Unassociated Document
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, 2008
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, a non-accelerated filer or a smaller reporting company.
See
definition of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer R Accelerated
filer ¨
Non-accelerated
filer ¨ (Do
not
check if a smaller reporting
company) Smaller
reporting company ¨
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, 49,416,526 shares outstanding as of April 30,
2008.
CATHAY
GENERAL BANCORP AND SUBSIDIARIES
1ST
QUARTER 2008 REPORT ON FORM 10-Q
TABLE
OF CONTENTS
|
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
|
20
|
Item
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
41
|
Item
4.
|
CONTROLS
AND PROCEDURES
|
42
|
|
|
|
PART
II – OTHER INFORMATION
|
42
|
|
|
|
Item
1.
|
LEGAL
PROCEEDINGS
|
42
|
Item
1A.
|
RISK
FACTORS
|
42
|
Item
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
43
|
Item
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
43
|
Item
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
43
|
Item
5.
|
OTHER
INFORMATION
|
44
|
Item
6.
|
EXHIBITS
|
44
|
|
|
|
SIGNATURES
|
45
|
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 Company 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:
|
·
|
deterioration
in asset or credit quality;
|
|
·
|
acquisitions
of other banks, if any;
|
|
·
|
fluctuations
in interest rates;
|
|
·
|
expansion
into new market areas;
|
|
·
|
earthquake,
wildfire or other natural
disasters;
|
|
· |
legislative
and regulatory developments; 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, 2007, (at 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 to 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 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, 2008
|
|
December 31, 2007
|
|
% change
|
|
|
|
(In thousands, except share and per share data)
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
115,171
|
|
$
|
118,437
|
|
|
(3
|
)
|
Short-term
investments
|
|
|
3,670
|
|
|
2,278
|
|
|
61
|
|
Securities
purchased under agreements to resell
|
|
|
305,000
|
|
|
516,100
|
|
|
(41
|
)
|
Long-term
certificates of deposit
|
|
|
-
|
|
|
50,000
|
|
|
(100
|
)
|
Securities
available-for-sale (amortized cost of $2,438,702 in 2008 and $2,348,606
in
2007)
|
|
|
2,451,549
|
|
|
2,347,665
|
|
|
4
|
|
Trading
securities
|
|
|
93
|
|
|
5,225
|
|
|
(98
|
)
|
Loans
|
|
|
6,918,849
|
|
|
6,683,645
|
|
|
4
|
|
Less:
Allowance for loan losses
|
|
|
(67,428
|
)
|
|
(64,983
|
)
|
|
4
|
|
Unamortized
deferred loan fees, net
|
|
|
(10,020
|
)
|
|
(10,583
|
)
|
|
(5
|
)
|
Loans,
net
|
|
|
6,841,401
|
|
|
6,608,079
|
|
|
4
|
|
Federal
Home Loan Bank stock
|
|
|
66,473
|
|
|
65,720
|
|
|
1
|
|
Other
real estate owned, net
|
|
|
16,699
|
|
|
16,147
|
|
|
3
|
|
Affordable
housing investments, net
|
|
|
97,730
|
|
|
94,000
|
|
|
4
|
|
Premises
and equipment, net
|
|
|
82,706
|
|
|
76,848
|
|
|
8
|
|
Customers’
liability on acceptances
|
|
|
31,191
|
|
|
53,148
|
|
|
(41
|
)
|
Accrued
interest receivable
|
|
|
42,197
|
|
|
53,032
|
|
|
(20
|
)
|
Goodwill
|
|
|
319,285
|
|
|
319,873
|
|
|
(0
|
)
|
Other
intangible assets, net
|
|
|
34,324
|
|
|
36,097
|
|
|
(5
|
)
|
Other
assets
|
|
|
35,418
|
|
|
39,883
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
10,442,907
|
|
$
|
10,402,532
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing
demand deposits
|
|
$
|
768,419
|
|
$
|
785,364
|
|
|
(2
|
)
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
|
|
NOW
deposits
|
|
|
254,198
|
|
|
231,583
|
|
|
10
|
|
Money
market deposits
|
|
|
712,503
|
|
|
681,783
|
|
|
5
|
|
Savings
deposits
|
|
|
332,182
|
|
|
331,316
|
|
|
0
|
|
Time
deposits under $100,000
|
|
|
1,164,561
|
|
|
1,311,251
|
|
|
(11
|
)
|
Time
deposits of $100,000 or more
|
|
|
3,056,641
|
|
|
2,937,070
|
|
|
4
|
|
Total
deposits
|
|
|
6,288,504
|
|
|
6,278,367
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased
|
|
|
37,000
|
|
|
41,000
|
|
|
(10
|
)
|
Securities
sold under agreements to repurchase
|
|
|
1,580,162
|
|
|
1,391,025
|
|
|
14
|
|
Advances
from the Federal Home Loan Bank
|
|
|
1,189,287
|
|
|
1,375,180
|
|
|
(14
|
)
|
Other
borrowings from financial institutions
|
|
|
20,629
|
|
|
8,301
|
|
|
149
|
|
Other
borrowings for affordable housing investments
|
|
|
19,654
|
|
|
19,642
|
|
|
0
|
|
Long-term
debt
|
|
|
171,136
|
|
|
171,136
|
|
|
-
|
|
Acceptances
outstanding
|
|
|
31,191
|
|
|
53,148
|
|
|
(41
|
)
|
Minority
interest in consolidated subsidiary
|
|
|
8,500
|
|
|
8,500
|
|
|
-
|
|
Other
liabilities
|
|
|
92,388
|
|
|
84,314
|
|
|
10
|
|
Total
liabilities
|
|
|
9,438,451
|
|
|
9,430,613
|
|
|
0
|
|
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,
|
|
|
|
|
|
|
|
|
|
|
53,589,915
issued and 49,382,350 outstanding at March 31, 2008 and
|
|
|
|
|
|
|
|
|
|
|
53,543,752
issued and 49,336,187 outstanding at December 31, 2007
