expense recorded related to non-vested stock above was $60,000
for
the three months ended March 31, 2006 and $148,000 for the three months ended
March 31, 2007. Unrecognized stock-based compensation expense related to
non-vested stock awards was $1.3 million at March 31, 2007, and is expected
to
be recognized over the next 1.8 years.
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
financing activity. The following table summarizes the tax benefit from options
exercised:
|
|
For
the three months ended
|
|
(Dollars
in thousands)
|
|
2007
|
|
2006
|
|
Benefit
of tax deductions in excess of
|
|
|
|
|
|
grant-date
fair value
|
|
$
|
420
|
|
$ |
242 |
|
Benefit
of tax deductions on
|
|
|
|
|
|
|
|
grant-date
fair value
|
|
|
43
|
|
|
45 |
|
Total
benefit of tax deductions
|
|
$
|
463
|
|
$ |
287 |
|
8.
Securities
Purchased Under Agreements
to Resell
In
January 2007, the Company entered into three long-term resale agreements
totaling $150.0 million with the same counterparty. The agreements have terms
of
ten years with interest rates of 8.10%, 8.15%, and 8.30%, respectively. The
counterparty has the right to a quarterly call after the first year. After
the
first year, there are no interest payments on these agreements if certain swap
yield curves are inverted by more than five basis points. The collateral for
these resale agreements consists of U.S Government agency securities.
9.
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.
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)
|
|
At
March 31, 2007
|
|
At
December 31, 2006
|
|
Commitments
to extend credit
|
|
$
|
2,325,098
|
|
$
|
2,178,640
|
|
Standby
letters of credit
|
|
|
62,593
|
|
|
81,292
|
|
Other
letters of credit
|
|
|
65,924
|
|
|
79,803
|
|
Bill
of lading guarantees
|
|
|
256
|
|
|
223
|
|
Total
|
|
$
|
2,453,871
|
|
$
|
2,339,958
|
|
As
of
March 31, 2007, $17.7 million unfunded commitments for affordable housing
limited partnerships were recorded under other liabilities compared to $21.3
million at December 31, 2006.
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 instrument
is
essentially the same as that involved in making loans to customers.
10.
Securities Sold Under Agreements to Repurchase
The
Company has entered into several long-term transactions involving the sale
of
securities under repurchase agreements which total $650.0 million at March
31,
2007 and $400.0 million at December 31, 2006. The terms of these agreements
at
March 31, 2007, were as follows: $200.0 million for five years, $250.0 million
for seven years, and $200.0 million for ten years. The rates are all initially
floating rate 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. At March 31, 2007, three repurchase agreements totaling $150.0
million were callable but had not been called. The interest rates on these
three
repurchase agreements range between 4.52% and 4.79% until their final maturities
in December 2010 and March 2011. In addition, there were four short term
repurchase agreements totaling $88.3 million which mature in May 2007 with
a
weighted average rate of 5.48% at March 31, 2007.
11.
Line of Credit and Subordinated Note
On
May 31, 2005, Cathay General Bancorp entered into a $30.0 million 364-day
unsecured revolving loan agreement with a commercial bank bearing an interest
rate of LIBOR plus 90 basis points and a commitment fee of 12.5 basis points
on
unused commitments. On September 29, 2006, in conjunction with the issuance
of
subordinated debt discussed below, this loan was further amended to reduce
the
commitment to $35.0 million until October 31, 2006 and to $10.0 million
thereafter. At March 31, 2007, $10.0 million was outstanding with a rate of
6.22% under this loan. The Company paid off the $10.0 million borrowing on
April
13, 2007.
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
and
bears interest at a per annum rate based on the three month LIBOR plus 110
basis
points, payable on a quarterly basis. At March 31, 2007, the per annum interest
rate on the subordinated debt was 6.45%. 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 statement of financial condition.
12.
Junior Subordinated Debt
On
March
30, 2007, Bancorp issued $46.4 million of junior subordinated debt securities
through a pooled trust preferred offering. Similar to previous offerings, these
securities were issued through a newly formed statutory business trust, Cathay
Capital Trust III, a wholly-owned subsidiary of Bancorp. The proceeds from
the
debt securities are loaned by Cathay Capital Trust III to Bancorp and are
included in long-term debt in the accompanying Condensed Consolidated Balance
Sheet. The securities issued by Cathay Capital Trust III have a scheduled
maturity of June 15, 2037 and bear interest at a per annum rate based on the
three-month LIBOR plus 148 basis points, payable on a quarterly basis. At March
31, 2007, the interest rate on the junior subordinated debt was 6.83%. The
junior subordinated debt issued qualifies as Tier 1 capital for regulatory
reporting purposes.
13.
Implementation
of FASB Interpretation No. 48
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 retains potential exposure for
assertion of an accuracy-related penalty should the FTB prevail in its position
in addition to the risk of not being successful in its refund claims.
The
FASB
issued Interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN
48”) which requires that the amount of recognized tax benefit should be the
maximum amount which is more-likely-than-not to be realized and that amounts
previously recorded that do not meet the requirements of FIN 48 be charged
as a
cumulative effect adjustment to retained earnings. As of December 31, 2006,
the
Company reflected a $12.1 million net state tax receivable related to payments
it made in April 2004 under the Voluntary Compliance Initiative program for
the
years 2000, 2001, and 2002, after giving effect to reserves for loss
contingencies on the refund claims. The Company has determined that its refund
claim related to its regulated investment company is not more-likely-than-not
to
be realized and consequently, charged a total of $8.5 million, comprised of
the
$7.9 million after tax amount related to its refund claims as well as a $0.6
million after tax amount related to California Net Operating Losses generated
in
2001 as a result of its regulated investment company, to the balance of retained
earnings as of the January 1, 2007 effective date of FIN 48.
At
the
January 1, 2007 adoption date of FIN 48, the total amount of the Company’s
unrecognized tax benefits was $5.5 million, of which $1.7 million, if
recognized, would affect the effective tax rate. The Company recognized interest
and penalties accrued related to unrecognized tax benefits in income tax
expense. At January 1, 2007, the adoption date of FIN 48, the total amounts
of
accrued interest and penalties was $1.7 million.
The
Company’s tax returns are open for audits by the Internal Revenue Service back
to 2003 and by the Franchise Tax Board of the State of California back to 2000.
The Company is currently under audit by the Internal Revenue Service for the
years 2004 and 2005 and by the California Franchise
Tax Board for the years 2000 to 2002.
14.
Stock Repurchase Program
During
the first quarter of 2007, the Company repurchased 877,903 shares of its common
stock for $29.9 million, or $34.11 average cost per share. On March 6, 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 following the completion of March 2005’s stock repurchase
program. At March 31, 2007, 573,800 shares remain under the Company’s
March 2007 repurchase program.
On
May 8,
2007, the Company completed its March 2007 repurchase program by purchasing
573,800 shares in May 2007 for $19.4 million or $33.90 average cost per share.
Also on May 8, 2007, the Company’s Board of Directors approved a new program to
repurchase up to an aggregate of one million shares of the Company’s common
stock following the completion of March 2007 repurchase program.
15.
Premises and Equipment
In
2005,
$3.6 million was transferred from premises and equipment to other assets when
management decided to sell a bank owned building, land, and related
improvements. The $3.6 million is the lower of the carrying amount or fair
value
less estimated selling costs and is recorded as other assets as of March 31,
2007 and December 31, 2006.
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 Annual Report on Form 10-K for the year ended December
31,
2006, 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 loan 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, 2006.
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, 2006.
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,
2006.
HIGHLIGHTS
· |
First
quarter earnings increased $2.7 million, or 9.6%, compared to the
same
quarter a year ago.
|
· |
Fully
diluted earnings per share reached $0.57, increasing 5.6% compared
to the
same quarter a year ago.
|
· |
Return
on average assets was 1.45% for the quarter ended March 31, 2007,
compared
to 1.54% for the quarter ended December 31, 2006 and compared to
1.67% for
the same quarter a year ago.
|
· |
Return
on average stockholders’ equity was 12.87% for the quarter ended March 31,
2007, compared to 13.03% for the quarter ended December 31, 2006,
and
compared to 14.06% for the same quarter a year
ago.
|
· |
Gross
loans, excluding the loans acquired through United Heritage Bank,
increased by $110.6 million, or 1.92% for the quarter to $5.9 billion
at
March 31, 2007.
|
· |
The
Company completed the acquisition of United Heritage Bank at the
close of
business on March 30, 2007.
|
Income
Statement Review
Net
Income
Net
income for the first quarter of 2007 was $30.0 million, or $0.57 per diluted
share, a $2.7 million, or 9.6%, increase compared with net income of $27.3
million, or $0.54 per diluted share for the same quarter a year ago. Return
on
average assets was 1.45% and return on average stockholders’ equity was 12.87%
for the first quarter of 2007 compared with a return on average assets of 1.67%
and a return on average stockholders’ equity of 14.06% for the first quarter of
2006.