|
|
|
536
|
|
|
535
|
|
|
0
|
|
Additional
paid-in-capital
|
|
|
483,132
|
|
|
480,557
|
|
|
1
|
|
Accumulated
other comprehensive loss, net
|
|
|
7,445
|
|
|
(545
|
)
|
|
(1,466
|
)
|
Retained
earnings
|
|
|
639,079
|
|
|
617,108
|
|
|
4
|
|
Treasury
stock, at cost (4,207,565 shares at March 31, 2008 and at December
31, 2007)
|
|
|
(125,736
|
)
|
|
(125,736
|
)
|
|
-
|
|
Total
stockholders’ equity
|
|
|
1,004,456
|
|
|
971,919
|
|
|
3
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
10,442,907
|
|
$
|
10,402,532
|
|
|
0
|
|
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,
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands, except share and per share data)
|
|
INTEREST
AND DIVIDEND INCOME
|
|
|
|
|
|
Loan
receivable, including loan fees
|
|
$
|
117,025
|
|
$
|
114,179
|
|
Securities
available-for-sale - taxable
|
|
|
28,506
|
|
|
21,815
|
|
Securities
available-for-sale - nontaxable
|
|
|
366
|
|
|
599
|
|
Federal
Home Loan Bank stock
|
|
|
753
|
|
|
509
|
|
Agency
preferred stock
|
|
|
716
|
|
|
164
|
|
Federal
funds sold and securities purchased under agreements to
resell
|
|
|
6,480
|
|
|
3,802
|
|
Deposits
with banks
|
|
|
454
|
|
|
786
|
|
|
|
|
|
|
|
|
|
Total
interest and dividend income
|
|
|
154,300
|
|
|
141,854
|
|
|
|
|
|
|
|
|
|
INTEREST
EXPENSE
|
|
|
|
|
|
|
|
Time
deposits of $100,000 or more
|
|
|
31,868
|
|
|
31,152
|
|
Other
deposits
|
|
|
17,235
|
|
|
17,987
|
|
Securities
sold under agreements to repurchase
|
|
|
14,625
|
|
|
5,717
|
|
Advances
from Federal Home Loan Bank
|
|
|
12,121
|
|
|
11,781
|
|
Long-term
debt
|
|
|
2,849
|
|
|
1,976
|
|
Short-term
borrowings
|
|
|
412
|
|
|
489
|
|
|
|
|
|
|
|
|
|
Total
interest expense
|
|
|
79,110
|
|
|
69,102
|
|
|
|
|
|
|
|
|
|
Net
interest income before provision for credit losses
|
|
|
75,190
|
|
|
72,752
|
|
Provision
for credit losses
|
|
|
7,500
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision for credit losses
|
|
|
67,690
|
|
|
71,752
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
INCOME
|
|
|
|
|
|
|
|
Securities
gains, net
|
|
|
-
|
|
|
191
|
|
Letters
of credit commissions
|
|
|
1,440
|
|
|
1,292
|
|
Depository
service fees
|
|
|
1,272
|
|
|
1,346
|
|
Other
operating income
|
|
|
3,812
|
|
|
3,055
|
|
|
|
|
|
|
|
|
|
Total
non-interest income
|
|
|
6,524
|
|
|
5,884
|
|
|
|
|
|
|
|
|
|
NON-INTEREST
EXPENSE
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
17,859
|
|
|
16,977
|
|
Occupancy
expense
|
|
|
3,283
|
|
|
2,768
|
|
Computer
and equipment expense
|
|
|
2,244
|
|
|
2,225
|
|
Professional
services expense
|
|
|
2,385
|
|
|
1,728
|
|
FDIC
and State assessments
|
|
|
291
|
|
|
259
|
|
Marketing
expense
|
|
|
1,017
|
|
|
901
|
|
Other
real estate owned (income) expense
|
|
|
(17
|
)
|
|
244
|
|
Operations
of affordable housing investments, net
|
|
|
825
|
|
|
944
|
|
Amortization
of core deposit intangibles
|
|
|
1,752
|
|
|
1,765
|
|
Other
operating expense
|
|
|
2,317
|
|
|
2,418
|
|
|
|
|
|
|
|
|
|
Total
non-interest expense
|
|
|
31,956
|
|
|
30,229
|
|
|
|
|
|
|
|
|
|
Income
before income tax expense
|
|
|
42,258
|
|
|
47,407
|
|
Income
tax expense
|
|
|
14,959
|
|
|
17,441
|
|
Net
income
|
|
|
27,299
|
|
|
29,966
|
|
|
|
|
|
|
|
|
|
Other
comprehensive gain, net of tax
|
|
|
|
|
|
|
|
Unrealized
holding gains arising during the period
|
|
|
8,154
|
|
|
4,500
|
|
Less:
reclassification adjustments included in net income
|
|
|
164
|
|
|
(183
|
)
|
Total
other comprehensive gain, net of tax
|
|
|
7,990
|
|
|
4,683
|
|
Total
comprehensive income
|
|
$
|
35,289
|
|
$
|
34,649
|
|
|
|
|
|
|
|
|
|
Net
income per common share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.55
|
|
$
|
0.58
|
|
Diluted
|
|
$
|
0.55
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
Cash
dividends paid per common share
|
|
$
|
0.105
|
|
$
|
0.090
|
|
Basic
average common shares outstanding
|
|
|
49,346,285
|
|
|
51,684,754
|
|
Diluted
average common shares outstanding
|
|
|
49,531,531
|
|
|
52,295,229
|
|
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
|
|
|
|
2008
|
|
2007
|
|
|
|
(In thousands)
|
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
Net
income
|
|
$
|
27,299
|
|
$
|
29,966
|
|
Adjustments
to reconcile net income to net cash provided by operting
activities:
|
|
|
|
|
|
|
|
Provision
for credit losses
|
|
|
7,500
|
|
|
1,000
|
|
Provision
for losses on other real estate owned
|
|
|
-
|
|
|
210
|
|
Deferred
tax liability
|
|
|
1,628
|
|
|
3,411
|
|
Depreciation
|
|
|
1,075
|
|
|
1,091
|
|
Net
gains on sale of other real estate owned
|
|
|
-
|
|
|
(7
|
)
|
Net
gains on sale of loans
|
|
|
(51
|
)
|
|
(61
|
)
|
Proceeds
from sale of loans
|
|
|
1,165
|
|
|
888
|
|
Originations
of loans held for sale
|
|
|
(1,105
|
)
|
|
(813
|
)
|
Write-downs
on venture capital investments
|
|
|
-
|
|
|
418
|
|
Gain
on sales and calls of securities
|
|
|
-
|
|
|
(183
|
)
|
Decrease
in fair value of warrants
|
|
|
13
|
|
|
28
|
|
Other
non-cash interest
|
|
|
8
|
|
|
117
|
|
Amortization
of security premiums, net
|
|
|
241
|
|
|
569
|
|
Amortization
of other intangible assets
|
|
|
1,790
|
|
|
1,797
|
|
Excess
tax short-fall (benefit) from share-based payment
arrangements
|
|
|
226
|
|
|
(420
|
)
|
Stock
based compensation expense
|
|
|
1,830
|
|
|
2,033
|
|
Gain
on sale of premises and equipment
|
|
|
-
|
|
|
24
|
|
Increase/(decrease)
in accrued interest receivable
|
|
|
10,835
|
|
|
(5,067
|
)
|
Decrease
in other assets, net
|
|
|
9,993
|
|
|
676
|
|
(Decrease)/increase
in other liabilities
|
|
|
(2,113
|
)
|
|
8,985
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
60,334
|
|
|
44,662
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
(Increase)/decrease
in short-term investment
|
|
|
(1,392
|
)
|
|
854
|
|
Decrease/(increase)
in long-term investment
|
|
|
50,000
|
|
|
(50,000
|
)
|
Decrease/(increase)
in securities purchased under agreements to resell
|
|
|
211,100
|
|
|
(150,000
|
)
|
Purchase
of investment securities available-for-sale
|
|
|
(626,393
|
)
|
|
(559,976
|
)
|
Proceeds
from maturity and call of investment securities
available-for-sale
|
|
|
582,795
|
|
|
121,038
|
|
Proceeds
from sale of investment securities available-for-sale
|
|
|
-
|
|
|
86,175
|
|
Purchase
of mortgage-backed securities available-for-sale
|
|
|
(128,389
|
)
|
|
-
|
|
Proceeds
from repayment and sale of mortgage-backed securities
available-for-sale
|
|
|
81,650
|
|
|
36,798
|
|
Purchase
of Federal Home Loan Bank stock
|
|
|
-
|
|
|
(15,248
|
)
|
Net
increase in loans
|
|
|
(241,086
|
)
|
|
(112,624
|
)
|
Purchase
of premises and equipment
|
|
|
(4,709
|
)
|
|
(3,111
|
)
|
Proceeds
from sales of premises and equipment
|
|
|
-
|
|
|
10
|
|
Proceeds
from sale of other real estate owned
|
|
|
-
|
|
|
918
|
|
Net
increase in investment in affordable housing
|
|
|
(4,450
|
)
|
|
(3,581
|
)
|
Acquisition,
net of cash acquired
|
|
|
-
|
|
|
(3,655
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(80,874
|
)
|
|
(652,402
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase/(decrease) in demand deposits, NOW accounts, money market
and
saving deposits
|
|
|
37,257
|
|
|
(8,177
|
)
|
Net
(decrease)/increase in time deposits
|
|
|
(27,120
|
)
|
|
3,445
|
|
Net
increase in federal funds purchased and securities sold under agreement to
repurchase
|
|
|
185,137
|
|
|
301,300
|
|
Advances
from Federal Home Loan Bank
|
|
|
1,111,107
|
|
|
1,108,000
|
|
Repayment
of Federal Home Loan Bank borrowings
|
|
|
(1,297,000
|
)
|
|
(848,000
|
)
|
Cash
dividends
|
|
|
(5,181
|
)
|
|
(4,676
|
)
|
Issuance
of long-term debt
|
|
|
-
|
|
|
45,000
|
|
Proceeds
from other borrowings
|
|
|
20,629
|
|
|
-
|
|
Repayment
of other borrowings
|
|
|
(8,301
|
)
|
|
-
|
|
Proceeds
from shares issued to Dividend Reinvestment Plan
|
|
|
616
|
|
|
576
|
|
Proceeds
from exercise of stock options
|
|
|
356
|
|
|
1,031
|
|
Excess
tax (short-fall) benefits from share-based payment
arrangements
|
|
|
(226
|
)
|
|
420
|
|
Purchase
of treasury stock
|
|
|
-
|
|
|
(26,874
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
17,274
|
|
|
572,045
|
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash equivalents
|
|
|
(3,266
|
)
|
|
(35,695
|
)
|
Cash
and cash equivalents, beginning of the period
|
|
|
118,437
|
|
|
132,798
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of the year
|
|
$
|
115,171
|
|
$
|
97,103
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
Cash
paid during the period:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
352,878
|
|
$
|
68,683
|
|
Income
taxes
|
|
$
|
5,691
|
|
$
|
3,462
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
Net
change in unrealized holding gains (loss) on securities
available-for-sale, net of tax
|
|
$
|
7,990
|
|
$
|
4,683
|
|
Adjustment
to initially apply FASB Interpretation 48
|
|
$
|
-
|
|
$
|
(8,524
|
)
|
Adjustment
to initially apply EITF 06-4
|
|
$
|
(147
|
)
|
|
|
|
Transfers
to other real estate owned
|
|
$
|
262
|
|
$
|
373
|
|
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. The
Bancorp also owns 100% of the common stock of five statutory business trusts
created for the purpose of issuing capital securities. The Bank was founded
in
1962 and offers a wide range of financial services. As of March 31, 2008, the
Bank operates twenty one branches in Southern California, ten branches in
Northern California, nine branches in New York State, three branches in
Illinois, three branches in Washington State, two branches Texas, one branch
in
Massachusetts, one branch in New Jersey, one branch in Hong Kong, and a
representative office in Shanghai and in Taipei. Deposit accounts at the Hong
Kong branch are not insured by the Federal Deposit Insurance Corporation (the
“FDIC”).