Financial
Performance
|
|
First
Quarter 2007
|
|
First
Quarter 2006
|
|
Net
income
|
|
$
|
30.0
million
|
|
$
|
27.3
million
|
|
Basic
earnings per share
|
|
$
|
0.58
|
|
$
|
0.54
|
|
Diluted
earnings per share
|
|
$
|
0.57
|
|
$
|
0.54
|
|
Return
on average assets
|
|
|
1.45
|
%
|
|
1.67
|
%
|
Return
on average stockholders’ equity
|
|
|
12.87
|
%
|
|
14.06
|
%
|
Efficiency
ratio
|
|
|
38.44
|
%
|
|
36.07
|
%
|
Net
Interest Income Before Provision for Loan Losses
The
comparability of financial information is affected by our acquisitions.
Operating results include the operations of acquired entities from the date
of
acquisition.
Net
interest income before provision for loan losses increased $7.7 million to
$72.8
million during the first quarter of 2007, or 11.7% higher than the $65.1 million
during the same quarter a year ago. The increase was due primarily to the
increases in loans and securities and higher loan prepayment fees of $0.9
million.
The
net
interest margin, on a fully taxable-equivalent basis, was 3.83% for the first
quarter of 2007. The net interest margin decreased 18-basis points from 4.01%
in
the fourth quarter of 2006 and decreased 50-basis points from 4.33% in the
first
quarter of 2006. The decrease in the net interest margin was primarily the
result of increases in investment securities that had lower yields than loans,
repricing of time deposits to reflect higher market interest rates, and
increased reliance on more expensive wholesale borrowings.
For
the
first quarter of 2007, the yield on average interest-earning assets was 7.44%
on
a fully taxable-equivalent basis, and the cost of funds on average
interest-bearing liabilities equaled 4.27%. In comparison, for the first quarter
of 2006, the yield on average interest-earning assets was 6.94% and cost of
funds on average interest-bearing liabilities equaled 3.18%. 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
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,
|
|
|
|
2007
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
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
|
|
$
|
1,234,003
|
|
$
|
24,983
|
|
|
8.21
|
%
|
$
|
1,068,271
|
|
$
|
19,577
|
|
|
7.43
|
%
|
Residential
mortgage
|
|
|
575,240
|
|
|
8,855
|
|
|
6.16
|
|
|
434,138
|
|
|
6,305
|
|
|
5.81
|
|
Commercial
mortgage
|
|
|
3,249,671
|
|
|
63,431
|
|
|
7.92
|
|
|
2,752,061
|
|
|
51,193
|
|
|
7.54
|
|
Real
estate construction loans
|
|
|
699,853
|
|
|
16,595
|
|
|
9.62
|
|
|
553,721
|
|
|
12,804
|
|
|
9.38
|
|
Other
loans and leases
|
|
|
29,192
|
|
|
315
|
|
|
4.38
|
|
|
30,460
|
|
|
207
|
|
|
2.76
|
|
Total
loans and leases (1)
|
|
|
5,787,959
|
|
|
114,179
|
|
|
8.00
|
|
|
4,838,651
|
|
|
90,086
|
|
|
7.55
|
|
Taxable
securities
|
|
|
1,578,706
|
|
|
21,815
|
|
|
5.60
|
|
|
1,161,798
|
|
|
13,146
|
|
|
4.59
|
|
Tax-exempt
securities (3)
|
|
|
75,549
|
|
|
1,148
|
|
|
6.16
|
|
|
86,755
|
|
|
1,400
|
|
|
6.54
|
|
Federal
Home Loan Bank Stock
|
|
|
44,957
|
|
|
509
|
|
|
4.59
|
|
|
29,756
|
|
|
348
|
|
|
4.74
|
|
Interest
bearing deposits
|
|
|
47,822
|
|
|
786
|
|
|
6.67
|
|
|
19,340
|
|
|
67
|
|
|
1.41
|
|
Federal
funds sold & securities purchased under
agreements to resell
|
|
|
217,662
|
|
|
3,802
|
|
|
7.08
|
|
|
2,622
|
|
|
28
|
|
|
4.33
|
|
Total
interest-earning assets
|
|
|
7,752,655
|
|
|
142,239
|
|
|
7.44
|
|
|
6,138,922
|
|
|
105,075
|
|
|
6.94
|
|
Non-interest
earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
93,895
|
|
|
|
|
|
|
|
|
94,997
|
|
|
|
|
|
|
|
Other
non-earning assets
|
|
|
621,767
|
|
|
|
|
|
|
|
|
468,189
|
|
|
|
|
|
|
|
Total
non-interest earning assets
|
|
|
715,662
|
|
|
|
|
|
|
|
|
563,186
|
|
|
|
|
|
|
|
Less:
Allowance for loan losses
|
|
|
(66,308
|
)
|
|
|
|
|
|
|
|
(60,361
|
)
|
|
|
|
|
|
|
Deferred
loan fees
|
|
|
(12,233
|
)
|
|
|
|
|
|
|
|
(12,914
|
)
|
|
|
|
|
|
|
Total
assets
|
|
$
|
8,389,776
|
|
|
|
|
|
|
|
$
|
6,628,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand accounts
|
|
$
|
232,656
|
|
$
|
723
|
|
|
1.26
|
|
$
|
242,462
|
|
$
|
566
|
|
|
0.95
|
|
Money
market accounts
|
|
|
666,454
|
|
|
5,065
|
|
|
3.08
|
|
|
575,759
|
|
|
3,260
|
|
|
2.30
|
|
Savings
accounts
|
|
|
344,336
|
|
|
845
|
|
|
1.00
|
|
|
357,795
|
|
|
681
|
|
|
0.77
|
|
Time
deposits
|
|
|
3,654,859
|
|
|
42,506
|
|
|
4.72
|
|
|
3,095,301
|
|
|
26,824
|
|
|
3.51
|
|
Total
interest-bearing deposits
|
|
|
4,898,305
|
|
|
49,139
|
|
|
4.07
|
|
|
4,271,317
|
|
|
31,331
|
|
|
2.97
|
|
Federal
funds purchased
|
|
|
25,244
|
|
|
332
|
|
|
5.33
|
|
|
45,028
|
|
|
503
|
|
|
4.53
|
|
Securities
sold under agreement to repurchase
|
|
|
616,418
|
|
|
5,717
|
|
|
3.76
|
|
|
280,000
|
|
|
2,513
|
|
|
3.64
|
|
Other
borrowings
|
|
|
923,273
|
|
|
11,938
|
|
|
5.24
|
|
|
384,913
|
|
|
4,077
|
|
|
4.30
|
|
Long-term
debt
|
|
|
105,156
|
|
|
1,976
|
|
|
7.62
|
|
|
53,982
|
|
|
1,041
|
|
|
7.82
|
|
Total
interest-bearing liabilities
|
|
|
6,568,396
|
|
|
69,102
|
|
|
4.27
|
|
|
5,035,240
|
|
|
39,465
|
|
|
3.18
|
|
Non-interest
bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
772,268
|
|
|
|
|
|
|
|
|
717,599
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
104,798
|
|
|
|
|
|
|
|
|
87,429
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
944,314
|
|
|
|
|
|
|
|
|
788,565
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
8,389,776
|
|
|
|
|
|
|
|
$
|
6,628,833
|
|
|
|
|
|
|
|
Net
interest spread (4)
|
|
|
|
|
|
|
|
|
3.17
|
%
|
|
|
|
|
|
|
|
3.76
|
%
|
Net
interest income (4)
|
|
|
|
|
$
|
73,137
|
|
|
|
|
|
|
|
$
|
65,610
|
|
|
|
|
Net
interest margin (4)
|
|
|
|
|
|
|
|
|
3.83
|
%
|
|
|
|
|
|
|
|
4.33
|
%
|
(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,
|
|
2007-2006
|
|
|
|
Increase
(Decrease) in
|
|
|
|
Net
Interest Income Due to:
|
|
(Dollars
in thousands)
|
|
Changes
in
|
|
Changes
in
|
|
Total
|
|
|
|
Volume
|
|
Rate
|
|
Change
|
|
Interest-Earning
Assets:
|
|
|
|
|
|
|
|
Loans
and leases
|
|
|
18,482
|
|
|
5,611
|
|
|
24,093
|
|
Taxable
securities
|
|
|
5,363
|
|
|
3,306
|
|
|
8,669
|
|
Tax-exempt
securities (2)
|
|
|
(174
|
)
|
|
(78
|
)
|
|
(252
|
)
|
Federal
Home Loan Bank Stock
|
|
|
173
|
|
|
(12
|
)
|
|
161
|
|
Deposits
with other banks
|
|
|
204
|
|
|
515
|
|
|
719
|
|
Federal
funds sold and securities purchased
|
|
|
|
|
|
|
|
|
|
|
under
agreements to resell
|
|
|
3,745
|
|
|
29
|
|
|
3,774
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
increase in interest income
|
|
|
27,793
|
|
|
9,371
|
|
|
37,164
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand accounts
|
|
|
(24
|
)
|
|
181
|
|
|
157
|
|
Money
market accounts
|
|
|
569
|
|
|
1,236
|
|
|
1,805
|
|
Savings
accounts
|
|
|
(27
|
)
|
|
191
|
|
|
164
|
|
Time
deposits
|
|
|
5,423
|
|
|
10,259
|
|
|
15,682
|
|
Federal
funds purchased
|
|
|
(251
|
)
|
|
80
|
|
|
(171
|
)
|
Securities
sold under agreement to repurchase
|
|
|
3,117
|
|
|
87
|
|
|
3,204
|
|
Other
borrowed funds
|
|
|
6,789
|
|
|
1,072
|
|
|
7,861
|
|
Long-term
debts
|
|
|
963
|
|
|
(28
|
)
|
|
935
|
|
Total
increase in interest expense
|
|
|
16,559
|
|
|
13,078
|
|
|
29,637
|
|
Changes
in net interest income
|
|
$
|
11,234
|
|
$
|
(3,707
|
)
|
$
|
7,527
|
|
(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 loan losses was $1.0 million for the first quarter of 2007
compared to $1.5 million for the first quarter of 2006 and to no provision
for
the fourth quarter of 2006. The provision for loan losses was based on the
review of the adequacy of the allowance for loan losses at March 31, 2007.