2.
Acquisitions
and Investments
We
continue to look for opportunities to expand the Bank’s branch network by
seeking new branch locations and/or by acquiring other financial institutions
to
diversify our customer base in order to compete for new deposits and loans,
and
to be able to serve our customers more effectively. 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
|
|
|
|
|
(In
thousands)
|
|
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
|
|
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.
As
of
March 31, 2008, goodwill was $319.3 million, a decrease of $588,000 compared
to
December 31, 2007 due to a reversal of accrued penalties of $528,000 as a result
of the settlement with the California Franchise Board for a claim related to
GBC
Bancorp’s 2001 California tax return and a tax refund of $60,000 related to New
Asia Bancorp’s 2006 tax year. Merger-related lease liability was $557,000 as of
March 31, 2008, with cash outlays of $49,000 for the three months ended March
31, 2008.
3.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by GAAP for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the interim periods presented are not necessarily indicative of
the
results that may be expected for the year ending December 31, 2008. 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, 2007.
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. 141,
“Business Combinations (Revised 2007).” SFAS 141R
replaces SFAS 141, “Business Combinations,” and applies to all transactions and
other events in which one entity obtains control over one or more other
businesses. SFAS 141R requires an acquirer, upon initially obtaining
control of another entity, to recognize the assets, liabilities and any
non-controlling interest in the acquiree at fair value as of the acquisition
date. Contingent consideration is required to be recognized and measured at
fair
value on the date of acquisition rather than at a later date when the amount
of
that consideration may be determinable beyond a reasonable doubt. This fair
value approach replaces the cost-allocation process required under SFAS 141
whereby the cost of an acquisition was allocated to the individual assets
acquired and liabilities assumed based on their estimated fair value.
SFAS 141R requires acquirers to expense acquisition-related costs as
incurred rather than allocating such costs to the assets acquired and
liabilities assumed, as was previously the case under SFAS 141. Under
SFAS 141R, the requirements of SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities,” would have to be met in order to
accrue for a restructuring plan in purchase accounting. Pre-acquisition
contingencies are to be recognized at fair value, unless it is a non-contractual
contingency that is not likely to materialize, in which case, nothing should
be
recognized in purchase accounting and, instead, that contingency would be
subject to the probable and estimable recognition criteria of SFAS 5,
“Accounting for Contingencies.” SFAS 141R is expected to have a significant
impact on the Company’s accounting for business combinations closing on or after
January 1, 2009.
In
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 adoption
of SFAS 157 did not have a material impact on the Company’s consolidated
financial statements. See Note 14- “Fair Value Measurements” for more
information. In February 2008, the FASB issued Staff Position (FSP) 157-2,
Effective
Date of FASB Statement No. 157.
This
FSP delays the effective date of FAS 157 for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at
fair
value on a recurring basis (at least annually) to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. The
Company does not expect a material impact on its consolidated financial
statements from adoption of SFAS 157-2.
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 elected the fair value option for any of its existing
assets or liabilities. The adoption of SFAS 159 did not have an impact on the
Company’s consolidated financial statements.
SFAS No. 160,
“Noncontrolling Interest in Consolidated Financial Statements, an amendment
of
ARB Statement No. 51.” SFAS 160
amends Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial
Statements,” to establish accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 clarifies that a non-controlling interest in a
subsidiary, which is sometimes referred to as minority interest, is an ownership
interest in the consolidated entity that should be reported as a component
of
equity in the consolidated financial statements. Among other requirements,
SFAS 160 requires consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the non-controlling
interest. It also requires disclosure, on the face of the consolidated income
statement, of the amounts of consolidated net income attributable to the parent
and to the non-controlling interest. SFAS 160 is effective for the Company
on January 1, 2009, and is not expected to have a significant impact on the
Company’s financial statements.
SAB No. 109,
“Written Loan Commitments Recorded at Fair Value Through Earnings.”
SAB No. 109
supersedes SAB 105, “Application of Accounting Principles to Loan
Commitments,” and indicates that the expected net future cash flows related to
the associated servicing of the loan should be included in the measurement
of
all written loan commitments that are accounted for at fair value through
earnings. The guidance in SAB 109 is applied on a prospective basis to
derivative loan commitments issued or modified in fiscal quarters beginning
after December 15, 2007. The
adoption of SAB 109 did not have a significant impact on the Company’s
consolidated financial statements.
SAB No. 110,
“Certain Assumptions Used in Valuation Methods.” SAB No. 110
continues to allow companies, under certain circumstances, to use the simplified
method beyond December 31, 2007. It is appropriate to use the simplified method
under SAB 110 when an entity does not have sufficient historical exercise
data to provide a reasonable basis upon which to estimate expected term. Based
on SAB 110 and SAB 107, the Company has estimated the expected life of its
stock
options based on the average of the contractual period and the vesting period
and has consistently applied the simplified method to all options granted in
2005, in 2006, and in the first quarter of 2008. There were no options granted
in 2007.