The
provision for loan 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 loan 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,
|
|
(Dollars
in thousands)
|
|
March
31, 2007
|
|
March
31, 2006
|
|
December
31, 2006
|
|
Charge-offs
|
|
$
|
3,281
|
|
$
|
265
|
|
$
|
1,185
|
|
Recoveries
|
|
|
2,477
|
|
|
241
|
|
|
342
|
|
Net
Charge-offs
|
|
$
|
804
|
|
$
|
24
|
|
$
|
843
|
|
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 $5.9 million for the first
quarter of 2007, an increase of $809,000, or 15.9%, compared to the non-interest
income of $5.1 million for the first quarter of 2006.
For
the
first quarter of 2007, the Company recorded net securities gains of $191,000
compared to net securities gains of $27,000 for the same quarter in
2006.
Letters
of credit commissions increased $223,000, or 20.9%, to $1.3 million in the
first
quarter of 2007 from $1.1 million in the same quarter of 2006 due primarily
to
increases in export letters of credit commissions and documentary collection
commissions due in part to the acquisition of Great Eastern Bank in
April 2006.
Depository
service fees increased $91,000, or 7.3%, from $1.26 million in the first quarter
of 2006 to $1.35 million in the first quarter of 2007 due primarily to the
increases in overdraft and non-sufficient fund charges.
In
addition, other operating income increased $331,000, or 12.2%, to $3.1 million
in the first quarter of 2007 from $2.7 million in the same quarter a year ago
primarily due to increases in loan referral fees of $356,000, commissions on
safe deposit box rentals of $156,000, wealth management commissions of $138,000,
wire transfer fees of $121,000, and other miscellaneous income of $181,000
offset by a decrease in warrant income of $883,000.
Non-Interest
Expense
Non-interest
expense increased $4.9 million, or 19.4%, to $30.2 million in the first quarter
of 2007 compared to $25.3 million during the same quarter a year ago primarily
due to increases in salaries and employee benefits expenses, occupancy expenses
and computer and equipment expenses. The efficiency ratio was 38.44% for the
first quarter of 2007 compared to 36.07% in the year ago quarter and 38.82%
for
the fourth quarter of 2006.
The
increase of non-interest expense from the first quarter a year ago to the first
quarter of 2007 was primarily due to the acquisitions of Great Eastern Bank
and
New Asia Bancorp in 2006, and a combination of the following:
· |
Salaries
and employee benefits increased $2.9 million, or 20.9%, from $14.04
million in the first quarter of 2006 to $16.98 million in the first
quarter of 2007 due primarily to increases in salaries, payroll taxes
and
benefits of $2.5 million.
|
· |
Occupancy
expenses increased $688,000, or 33.1%, due to increases in depreciation
expenses, property taxes, rent expenses, utility expenses and repair
and
maintenance expenses due to
acquisitions.
|
· |
Computer
and equipment expenses increased $615,000, or 38.2%, due to the increase
in software license fees under a new data processing contract and
in
depreciation expenses.
|
· |
Marketing
expenses increased $206,000, or 29.6%, in the first quarter of 2007
compared to the same quarter a year ago due to increased donations,
sponsorships and charitable contributions.
|
· |
OREO
expenses increased $159,000 due to an additional lower of cost or
market
write-down recorded as of March 31, 2007 due to the sale of a property
which closed on April 20, 2007.
|
· |
Amortization
of core deposit intangibles increased $364,000, or 26.0%, due to
the
acquisitions completed during 2006.
|
· |
Other
operating expenses increased $192,000, or 8.6%, primarily due to
increases
in printing and supply expenses and higher operating losses.
|
Offsetting
the above increases was a $355,000, or 27.3%, decrease in operations of
affordable housing investments primarily due to a $500,000 cash distribution
from a low income housing partnership which had been fully amortized in previous
years.
Income
Taxes
The
effective tax rate was 36.8% for the first quarter of 2007, compared to 37.0%
for the same quarter a year ago and 36.4% for the full year 2006.
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 retains potential exposure for
assertion of an accuracy-related penalty should the FTB prevail in its position
in addition to the risk of not being successful in its refund claims.
The
FASB
issued Interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN
48”) which requires that the amount of recognized tax benefit should be the
maximum amount which is more-likely-than-not to be realized and that amounts
previously recorded that do not meet the requirements of FIN 48 be charged
as a
cumulative effect adjustment to retained earnings. As of December 31, 2006,
the
Company reflected a $12.1 million net state tax receivable related to payments
it made in April 2004 under the Voluntary Compliance Initiative program for
the
years 2000, 2001, and 2002, after giving effect to reserves for loss
contingencies on the refund claims. The Company has determined that its refund
claim related to its regulated investment company is not more-likely-than-not
to
be realized and consequently, charged a total of $8.5 million, comprised of
the
$7.9 million after tax amount related to its refund claims as well as a $0.6
million after tax amount related to California Net Operating Losses generated
in
2001 as a result of its regulated investment company, to the opening balance
of
retained earnings as of the January 1, 2007, effective date of FIN 48.
Balance
Sheet Review
Assets
Total
assets increased by $662.3 million, or 8.3%, to $8.7 billion at March 31, 2007,
from year-end 2006 of $8.0 billion. The increase in total assets was represented
primarily by increases in investment securities, securities purchased under
agreements to resell and loans funded by increases in securities sold under
agreement to repurchase agreements and FHLB borrowings. Securities purchased
under agreements to resell increased $150.0 million and long-term certificates
of deposit increased $50.0 million during the first quarter due to attractive
rates available on these investments
Securities
Total
securities were $1.9 billion, or 21.4%, of total assets at March 31, 2007,
compared with $1.5 billion, or 19.0%, of total assets at December 31, 2006.
The
increase of $338.0 million, or 22.2%, was primarily due to purchases of callable
agency securities which provided collateral for repurchase agreements.
The
net
unrealized loss on securities available-for-sale, which represented the
difference between fair value and amortized cost, totaled $13.4 million at
March
31, 2007, compared to a net unrealized loss of $21.4 million at year-end 2006.
The decrease in unrealized loss on securities available-for-sale was caused
by
the decrease in market interest rates during the first quarter of 2007. 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 increased
101
basis points to 5.60% for the three months ended March 31, 2007, compared with
4.59% for the same period a year ago, as securities matured, prepaid, or were
called and proceeds were reinvested at higher 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, 2007, and December 31, 2006:
|
|
March
31, 2007
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair
Value
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
U.S.
treasuries securities
|
|
$
|
998
|
|
$
|
-
|
|
$
|
1
|
|
$
|
997
|
|
U.S.
government sponsored entities
|
|
|
694,473
|
|
|
107
|
|
|
1,085
|
|
|
693,495
|
|
State
and municipal securities
|
|
|
53,810
|
|
|
715
|
|
|
71
|
|
|
54,454
|
|
Mortgage-backed
securities
|
|
|
525,251
|
|
|
732
|
|
|
12,603
|
|
|
513,380
|
|
Commercial
mortgage-backed securities
|
|
|
17,479
|
|
|
-
|
|
|
481
|
|
|
16,998
|
|
Collateralized
mortgage obligations
|
|
|
242,278
|
|
|
59
|
|
|
4,639
|
|
|
237,698
|
|
Asset-backed
securities
|
|
|
737
|
|
|
-
|
|
|
3
|
|
|
734
|
|
Corporate
bonds
|
|
|
226,782
|
|
|
1,525
|
|
|
50
|
|
|
228,257
|
|
Preferred
stock of government sponsored entities
|
|
|
11,750
|
|
|
1,880
|
|
|
-
|
|
|
13,630
|
|
Foreign
corporate bonds
|
|
|
100,000
|
|
|
564
|
|
|
13
|
|
|
100,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,873,558
|
|
$
|
5,582
|
|
$
|
18,946
|
|
$
|
1,860,194
|
|
|
|
December
31, 2006
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Fair
Value
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
U.S.
treasury securities
|
|
$
|
994
|
|
$
|
-
|
|
$
|
1
|
|
$
|
993
|
|
U.S.
government sponsored entities
|
|
|
364,988
|
|
|
67
|
|
|
3,556
|
|
|
361,499
|
|
State
and municipal securities
|
|
|
54,843
|
|
|
769
|
|
|
80
|
|
|
55,532
|
|
Mortgage-backed
securities
|
|
|
549,150
|
|
|
687
|
|
|
15,070
|
|
|
534,767
|
|
Commercial
mortgage-backed securities
|
|
|
20,554
|
|
|
-
|
|
|
588
|
|
|
19,966
|
|
Collateralized
mortgage obligations
|
|
|
251,997
|
|
|
46
|
|
|
6,417
|
|
|
245,626
|
|
Asset-backed
securities
|
|
|
783
|
|
|
-
|
|
|
3
|
|
|
780
|
|
Corporate
bonds
|
|
|
206,008
|
|
|
325
|
|
|
396
|
|
|
205,937
|
|
Preferred
stock of government sponsored entities
|
|
|
19,350
|
|
|
2,660
|
|
|
-
|
|
|
22,010
|
|
Foreign
corporate bonds
|
|
|
75,000
|
|
|
126
|
|
|
13
|
|
|
75,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,543,667
|
|
$
|
4,680
|
|
$
|
26,124
|
|
$
|
1,522,223
|
|
The
following table summarizes the scheduled maturities by security type of
securities available-for-sale, as of March 31, 2007:
|
|
As
of March 31, 2007
|
|
|
|
|
|
After
One
|
|
After
Five
|
|
|
|
|
|
|
|
One
Year
|
|
Year
to
|
|
Years
to
|
|
Over
Ten
|
|
|
|
|
|
or
Less
|
|
Five
Years
|
|
Ten
Years
|
|
Years
|
|
Total
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
Maturity
Distribution:
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury entities
|
|
$
|
997
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
997
|
|
U.S.
government sponsored entities
|
|
|
26,847
|
|
|
661,283
|
|
|
3,961
|
|
|
1,404
|
|
|
693,495
|
|
State
and municipal securities
|
|
|
1,199
|
|
|
7,555
|
|
|
27,387
|
|
|
18,313
|
|
|
54,454
|
|
Mortgage-backed
securities(1)
|
|
|
16
|
|
|
26,123
|
|
|
2,638
|
|
|
484,603
|
|
|
513,380
|
|
Commercial
mortgage-backed securities(1)
|
|
|
-
|
|
|
438
|
|
|
-
|
|
|
16,560
|
|
|
16,998
|
|
Collateralized
mortgage obligations(1)
|
|
|
5
|
|
|
-
|
|
|
8,993
|
|
|
228,700
|
|
|
237,698
|
|
Asset-backed
securities(1)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
734
|
|
|
734
|
|
Corporate
bonds
|
|
|
650
|
|
|
1,132
|
|
|
226,475
|
|
|
-
|
|
|
228,257
|
|
Preferred
stock of government sponsored entities (2)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
13,630
|
|
|
13,630
|
|
Foreign
corporate bonds
|
|
|
-
|
|
|
-
|
|
|
100,551
|
|
|
-
|
|
|
100,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,714
|
|
$
|
696,531
|
|
$
|
370,005
|
|
$
|
763,944
|
|
$
|
1,860,194
|
|
(1)
|
Securities
reflect stated maturities and do not reflect the impact of anticipated
prepayments. |
(2)
|
These
securities have no final maturity
date. |
The
Company has the ability and intent to hold the securities for a period of time
sufficient for a recovery of cost for those issues with unrealized losses.
The
temporarily impaired securities represent 68.7% of the fair value of the
Company’s securities as of March 31, 2007. Unrealized
losses for securities with unrealized losses for less than twelve months
represent 0.1%, and securities with unrealized losses for twelve months or
more
represent 2.3% of the historical cost of these securities and generally resulted
from increases in interest rates from the date that these securities were
purchased.
At March
31, 2007, 127 issues of securities had unrealized losses for 12 months or longer
and 52 issues of securities had unrealized losses of less than 12 months. All
of
these securities are investment grade, as of March 31, 2007. At March 31, 2007,
management believes the impairment is temporary and, accordingly, no impairment
loss has been recognized in the Company’s consolidated statements of income. The
table below shows the fair value, unrealized losses and number of issuances
as
of March 31, 2007, of the temporarily impaired securities in the Company’s
available-for-sale securities portfolio:
|
|
Temporarily
Impaired Securities as of March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than 12 months
|
|
12
months or longer
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
No.
of
|
|
Fair
|
|
Unrealized
|
|
No.
of
|
|
Fair
|
|
Unrealized
|
|
No.
of
|
|
|
|
Value
|
|
Losses
|
|
Issuances
|
|
Value
|
|
Losses
|
|
Issuances
|
|
Value
|
|
Losses
|
|
Issuances
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
of securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. Treasury entities
|
|
$
|
998
|
|
$
|
1
|
|
|
1
|
|
$
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
998
|
|
$
|
1
|
|
|
1
|
|
U.S.
government sponsored entities
|
|
|
424,721
|
|
|
312
|
|
|
31
|
|
|
94,486
|
|
|
773
|
|
|
5
|
|
|
519,207
|
|
|
1,085
|
|
|
36
|
|
State
and municipal securities
|
|
|
3,636
|
|
|
23
|
|
|
7
|
|
|
2,349
|
|
|
48
|
|
|
5
|
|
|
5,985
|
|
|
71
|
|
|
12
|
|
Mortgage-backed
securities
|
|
|
2,845
|
|
|
14
|
|
|
10
|
|
|
448,612
|
|
|
12,589
|
|
|
77
|
|
|
451,457
|
|
|
12,603
|
|
|
87
|
|
Commercial
mortgage-backed securities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
16,997
|
|
|
481
|
|
|
3
|
|
|
16,997
|
|
|
481
|
|
|
3
|
|
Collateralized
mortgage obligations
|
|
|
5,668
|
|
|
6
|
|
|
1
|
|
|
227,375
|
|
|
4,633
|
|
|
35
|
|
|
233,043
|
|
|
4,639
|
|
|
36
|
|
Asset-backed
securities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
734
|
|
|
3
|
|
|
2
|
|
|
734
|
|
|
3
|
|
|
2
|
|
Corporate
bonds
|
|
|
24,950
|
|
|
50
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
24,950
|
|
|
50
|
|
|
1
|
|
Foreign
corporate bonds
|
|
|
24,988
|
|
|
13
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
24,988
|
|
|
13
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
487,806
|
|
$
|
419
|
|
|
52
|
|
$
|
790,553
|
|
$
|
18,527
|
|
|
127
|
|
$
|
1,278,359
|
|
$
|
18,946
|
|
|
179
|
|
Loans
The
growth of gross loans to $5.9 billion as of March 31, 2007, from $5.7 billion
as
of December 31, 2006, represents an increase of $149.2 million, or 2.6%, of
which $38.6 million resulted from the acquisition of United Heritage Bank on
March 30, 2006.
Commercial
mortgage loans increased $114.7 million, or 3.6%, to $3.3 billion at March
31,
2007, compared to $3.2 billion at year-end 2006. At March 31, 2007, this
portfolio represented approximately 56.7% of the Bank’s gross loans compared to
56.1% at year-end 2006. Residential mortgage loans increased $19.5 million,
or
4.3%, to $475.5 million at March 31, 2007 compared to $455.9 million at year-end
2006. Commercial loans increased $14.5 million, or 1.2%, to $1.26 billion at
March 31, 2007 compared to $1.24 billion at year-end 2006.