Emerging
Issues Task Force (“EITF”) Issue No. 06-4, “Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar
Life
Insurance Arrangements.” EITF 06-4
requires the recognition of a liability and related compensation expense for
endorsement split-dollar life insurance policies that provide a benefit to
an
employee that extends to post-retirement periods. Under EITF 06-4, life
insurance policies purchased for the purpose of providing such benefits do
not
effectively settle an entity’s obligation to the employee. Accordingly, the
entity must recognize a liability and related compensation expense during the
employee’s active service period based on the future cost of insurance to be
incurred during the employee’s retirement. If the entity has agreed to provide
the employee with a death benefit, then the liability for the future death
benefit should be recognized by following the guidance in SFAS 106,
“Employer’s Accounting for Postretirement Benefits Other Than Pensions.” The
Company adopted EITF 06-4 effective as of January 1, 2008, and charged
a $147,000 cumulative effect adjustment to the opening balance of retained
earnings as of January 1, 2008.
5.
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)
|
|
2008
|
|
2007
|
|
Net
income
|
|
$
|
27,299
|
|
$
|
29,966
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares:
|
|
|
|
|
|
|
|
Basic
weighted-average number of common shares outstanding
|
|
|
49,346,285
|
|
|
51,684,754
|
|
Dilutive
effect of weighted-average outstanding common shares
equivalents
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
184,432
|
|
|
604,514
|
|
Restricted
Stock
|
|
|
-
|
|
|
5,961
|
|
Restricted
Stock Units
|
|
|
814
|
|
|
-
|
|
Diluted
weighted-average number of common shares outstanding
|
|
|
49,531,531
|
|
|
52,295,229
|
|
|
|
|
|
|
|
|
|
Average
shares of stock options with anti-dilutive effect
|
|
|
3,680,678
|
|
|
1,451,290
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.55
|
|
$
|
0.58
|
|
Diluted
|
|
$
|
0.55
|
|
$
|
0.57
|
|
6.
Stock-Based Compensation
In
1998,
the Board adopted the Cathay Bancorp, Inc. Equity Incentive Plan. Under the
Equity Incentive Plan, as amended in September, 2003, directors and eligible
employees may be granted incentive or non-statutory stock options and/or
restricted stock units, or awarded non-vested stock, for up to
7,000,000 shares of the Company’s common stock on a split adjusted basis.
In May 2005, the 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, and/or restricted stock
units, 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, 2008, the only options granted by the Company
under the 2005 Incentive Plan were non-statutory stock options to selected
bank
officers and non-employee directors at exercise prices equal to the fair market
value of a share of the Company’s common stock on the date of grant. Such
options have a maximum ten-year term and vest in 20% annual increments (subject
to early termination in certain events) except options granted to the Chief
Executive Officer of the Company for 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,
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, and 100,000 shares granted on February 21, 2008, of which 50%
would vest on February 21, 2009, and the remaining 50% would vest on February
21, 2010. If such options expire or terminate without having been exercised,
any
shares not purchased will again be available for future grants or awards.
Stock
options are typically granted in the first quarter of the year. There
were
no options granted in
2007.
The Board of Directors of the Company was in the process of reviewing the
relative merits of granting restricted stock or restricted stock units either
in
place of or in combination with stock options. As a result, the Company deferred
the granting of any stock option awards until 2008. The Company expects to
issue
new shares to satisfy stock option exercises and the vesting of restricted
stock
units.
Stock-based
compensation expense for stock options is calculated based on the fair value
of
the award at the grant date for those options expected to vest, and is
recognized as an expense over the vesting period of the grant. The Company
uses
the Black-Scholes option pricing model to estimate the value of granted options.
This model takes into account the option exercise price, the expected life,
the
current price of the underlying stock, the expected volatility of the Company’s
stock, expected dividends on the stock and a risk-free interest rate. The
Company estimates the expected volatility based on the Company’s historical
stock prices for the period corresponding to the expected life of the stock
options. Based
on
SAB 107 and SAB 110, the Company has estimated the expected life of the options
based on the average of the contractual period and the vesting period and has
consistently applied the simplified method to all option granted starting from
2005. Option
compensation expense totaled $1.6 million for the three months ended March
31,
2008, and $1.9 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 $16.0 million at March 31, 2008, 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 $7.33 during the first three months of 2008. 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, 2008
|
|
Expected
life- number of years
|
|
|
6.4
|
|
Risk-free
interest rate
|
|
|
3.09
|
%
|
Volatility
|
|
|
30.04
|
%
|
Dividend
yield
|
|
|
1.20
|
%
|
Cash
received from exercises of stock options totaled $356,000 from the exercise
of
18,906 shares during the three months ended March 31, 2008, and $1.0 million
from the exercise of 63,522 shares during the three months ended March 31,
2007.