The
following table sets forth the classification of loans by type, mix, and
percentage change as of the dates indicated:
(Dollars
in thousands)
|
|
March
31, 2007
|
|
%
of Gross Loans
|
|
December
31, 2006
|
|
%
of Gross Loans
|
|
%
Change
|
|
Type
of Loans
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,258,234
|
|
|
21.3
|
%
|
$
|
1,243,756
|
|
|
21.7
|
%
|
|
1.2
|
%
|
Residential
mortgage
|
|
|
475,463
|
|
|
8.1
|
|
|
455,949
|
|
|
7.9
|
|
|
4.3
|
|
Commercial
mortgage
|
|
|
3,341,377
|
|
|
56.7
|
|
|
3,226,658
|
|
|
56.1
|
|
|
3.6
|
|
Equity
lines
|
|
|
114,137
|
|
|
1.9
|
|
|
118,473
|
|
|
2.1
|
|
|
(3.7
|
)
|
Real
estate construction
|
|
|
687,989
|
|
|
11.6
|
|
|
685,206
|
|
|
11.9
|
|
|
0.4
|
|
Installment
|
|
|
16,212
|
|
|
0.3
|
|
|
13,257
|
|
|
0.2
|
|
|
22.3
|
|
Other
|
|
|
3,303
|
|
|
0.1
|
|
|
4,247
|
|
|
0.1
|
|
|
(22.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
loans and leases
|
|
$
|
5,896,715
|
|
|
100
|
%
|
$
|
5,747,546
|
|
|
100
|
%
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(65,317
|
)
|
|
|
|
|
(64,689
|
)
|
|
|
|
|
1.0
|
|
Unamortized
deferred loan fees
|
|
|
(11,354
|
)
|
|
|
|
|
(11,984
|
)
|
|
|
|
|
(5.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans and leases, net
|
|
$
|
5,820,044
|
|
|
|
|
$
|
5,670,873
|
|
|
|
|
|
2.6
|
%
|
Asset
Quality Review
Non-performing
Assets
Non-performing
assets to gross loans and other real estate owned was 0.63% at March 31, 2007,
compared to 0.62% at December 31, 2006. Total non-performing assets increased
$1.6 million, or 4.6%, to $37.2 million at March 31, 2007, compared with $35.6
million at December 31, 2006, primarily due to a $10.1 million increase in
non-accrual loans, including $0.6 million from the acquisition of United
Heritage Bank, offset by a $7.7 million decrease in accruing loans past due
90
days or more and by a $748,000 decrease in OREO. Included in nonaccrual loans
at
March 31, 2007 was one land loan for $12.0 million which subsequent to quarter
end was reduced by a $8.1 million principal payment received on April 26, 2007.
In addition, on April 20, 2007, the sale of a $4.1 million OREO was completed
at
its recorded book value as of March 31, 2007 after reflecting the lower of
cost
or market writedown of $159,000 recorded in the first quarter of
2007.
The
following table sets forth the breakdown of non-performing assets by category
as
of the dates indicated:
(Dollars
in thousands)
|
|
March
31, 2007
|
|
December
31, 2006
|
|
Non-performing
assets
|
|
|
|
|
|
Accruing
loans past due 90 days or more
|
|
$
|
262
|
|
$
|
8,008
|
|
Non-accrual
loans
|
|
|
32,462
|
|
|
22,322
|
|
Total
non-performing loans
|
|
|
32,724
|
|
|
30,330
|
|
|
|
|
|
|
|
|
|
Other
real estate owned
|
|
|
4,511
|
|
|
5,259
|
|
Total
non-performing assets
|
|
$
|
37,235
|
|
$
|
35,589
|
|
Troubled
debt restructurings
|
|
$
|
955
|
|
$
|
955
|
|
|
|
|
|
|
|
|
|
Non-performing
assets as a percentage of gross loans and OREO
|
|
|
0.63
|
%
|
|
0.62
|
%
|
Allowance
for loan losses as a percentage of gross loans and leases
|
|
|
1.11
|
%
|
|
1.13
|
%
|
Allowance
for loan losses as a percentage of non-performing loans
|
|
|
199.60
|
%
|
|
213.28
|
%
|
Non-accrual
Loans
Non-accrual
loans increased by $10.1 million to $32.4 million at March 31, 2007, from $22.3
million at December 31, 2006.
The
following table presents non-accrual loans by type of collateral securing the
loans, as of the dates indicated:
|
|
March
31, 2007
|
|
December
31, 2006
|
|
|
|
Real
|
|
|
|
|
|
Real
|
|
|
|
|
|
|
|
Estate
(1)
|
|
Commercial
|
|
Other
|
|
Estate
(1)
|
|
Commercial
|
|
Other
|
|
|
|
(In
thousands)
|
|
Type
of Collateral
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single/
multi-family residence
|
|
$
|
6,272
|
|
$
|
179
|
|
$
|
-
|
|
$
|
7,111
|
|
$
|
180
|
|
$
|
-
|
|
Commercial
real estate
|
|
|
5,332
|
|
|
92
|
|
|
-
|
|
|
674
|
|
|
1,265
|
|
$
|
-
|
|
Land
|
|
|
12,135
|
|
|
-
|
|
|
-
|
|
|
113
|
|
|
-
|
|
|
-
|
|
UCC
|
|
|
-
|
|
|
8,070
|
|
|
-
|
|
|
-
|
|
|
12,779
|
|
|
-
|
|
Unsecured
|
|
|
-
|
|
|
362
|
|
|
-
|
|
|
-
|
|
|
200
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
-
|
|
|
20
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
23,739
|
|
$
|
8,703
|
|
$
|
20
|
|
$
|
7,898
|
|
$
|
14,424
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Real estate includes commercial mortgage loans, real estate construction
loans, and residential mortgage loans.
|
|
The
following table presents non-accrual loans by type of businesses in which the
borrowers are engaged, as of the dates indicated:
|
|
March
31, 2007
|
|
December
31, 2006
|
|
|
|
Real
|
|
|
|
|
|
Real
|
|
|
|
|
|
|
|
Estate
(1)
|
|
Commercial
|
|
Other
|
|
Estate
(1)
|
|
Commercial
|
|
Other
|
|
|
|
(In
thousands)
|
|
Type
of Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate development
|
|
$
|
22,245
|
|
$
|
-
|
|
$
|
-
|
|
$
|
6,651
|
|
$
|
-
|
|
$
|
-
|
|
Wholesale/Retail
|
|
|
631
|
|
|
2,166
|
|
|
-
|
|
|
130
|
|
|
8,631
|
|
|
-
|
|
Food/Restaurant
|
|
|
-
|
|
|
3,102
|
|
|
-
|
|
|
282
|
|
|
3,126
|
|
|
-
|
|
Import/Export
|
|
|
-
|
|
|
3,435
|
|
|
-
|
|
|
-
|
|
|
2,667
|
|
|
-
|
|
Other
|
|
|
863
|
|
|
-
|
|
|
20
|
|
|
835
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
23,739
|
|
$
|
8,703
|
|
$
|
20
|
|
$
|
7,898
|
|
$
|
14,424
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Real estate includes commercial mortgage loans, real estate construction
loans, and residential mortgage loans.
|
|
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.
Troubled
debt restructurings were $955,000 as of March 31, 2007, and as of December
31,
2006.
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.
None
of
the loans acquired as part of the acquisition of UHB were determined to be
impaired and therefore were all excluded from the scope of Statement of Position
(SOP) 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a
Transfer”.
The
Company identified impaired loans with a recorded investment of $32.5 million
at
March 31, 2007, compared with $22.3 million at year-end 2006. The Company
considers all nonaccrual loans to be impaired.
The following table presents impaired loans and the related allowance, as of
the
dates indicated:
|
|
At
March 31, 2007
|
|
At
December 31, 2006
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Balance
of impaired loans with no allocated allowance
|
|
$
|
24,273
|
|
$
|
10,522
|
|
Balance
of impaired loans with an allocated allowance
|
|
|
8,189
|
|
|
11,800
|
|
Total
recorded investment in impaired loans
|
|
$
|
32,462
|
|
$
|
22,322
|
|
Amount
of the allowance allocated to impaired loans
|
|
$
|
3,878
|
|
$
|
4,310
|
|
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; Dallas and
Houston, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois;
and 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 March 31, 2007, or December 31,
2006.
Allowance
for Loan Losses
The
Bank
maintains the allowance for loan losses at a level that is considered to be
equal to the estimated and probable losses in the loan portfolio. 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
loan losses in a timely manner.
In
addition, our Board of Directors has established a written loan policy that
includes a loan review and control system which it believes should be effective
in ensuring that the Bank maintains an adequate allowance for loan 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 loan portfolio. The determination of the amount
of the allowance for loan losses and the provision for loan 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 loan losses. The nature of the process by which the Bank determines the
appropriate allowance for loan losses requires the exercise of considerable
judgment. Additions to the allowance for loan losses are made by charges to
the
provision for loan 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 loan losses. Recoveries of previously charged off amounts, if
any,
are credited to the allowance for loan 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 loan losses
in future periods.
The
allowance for loan losses totaled $65.3 million at March 31, 2007, and
represented the amount needed to maintain an allowance that we believe to be
sufficient to absorb loan losses inherent in the Company’s loan portfolio. The
allowance for loan losses represented 1.11% of period-end gross loans and 200%
of non-performing loans at March 31, 2007. The comparable ratios were 1.13%
of
year-end 2006 gross loans and 213% of non-performing loans at December 31,
2006.
The
following table sets forth information relating to the allowance for loan losses
for the periods indicated:
(Dollars
in thousands)
|
|
For
the three months ended March 31, 2007
|
|
For
the year ended December 31, 2006
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
64,689
|
|
$
|
60,251
|
|
Provision
of loan losses
|
|
|
1,000
|
|
|
2,000
|
|
Loans
charged off
|
|
|
(3,281
|
)
|
|
(2,030
|
)
|
Recoveries
of loans charged off
|
|
|
2,477
|
|
|
1,315
|
|
Allowance
from acquisitions
|
|
|
432
|
|
|
3,153
|
|
Balance
at end of period
|
|
$
|
65,317
|
|
$
|
64,689
|
|
|
|
|
|
|
|
|
|
Average
loans outstanding during the period
|
|
$
|
5,787,959
|
|
$
|
5,310,564
|
|
Total
gross loans outstanding, at period-end
|
|
$
|
5,896,715
|
|
$
|
5,747,546
|
|
Total
non-performing loans, at period-end
|
|
$
|
32,724
|
|
$
|
30,330
|
|
Ratio
of net charge-offs to average loans outstanding during the period
(annualized)
|
|
|
0.06
|
%
|
|
0.01
|
%
|
Provision
for loan losses to average loans outstanding during the period
(annualized)
|
|
|
0.07
|
%
|
|
0.04
|
%
|
Allowance
to non-performing loans, at period-end
|
|
|
199.60
|
%
|
|
213.28
|
%
|
Allowance
to gross loans, at period-end
|
|
|
1.11
|
%
|
|
1.13
|
%
|
For
impaired loans, we provide specific allowances based on an evaluation of
impairment. For the portfolio of classified loans we determine an allowance
based on assigned loss percentage. 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.
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, the trends in delinquencies and
non-accrual loans, 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.
To
determine the allowance, the Bank employs two primary methodologies, the
classification process 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 loss 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, concentrations of credit, and trends in the national
and
local economy.
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:
|
|
|
|
|
|
(Dollars
in thousands)
|
|
March
31, 2007
|
|
December
31, 2006
|
|
|
|
|
|
Percentage
of
|
|
|
|
Percentage
of
|
|
|
|
|
|
Loans
in Each
|
|
|
|
Loans
in Each
|
|
|
|
|
|
Category
|
|
|
|
Category
|
|
|
|
|
|
to
Average
|
|
|
|
to
Average
|
|
Type
of Loans:
|
|
Amount
|
|
Gross
Loans
|
|
Amount
|
|
Gross
Loans
|
|
Commercial
loans
|
|
$
|
32,593
|
|
|
21.3
|
%
|
$
|
35,569
|
|
|
20.9
|
%
|
Residential
mortgage loans
|
|
|
1,446
|
|
|
9.9
|
|
|
1,510
|
|
|
9.1
|
|
Commercial
mortgage loans
|
|
|
22,292
|
|
|
56.2
|
|
|
22,160
|
|
|
57.6
|
|
Real
estate construction loans
|
|
|
8,965
|
|
|
12.1
|
|
|
5,431
|
|
|
11.8
|
|
Installment
loans
|
|
|
14
|
|
|
0.3
|
|
|
10
|
|
|
0.3
|
|
Other
loans
|
|
|
7
|
|
|
0.2
|
|
|
9
|
|
|
0.3
|
|
Total
|
|
$
|
65,317
|
|
|
100
|
%
|
$
|
64,689
|
|
|
100
|
%
|
The
allowance allocated to commercial loans decreased from $35.6 million at December
31, 2006, to $32.6 million at March 31, 2007, due primarily to charge-offs
of
certain impaired commercial loans during the first quarter and the decrease
in
the reserve factor based on 5-year moving average of loss experience in
commercial loans. Non-accrual commercial loans by collateral type were $8.7
million, or 26.8% of non-accrual loans at March 31, 2007, compared to $14.4
million, or 64.6% at December 31, 2006.
The
allowance allocated to residential mortgage loans also decreased $64,000 from
$1.5 million at December 31, 2006, to $1.4 million at March 31,
2007.
The
allowance allocated to commercial mortgage loans increased from $22.2 million
at
December 31, 2006, to $22.3 million at March 31, 2007, due to the loan growth.
As of March 31, 2007, there were $5.4 million commercial mortgage loans on
non-accrual status. Non-accrual commercial mortgage loans comprised 16.8% of
nonaccrual loans at March 31, 2007.
The
allowance allocated to construction loans has increased from $5.4 million at
December 31, 2006, to $9.0 million at March 31, 2007, due primarily to an
increase in the amount of construction loans risk graded as Special Mention
and
Substandard during the first quarter of 2007 as a result of slower housing
sales
and lower selling prices in Southern California. The allowance allocated to
construction loans as a percentage of total construction loans was 1.3% of
construction loans at March 31, 2007 compared to 0.9% at December 31, 2006.
At
March 31, 2007, there were two construction loans totaling $17.4 million on
non-accrual status which comprised 53.7% of nonaccrual loans.
Allowances
for other risks of potential loan losses equaling $2.4 million as of March
31,
2007, compared to $2.5 million at December 31, 2006, have been included in
the
allocations above. The Bank has set aside this amount to cover the risk factors
of higher energy prices on the ability of its borrowers to service their loans.
Based on the assessment of the risk of higher energy prices on the ability
of
the Bank’s borrowers to service their loans, management has determined that the
allowance of $2.4 million at March 31, 2007 was appropriate.
Deposits
At
March
31, 2007, total deposits increased $49.4 million, or 0.9%, to $5.72 billion
from
December 31, 2006, of $5.68 billion, due primarily to $54.2 million from the
acquisition of United Heritage Bank. Non-interest-bearing demand deposits,
interest-bearing demand deposits, and savings deposits comprised 35.7% of total
deposits at March 31, 2007, time deposit accounts of less than $100,000
comprised 18.0% of total deposits, while the remaining 46.3% was comprised
of
time deposit accounts of $100,000 or more.
The
following tables display the deposit mix as of the dates indicated:
|
|
March
31, 2007
|
|
%
of Total
|
|
December
31, 2006
|
|
%
of Total
|
|
Deposits
|
|
(Dollars
in thousands)
|
|
Non-interest-bearing
demand
|
|
$
|
778,965
|
|
|
13.6
|
%
|
$
|
781,492
|
|
|
13.8
|
%
|
NOW
|
|
|
236,601
|
|
|
4.1
|
|
|
239,589
|
|
|
4.2
|
|
Money
market
|
|
|
677,406
|
|
|
11.8
|
|
|
657,689
|
|
|
11.6
|
|
Savings
|
|
|
351,432
|
|
|
6.2
|
|
|
358,827
|
|
|
6.3
|
|
Time
deposits under $100,000
|
|
|
1,032,774
|
|
|
18.0
|
|
|
1,007,637
|
|
|
17.8
|
|
Time
deposits of $100,000 or more
|
|
|
2,647,562
|
|
|
46.3
|
|
|
2,630,072
|
|
|
46.3
|
|
Total
deposits
|
|
$
|
5,724,740
|
|
|
100.0
|
%
|
$
|
5,675,306
|
|
|
100.0
|
%
|
At
March
31, 2007, brokered deposits increased $21.1 million to $268.8 million from
$247.7 million at December 31, 2006.
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, borrowing from other financial institutions, subordinated and junior
subordinated notes issued.
Federal
funds purchased were $13.0 million with a weighted average rate of 5.25% as
of
March 31, 2007, compared to $50.0 million with a weighted average rate of 5.31%
as of December 31, 2006.