The
fair
value of stock options vested during the first quarter of 2008 was $4.8 million
compared to $5.1 million for the first quarter of 2007. Aggregate intrinsic
value for options exercised were $108,000 during the three months ended March
31, 2008, and $1.1 million during the three months ended March 31, 2007. The
table below summarizes stock option activity for the quarter ended March 31,
2008:
|
|
|
|
|
|
Weighted-Average
|
|
Aggregate
|
|
|
|
|
|
Weighted-Average
|
|
Remaining Contractual
|
|
Intrinsic
|
|
|
|
Shares
|
|
Exercise Price
|
|
Life (in years)
|
|
Value (in thousands)
|
|
Balance
at December 31, 2007
|
|
|
4,574,280
|
|
$
|
28.36
|
|
|
6.1
|
|
$
|
24,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
689,200
|
|
|
23.37
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(16,784
|
)
|
|
32.63
|
|
|
|
|
|
|
|
Exercised
|
|
|
(18,906
|
)
|
|
18.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2008
|
|
|
5,227,790
|
|
$
|
27.72
|
|
|
6.4
|
|
$
|
2,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2008
|
|
|
3,415,733
|
|
$
|
26.67
|
|
|
5.4
|
|
$
|
2,901
|
|
At
March
31, 2008, 1,527,001 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,
2008, 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
|
|
|
2,000
|
|
|
0.5
|
|
|
2,000
|
|
10.63
|
|
|
92,836
|
|
|
1.8
|
|
|
92,836
|
|
11.06
|
|
|
10,240
|
|
|
1.8
|
|
|
10,240
|
|
11.34
|
|
|
10,240
|
|
|
4.8
|
|
|
10,240
|
|
15.05
|
|
|
130,488
|
|
|
2.8
|
|
|
130,488
|
|
16.28
|
|
|
156,056
|
|
|
3.9
|
|
|
156,056
|
|
17.29
|
|
|
10,240
|
|
|
3.8
|
|
|
10,240
|
|
19.93
|
|
|
336,844
|
|
|
4.8
|
|
|
336,844
|
|
21.09
|
|
|
10,240
|
|
|
2.8
|
|
|
10,240
|
|
22.01
|
|
|
406,674
|
|
|
2.8
|
|
|
406,674
|
|
23.37
|
|
|
689,200
|
|
|
9.9
|
|
|
-
|
|
24.80
|
|
|
888,816
|
|
|
5.6
|
|
|
703,072
|
|
28.70
|
|
|
527,600
|
|
|
5.9
|
|
|
421,800
|
|
32.26
|
|
|
40,000
|
|
|
6.2
|
|
|
24,000
|
|
32.47
|
|
|
245,060
|
|
|
7.0
|
|
|
196,048
|
|
33.54
|
|
|
264,694
|
|
|
7.1
|
|
|
211,755
|
|
33.81
|
|
|
3,000
|
|
|
7.2
|
|
|
1,200
|
|
36.24
|
|
|
414,230
|
|
|
7.8
|
|
|
165,692
|
|
36.90
|
|
|
316,336
|
|
|
7.8
|
|
|
126,904
|
|
37.00
|
|
|
645,996
|
|
|
6.9
|
|
|
388,004
|
|
38.26
|
|
|
12,000
|
|
|
8.1
|
|
|
2,400
|
|
38.38
|
|
|
15,000
|
|
|
6.6
|
|
|
9,000
|
|
|
|
|
5,227,790
|
|
|
6.4
|
|
|
3,415,733
|
|
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, 2008:
|
|
Date
Granted
|
|
|
|
January
25, 2006
|
|
January
31, 2007
|
|
Shares
granted
|
|
|
30,000
|
|
|
20,000
|
|
Vested
ratably over
|
|
|
3
years
|
|
|
2
years
|
|
Price
per share at grant date
|
|
$
|
36.24
|
|
$
|
34.66
|
|
Vested
shares
|
|
|
20,000
|
|
|
10,000
|
|
Non-vested
shares
|
|
|
10,000
|
|
|
10,000
|
|
The
stock
compensation expense recorded related to non-vested stock above was $177,000
for
the three months ended March 31, 2008, and $148,000 for the three months ended
March 31, 2007. Unrecognized stock-based compensation expense related to
non-vested stock awards was $0.6 million at March 31, 2008, and is expected
to
be recognized over the next 10 months.
In
addition to stock options and restricted stock awards above, in February 2008,
the Company also granted restricted stock units on 82,291 shares of the
Company’s common stock to its eligible employees. On the date of granting of
these restricted stock units, the closing price of the Company’s stock was
$23.37 per share. Such restricted stock units have a maximum term of five years
and vest in approximately 20% annual increments subject to employees’ continued
employment with the Company. The following table presents information relating
to the restricted stock units grant as of March 31, 2008:
|
|
|
|
Weighted-Average
|
|
|
|
|
|
Remaining Contractual
|
|
|
|
Units
|
|
Life (in years)
|
|
Balance
at December 31, 2007
|
|
-
|
|
-
|
|
|
|
|
|
|
|
Granted
|
|
|
82,291
|
|
|
3.0
|
|
Forfeited
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2008
|
|
|
82,041
|
|
|
2.9
|
|
The
compensation expense recorded related to restricted stock units above was
$27,000 for the three months ended March 31, 2008. Unrecognized stock-based
compensation expense related to restricted stock units was $1.6 million at
March
31, 2008, and is expected to be recognized over the next 4.9 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 (short-fall)
from share-based payment arrangements:
|
|
For the three months ended March 31,
|
|
(In
thousands)
|
|
2008
|
|
2007
|
|
(Short-fall)/Benefit
of tax deductions in excess of grant-date fair
value
|
|
$
|
(226
|
)
|
$
|
420
|
|
Benefit
of tax deductions on grant-date fair value
|
|
|
271
|
|
|
43
|
|
Total
benefit of tax deductions
|
|
$
|
45
|
|
$
|
463
|
|
7.
Securities Purchased Under Agreements
to Resell
Securities
purchased under agreements to resell are usually collateralized by U.S.
government agency and mortgage-backed securities. The counter-parties to these
agreements are nationally recognized investment banking firms that meet
credit requirements
of the Company and with whom a master repurchase agreement has been duly
executed. As of March 31,
2008,
the Company entered into five long-term resale agreements totaling $250.0
million compared to nine long-term resale agreements totaling $450.0 million
at
December 31, 2007. The agreements have terms from seven to ten years with
interest rates ranging from 7.00% to 7.15%. The counterparty has the right
to a
quarterly call. Among these agreements, $200.0 million are callable after the
first three months and $50.0 million are callable after the first six months.
When the callable term starts if certain conditions are met, there may be no
interest earned for those days when the certain conditions are met. In addition
to long-term agreements, the Company entered into a $55.0 million short term
resale agreement at a rate of 3.65% that matured in April 2008.
Securities
purchased under agreements to resell were $305.0 million at a weighted average
interest rate 6.47% at March 31, 2008, compared to $516.1 million at a weighted
average interest rate of 7.44% at December 31, 2007.
For
those
securities obtained under the resale agreements, the collateral is either held
by a third party custodian or by the counter-party and is segregated under
written agreements that recognize the Company’s interest in the securities.
Interest income associated with securities purchased under resale agreements
totaled $6.3 million for the first quarter of 2008 and $3.3 million for the
same
quarter a year ago.
8.
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, 2008
|
|
At December 31, 2007
|
|
Commitments
to extend credit
|
|
$
|
2,214,874
|
|
$
|
2,310,887
|
|
Standby
letters of credit
|
|
|
58,290
|
|
|
62,413
|
|
Other
letters of credit
|
|
|
61,548
|
|
|
71,089
|
|
Bill
of lading guarantees
|
|
|
260
|
|
|
323
|
|
Total
|
|
$
|
2,334,972
|
|
$
|
2,444,712
|
|
As
of
March 31, 2008, $19.8 million unfunded commitments for affordable housing
investments were recorded under other liabilities compared to $19.2 million
at
December 31, 2007.
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.
9.
Securities Sold Under Agreements to
Repurchase
Securities
sold under agreements to repurchase were $1.6 billion with a weighted average
rate of 3.77% at March 31, 2008, compared to $1.4 billion with a weighted
average rate of 3.57% at December 31, 2007. Seventeen floating-to-fixed rate
agreements totaling $900.0 million are with initial floating rates for a period
of time ranging from six months to one year, with the floating rates ranging
from the three-month LIBOR minus 100 basis points to the three-month LIBOR
minus
340 basis points. Thereafter, the rates are fixed for the remainder of the
term,
with interest rates ranging from 4.29% to 5.07%. After the initial floating
rate
term, the counterparties have the right to terminate the transaction at par
at
the fixed rate reset date and quarterly thereafter. Thirteen fixed-to-floating
rate agreements totaling $650.0 million are with initial fixed rates ranging
from 1.00% and 3.50% with initial fixed rate terms ranging from six months
to
eighteen months. For the remainder of the seven year term, the rates float
at 8%
minus the three-month LIBOR rate with a maximum rate ranging from 3.25% to
3.75%
and minimum rate of 0.0%. After the initial fixed rate term, the counterparties
have the right to terminate the transaction at par at the floating rate reset
date and quarterly thereafter. In addition, there were two short term repurchase
agreements totaling $30.2 million which matured on April 10, 2008, with a
weighted average interest rate of 3.48% at March 31, 2008.
At
March
31, 2008, included in long-term transactions are nineteen repurchase agreements
totaling $1.0 billion that were callable but which had not been called. Two
fixed-to-floating rate repurchase agreements of $50.0 million each have variable
interest rates currently at 3.75% maximum rate until their final maturities
in
September 2014. Four floating-to-fixed rate repurchase agreements of $50.0
million each have fixed interest rates ranging from 4.89% to 5.07%, until their
final maturities in January 2017. Ten floating-to-fixed rate repurchase
agreements totaled $550.0 million have fixed interest rates ranging from 4.29%
to 4.78%, until their final maturities in 2014. Two floating-to-fixed rate
repurchase agreements of $50.0 million each have fixed interest rates ranging
at
4.75% and 4.79%, until their final maturities in 2011. One floating-to-fixed
rate repurchase agreement of $50.0 million has fixed interest rate at 4.83%
until its final maturities in 2012.
These
transactions are accounted for as collateralized financing transactions and
recorded at the amounts at which the securities were sold. The Company may
have
to provide additional collateral for the repurchase agreements, as necessary.
The
underlying collateral pledged for the repurchase agreements consists of U.S.
government agency security debt
and
mortgage-backed securities with
a
fair value of $1.7 billion as of March 31, 2008, and $1.5 billion as of December
31, 2007.
10.Advances
from the Federal Home Loan Bank
Total
advances from the FHLB of San Francisco decreased $185.9 million to $1.2 billion
at March 31, 2008 from $1.4 billion at December 31, 2007. Non-puttable advances
totaled $489.3 million with a weighted rate of 3.42% and puttable advances
totaled $700.0 million with a weighted average rate of 4.42% at March 31, 2008.
The FHLB has the right to terminate the puttable transaction at par at the
first
anniversary date in the first quarter of 2008 and quarterly thereafter for
$300.0 million of the advances, and on the second anniversary date in 2009
and
quarterly thereafter for $400.0 million of the advances
11.
Subordinated Note and Junior Subordinated Debt
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, 2008, the per annum interest
rate on the subordinated debt was 3.80% compared to 5.93% at December 31, 2007.
The subordinated debt was issued through the Bank and qualifies as Tier 2
capital for regulatory reporting purposes and is included in long-term debt
in
the accompanying condensed consolidated balance sheets.