Securities
sold under agreements to repurchase were $738.3 million with a weighted average
rate of 3.57% as of March 31, 2007, compared to $400.0 million with a weighted
average rate of 4.40% at December 31, 2006. At
March
31, 2007, the terms of the long-term repurchase agreements were as follows:
$200.0 million for five years, $250.0 million for seven years and $200.0 million
for ten years. The rates are all initially floating 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. At March 31, 2007, three
repurchase agreements totaling $150.0 million were callable but had not been
called. The interest rates on these three repurchase agreements range between
4.52% and 4.79% until their final maturities in December 2010 and March 2011.
In
addition, there were four short term repurchase agreements totaling $88.3
million which mature in May 2007 with a weighted average rate of 5.48% at March
31, 2007.
Total
advances from the FHLB of San Francisco increased $260.0 million to $974.7
million at March 31, 2007 from $714.7 million at December 31, 2006. Non-puttable
advances totaled $574.7 million with a weighted rate of 5.40% and puttable
advances totaled $400.0 million with a weighted average rate of 4.32% at March
31, 2007. The FHLB has the right to terminate the puttable transaction at par
at
the first anniversary date and quarterly thereafter and at the second
anniversary date and quarterly thereafter for $300.0 million and $100.0 million
of the advances, respectively.
On
May 31, 2005, Cathay General Bancorp entered into a $30.0 million 364-day
unsecured revolving loan agreement with a commercial bank bearing an interest
rate of LIBOR plus 90 basis points and a commitment fee of 12.5 basis points
on
unused commitments. On September 29, 2006, in conjunction with the issuance
of
subordinated debt discussed below, this loan was further amended to reduce
the
commitment to $35.0 million until October 31, 2006, and to $10.0 million
thereafter. At March 31, 2007, $10.0 million was outstanding with a rate of
6.22% under this loan, compared to $10.0 million outstanding with a rate of
6.26% at December 31, 2006. The Company paid off the $10.0 million borrowing
on
April 13, 2007.
Long-term
Debt
On
September 29, 2006, the Bank issued $50.0 million in subordinated debt. The
debt
has a maturity term of 10 years and bears interest at a rate of LIBOR plus
110
basis points. As of March 31, 2007, $50.0 million was outstanding with a rate
of
6.45% under this note compared to $50.0 million at a rate of 6.46% at December
31, 2006.
On
March
30, 2007, the Company issued an additional $46.4 million of Junior Subordinated
Notes which generated $45.0 million of Tier 1 capital. At March 31, 2007, the
Junior Subordinated Notes issued by the Company totaled $100.5 million with
a
weighted average rate of 7.67% compared to $54.1 million with a weighted average
rate of 8.39% at December 31, 2006.
Off-Balance-Sheet
Arrangements and Contractual Obligations
The
following table summarizes the Company’s contractual obligations to make future
payments as of March 31, 2007. Payments for deposits and borrowings do not
include interest. Payments related to leases are based on actual payments
specified in the underlying contracts.
|
|
Payment
Due by Period
|
|
|
|
|
|
More
than
|
|
3
years or
|
|
|
|
|
|
|
|
|
|
1
year but
|
|
more
but
|
|
|
|
|
|
|
|
1
year
|
|
less
than
|
|
less
than
|
|
5
years
|
|
|
|
|
|
or
less
|
|
3
years
|
|
5
years
|
|
or
more
|
|
Total
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
with stated maturity dates
|
|
$
|
3,595,672
|
|
$
|
83,020
|
|
$
|
1,634
|
|
$
|
10
|
|
$
|
3,680,336
|
|
Federal
funds purchased
|
|
|
13,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
13,000
|
|
Securities
sold under agreements to repurchase (1)
|
|
|
88,300
|
|
|
-
|
|
|
200,000
|
|
|
450,000
|
|
|
738,300
|
|
Advances
from the Federal Home Loan Bank (2)
|
|
|
429,500
|
|
|
-
|
|
|
545,180
|
|
|
-
|
|
|
974,680
|
|
Other
borrowings
|
|
|
10,000
|
|
|
-
|
|
|
-
|
|
|
19,777
|
|
|
29,777
|
|
Long-term
debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
150,517
|
|
|
150,517
|
|
Operating
leases
|
|
|
7,346
|
|
|
11,205
|
|
|
6,491
|
|
|
7,641
|
|
|
32,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual obligations and other commitments
|
|
$
|
4,143,818
|
|
$
|
94,225
|
|
$
|
753,305
|
|
$
|
627,945
|
|
$
|
5,619,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
These
repurchase agreements have a final maturity
of 5-year, 7-year and 10-year from origination date but are callable
on
a quarterly basis after six months for the 7-year term or one year
for the
5-year and 10-year term. |
|
|
|
(2)
|
|
FHLB
advances of $400.0 million that mature in the
first quarter of 2012 have a callable option. On a quarterly basis,
$300.0
million are callable at the first anniversary date and $100.0 million
are
callable at the second anniversay
date. |
Capital
Resources
Stockholders’
equity of $938.6 million at March 31, 2007, decreased by $4.4 million, or 0.5%,
compared to $943.1 million at December 31, 2006. The following table summarizes
the activity in stockholders’ equity:
(Dollars
in thousands)
|
|
Three
months ended
|
|
|
|
March
31, 2007
|
|
Net
income
|
|
$
|
29,966
|
|
Proceeds
from shares issued to the Dividend Reinvestment Plan
|
|
|
576
|
|
Proceeds
from exercise of stock options
|
|
|
1,031
|
|
Tax
benefits from stock-based compensation expense
|
|
|
420
|
|
Share-based
compensation
|
|
|
2,033
|
|
Purchase
of treasury stock
|
|
|
(29,945
|
)
|
Changes
in other comprehensive income
|
|
|
4,683
|
|
Cumulative
effect adjustment as a result of adoption of FASB Interpretation
No. 48 -
Accounting for Uncertainty in Income Taxes
|
|
|
(8,524
|
)
|
Cash
dividends paid
|
|
|
(4,676
|
)
|
Net
decrease in stockholders' equity
|
|
$
|
(4,436
|
)
|
On
March
6, 2007, the Company announced that its Board of Directors had approved a new
stock repurchase program to buyback up to an aggregate of one million shares
of
the Company’s common stock following the completion of the March 2005 stock
repurchase authorization. During the first quarter of 2007, the Company
repurchased 877,903 shares of its common stock for $29.9 million, or $34.11
average cost per share. On March 6, 2007, the Company completed the March 2005
repurchase program with 1.0 million shares of its common stock repurchased
for
$33.9 million, or $33.91 average cost per share. At March 31, 2007, 573,800
shares remain under the Company’s March 2007 repurchase program.
On
May 8,
2007, the Company completed its March 2007 repurchase program by purchasing
573,800 shares in May 2007 for $19.4 million or $33.90 average cost per share.
Also on May 8, 2007, the Company’s Board of Directors approved a new program to
repurchase up to an aggregate of one million shares of the Company’s common
stock following the completion of March 2007 repurchase program.
The
Company declared a cash dividend of 9 cents per share for distribution in
January 2007 on 51,953,759 shares outstanding. In April, 2007, the Company
declared a cash dividend of 10.5 cents per share on 51,158,476 shares
outstanding. Total cash dividends paid in 2007, including the $5.4 million
paid
in April, amounted to $10.0 million.
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 is 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.
On
March
30, 2007, Cathay General Bancorp issued $46.4 million of junior subordinated
debt which generated $45.0 million of Tier 1 capital.
Both
the
Bancorp’s and the Bank’s regulatory capital continued to exceed the regulatory
minimum requirements as of March 31, 2007. In addition, the capital ratios
of
the Bank place it in the “well capitalized” category which is defined as
institutions with a total risk-based ratio equal to or greater than 10.0%,
Tier
1 risk-based capital ratio equal to or greater than 6.0%, and Tier 1 leverage
capital ratio equal to or greater than 5.0%.
The
following table presents the Bancorp’s and the Bank’s capital and leverage
ratios as of March 31, 2007, and December 31, 2006:
|
|
Cathay
General Bancorp
|
|
Cathay
Bank
|
|
|
|
March
31, 2007
|
|
|
|
|
December
31, 2006
|
|
|
|
|
March
31, 2007
|
|
|
|
|
December
31, 2006
|
|
|
|
|
(Dollars
in thousands)
|
|
Balance
|
|
|
%
|
|
Balance
|
|
|
%
|
|
Balance
|
|
|
%
|
|
Balance
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital (to risk-weighted assets)
|
|
$
|
706,623
|
|
|
|
9.40
|
|
$
|
673,705
|
|
|
|
9.40
|
|
$
|
668,570
|
|
|
|
8.90
|
|
$
|
670,206
|
|
|
|
9.37
|
|
Tier
1 capital minimum requirement
|
|
|
300,821
|
|
|
|
4.00
|
|
|
286,744
|
|
|
|
4.00
|
|
|
300,821
|
|
|
|
4.00
|
|
|
286,238
|
|
|
|
4.00
|
|
Excess
|
|
$
|
405,802
|
|
|
|
5.40
|
|
$
|
386,961
|
|
|
|
5.40
|
|
$
|
367,749
|
|
|
|
4.90
|
|
$
|
383,968
|
|
|
|
5.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital (to risk-weighted assets)
|
|
$
|
821,479
|
|
|
|
10.92
|
|
$
|
788,284
|
|
|
|
11.00
|
|
$
|
784,733
|
|
|
|
10.45
|
|
$
|
786,092
|
|
|
|
10.99
|
|
Total
capital minimum requirement
|
|
|
601,642
|
|
|
|
8.00
|
|
|
573,488
|
|
|
|
8.00
|
|
|
601,642
|
|
|
|
8.00
|
|
|
572,476
|
|
|
|
8.00
|
|
Excess
|
|
$
|
219,837
|
|
|
|
2.92
|
|
$
|
214,796
|
|
|
|
3.00
|
|
$
|
183,091
|
|
|
|
2.45
|
|
$
|
213,616
|
|
|
|
2.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
Leverage ratio
|
|
$
|
706,623
|
|
|
|
8.78
|
|
$
|
673,705
|
|
|
|
8.98
|
|
$
|
668,570
|
|
|
|
8.33
|
|
$
|
670,206
|
|
|
|
8.95
|
|
Minimum
leverage requirement
|
|
|
321,761
|
|
|
|
4.00
|
|
|
300,055
|
|
|
|
4.00
|
|
|
321,135
|
|
|
|
4.00
|
|
|
299,409
|
|
|
|
4.00
|
|
Excess
|
|
$
|
384,862
|
|
|
|
4.78
|
|
$
|
373,650
|
|
|
|
4.98
|
|
$
|
347,435
|
|
|
|
4.33
|
|
$
|
370,797
|
|
|
|
4.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted
assets
|
|
$
|
7,520,523
|
|
|
|
|
|
$
|
7,168,601
|
|
|
|
|
|
$
|
7,508,291
|
|
|
|
|
|
$
|
7,155,951
|
|
|
|
|
|
Total
average assets (1)
|
|
$
|
8,044,018
|
|
|
|
|
|
$
|
7,501,371
|
|
|
|
|
|
$
|
8,028,372
|
|
|
|
|
|
$
|
7,485,214
|
|
|
|
|
|
(1)
|
The
quarterly total average assets reflect all
debt securities at amortized cost, equity security with readily
determinable fair
values at the lower of cost or fair value, and equity securities
without
readily determinable fair values at historical
cost.
|
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 March 31, 2007, our
liquidity ratio (defined as net cash, short-term and marketable securities
to
net deposits and short-term liabilities) was at 17.6%, which increased from
15.4% at year-end 2006.
To
supplement its liquidity needs, the Bank maintains a total credit line
of
$241.0
million
for federal funds with three 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
March 31, 2007, the Bank had an approved credit line with the FHLB of San
Francisco totaling $1.2 billion. The total advances outstanding with the FHLB
of
San Francisco at March 31, 2007, was $974.7 million. These borrowings are
secured by loans and securities.
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 March 31, 2007, investment
securities available-for-sale at
fair
value totaled $1.9 billion, with $1.3 billion pledged
as collateral for borrowings and other commitments. The remaining $533.0 million
was available as additional liquidity or to be pledged as collateral for
additional borrowings.
Approximately
98% of the Company’s time deposits are maturing within one year or less as of
March 31, 2007. 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 and the exercise of stock options. Dividends paid to the
Bancorp by the Bank are subject to regulatory limitations. 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
liquidity generated from its prevailing sources is sufficient to meet its
operational needs.
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 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 March
31, 2007, the market value of equity 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 which will bring the Company’s exposure to
under 15%.
The
table
below shows the estimated impact of changes in interest rate on net interest
income and market value of equity as of March 31, 2007:
|
|
Net
Interest
|
|
Market
Value
|
|
|
|
Income
|
|
of
Equity
|
|
|
|
Volatility
(1)
|
|
Volatility
(2)
|
|
Change
in Interest Rate (Basis Points)
|
|
March
31, 2007
|
|
March
31, 2007
|
|
+200
|
|
|
-1.3
|
|
|
-19.5
|
|
+100
|
|
|
-0.2
|
|
|
-10.6
|
|
-100
|
|
|
-4.2
|
|
|
3.4
|
|
-200
|
|
|
-7.2
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
(1)
.
|
The
percentage change in this column represents net interest income
of the Company for 12 months in
a stable interest rate environment versus the net interest income
in the
various rate scenarios |
|
|
(2)
|
The
percentage change in this column represents net portfolio value
of the Company in a stable interest
rate environment versus the net portfolio value in the various rate
scenarios. |
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.
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
Item
1. LEGAL
PROCEEDINGS.
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.
Item
1a. RISK
FACTORS.
There
is
no material change from risk factors as previously disclosed in the registrant’s
2006 Annual Report on Form 10-K in response to Item 1A to Part I of Form
10-K.
Item
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
ISSUER
PURCHASES OF EQUITY SECURITIES
|
|
Period
|
|
(a)
Total Number of Shares (or Units) Purchased
|
|
(b)
Average Price Paid per Share (or Unit)
|
|
(c)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced
Plans or Programs
|
|
(d)
Maximum Number (or Approximate Dollar Value) of Shares (or Units)
that May
Yet Be Purchased Under the Plans or Programs
|
|
Month
#1 (January 1, 2007 - January 31, 2007)
|
|
|
50,000
|
|
$
|
34.50
|
|
|
|
|
|
401,703
|
|
Month
#2 (February 1, 2007 - February 28, 2007)
|
|
|
265,826
|
|
$
|
34.93
|
|
|
|
|
|
135,877
|
|
Month
#3 (March 1, 2007 - March 31, 2007)
|
|
|
562,077
|
|
$
|
33.69
|
|
|
|
|
|
573,800
|
|
Total
|
|
|
877,903
|
|
|
|
|
|
|
|
|
573,800
|
|
On
March
6, 2007, the Company announced that its Board of Directors had approved a new
stock repurchase program to buyback up to an aggregate of one million shares
of
the Company’s common stock following the completion of the March 2005 repurchase
authorization. During the first quarter of 2007, the Company repurchased 877,903
shares of its common stock for $29.9 million, or $34.11 average cost per share.
On March 6, 2007, the Company completed the March 2005 repurchase program with
1.0 million shares of its common stock repurchased for $33.9 million, or $33.91
average cost per share. At March 31, 2007, 573,800 shares remain under the
Company’s March 2007 repurchase program.
On
May 8,
2007, the Company completed its March 2007 repurchase program by purchasing
573,800 shares in May 2007 for $19.4 million or $33.90 average cost per share.
Also on May 8, 2007, the Company’s Board of Directors approved a new program to
repurchase up to an aggregate of one million shares of the Company’s common
stock following the completion of March 2007 repurchase program.
Item
3. DEFAULTS
UPON SENIOR SECURITIES.
Not
applicable.
Item
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not
applicable.
Item
5. OTHER
INFORMATION.
Not
applicable.
Item
6. EXHIBITS.
|
(i)
|
Exhibit
4.1
Indenture, dated as of March 30, 2007, between Cathay General Bancorp
and
LaSalle Bank National Association (including form of
debenture).
|
|
(ii)
|
Exhibit
4.2
Amended and Restated Declaration of Trust of Cathay Capital Trust
III,
dated as of March 30, 2007.
|
|
(iii)
|
Exhibit
4.3
Guarantee Agreement, dated as of March 30, 2007, between Cathay General
Bancorp and LaSalle Bank National Association.
|
|
(iv) |
Exhibit
4.4
Form of Capital Securities of Cathay Capital Trust III (included within
Exhibit 4.2) |
|
(v) |
Exhibit
31.1 Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
(vi) |
Exhibit
31.2 Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
(vii) |
Exhibit
32.1 Certification
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
(viii) |
Exhibit
32.2 Certification
of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
SIGNATURES
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.
|
Cathay
General Bancorp |
|
(Registrant)
|
Date:
May 10, 2007
|
By:
/s/ Dunson K. Cheng
Dunson
K. Cheng
Chairman,
President, and
Chief
Executive Officer
|
|
|
Date:
May 10, 2007
|
By:
/s/ Heng W. Chen
Heng
W. Chen
Executive
Vice President and
Chief
Financial Officer
|
|
|