The
Bancorp established three special purpose trusts in 2003 and two in 2007 for
the
purpose of issuing trust preferred securities to outside investors (Capital
Securities). The trusts exist for the purpose of issuing the Capital Securities
and investing the proceeds thereof, together with proceeds from the purchase
of
the common stock of the trusts by the Bancorp, in junior subordinated notes
issued by the Bancorp. The five special purpose trusts are considered variable
interest entities under FIN 46R. Because the Bancorp is not the primary
beneficiary of the trusts, the financial statements of the trusts are not
included in the consolidated financial statements of the Company. At
March
31, 2008, junior subordinated debt securities totaled $121.1 million with a
weighted average interest rate of 4.97% compared to $121.1 million with a
weighted average rate of 7.13% at December 31, 2007. The junior subordinated
debt securities have a stated maturity term of 30 years and are
currently included in the Tier 1 capital of the Bancorp for regulatory capital
purposes.
12.
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 $1.6 million, if
recognized, would affect the effective tax rate. The Company recognizes 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 amount
of
accrued interest and penalties was $1.7 million. In February 2008, the Company
withdrew, with the agreement of the California Franchise Tax Board, a claim
related to GBC Bancorp’s 2001 California tax return and reversed $0.5 million of
accrued penalties with a corresponding decrease in goodwill. The amount of
additional unrecognized tax benefits expected to be recognized during 2008
is
not expected to be significant.
The
Company’s tax returns are open for audits by the Internal Revenue Service back
to 2004 and by the Franchise Tax Board of the State of California back to 2000.
The Company is currently under audit by the California Franchise
Tax Board for the years 2000 to 2004. During the second quarter of 2007, the
Internal Revenue Service completed an examination of the Company’s 2004 and 2005
tax returns and did not propose any adjustments deemed to be
material.
13.
Stock Repurchase Program
On
November 2007, the Company announced that its Board of Directors had approved
a
new stock repurchase program to buy back up to an aggregate of one million
shares of the Company’s common stock following the completion of the stock
repurchase program of May 2007. During 2007, the Company repurchased 2,829,203
shares of common stock for $92.4 million, or an average price of $32.67 per
share. No shares were purchased during the first quarter of 2008. At March
31,
2008, 622,500 shares remain under the Company’s November 2007 repurchase
program.
14.
Fair Value Measurements
SFAS
157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. The Company adopted SFAS 157 on January 1, 2008, and
determined the fair values of our financial instruments based on the three-level
fair value hierarchy established in SFAS 157. The three-level inputs to measure
the fair value of assets and liabilities are as follows:
|
·
|
Level
1 - Quoted prices in active markets for identical assets or
liabilities.
|
|
·
|
Level
2 - Observable prices in active markets for similar assets or liabilities;
prices for identical or similar assets or liabilities in markets
that are
not active; directly observable market inputs for substantially the
full
term of the asset and liability; market inputs that are not directly
observable but are derived from or corroborated by observable market
data.
|
|
·
|
Level
3 – Unobservable inputs based on the Company’s own judgments about the
assumptions that a market participant would
use.
|
The
Company uses the following methodologies to measure the fair value of its
financial assets on recurring basis:
|
Securities
available for sale- For
certain actively traded trust preferred security and agency preferred
stocks, the Company measures the fair value based on quoted market
prices
in active exchange markets at the reporting date, a level 1 measurement.
The Company measures all other securities by using quoted market
prices
for similar securities or dealer quotes, a level 2 measurement. This
category generally includes U.S. Government agency securities, state
and
municipal securities, mortgage-backed securities (“MBS”), commercial MBS,
collateralized mortgage obligations, asset-backed securities and
corporate
bonds.
|
|
Trading
securities- The Company measures the fair value of trading securities
based on quoted market prices in active exchange market at the reporting
date, a level 1 measurement.
|
|
Impaired
loans- The Company does not record loans at fair value on a recurring
basis. However, from time to time, nonrecurring fair value adjustments
to
collateral dependent impaired loans are recorded based on either
current
appraised value of the collateral, a level 2 measurement, or management’s
judgment and estimation of value reported on old appraisal which
is then
adjusted based on recent market trends, a level 3 measurement.
|
|
Equity
investment- The Company measures the fair value of equity investment
based
on quoted market prices in active exchange market at the reporting
date, a
level 1 measurement.
|
|
|
Warrants-
The Company measures the fair value of warrants based on unobservable
inputs based on assumption and management judgment , a level 3
measurement.
|
The
following table presents the Company’s hierarchy for its assets and liabilities
measured at fair value on a recurring basis at March 31, 2008:
|
|
Fair Value Measurements Using
|
|
Total at
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Fair
Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
$
|
41,838
|
|
$
|
2,409,711
|
|
$
|
-
|
|
$
|
2,451,549
|
|
Trading
securities
|
|
|
93
|
|
|
-
|
|
|
-
|
|
|
93
|
|
Impaired
loans
|
|
|
-
|
|
|
7,430
|
|
|
18,268
|
|
|
25,698
|
|
Equity
investment
|
|
|
1,868
|
|
|
-
|
|
|
-
|
|
|
1,868
|
|
Warrants
|
|
|
-
|
|
|
-
|
|
|
113
|
|
|
113
|
|
Total
assets
|
|
$
|
43,799
|
|
$
|
2,417,141
|
|
$
|
18,381
|
|
$
|
2,479,321
|
|
The
Company measured the fair value of its warrants on a recurring basis using
significant unobservable inputs. The fair value of warrants was $113,000 at
March 31, 2008, compared to $125,000 at December 31, 2008. The fair value
adjustment of $12,000 were included in earnings in the first quarter of 2008.
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,
2007, of Cathay General Bancorp (“Bancorp”) and its wholly-owned subsidiary
Cathay Bank (the “Bank” and, together, the “Company” or “we”, “us,” or
“our”).
Critical
Accounting Policies
The
discussion and analysis of the Company’s unaudited condensed consolidated
balance sheets and results of operations are based upon its unaudited condensed
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these consolidated financial statements requires management
to
make estimates and judgments that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or
conditions.
Accounting
for the allowance for credit losses involves significant judgments and
assumptions by management, which have a material impact on the carrying value
of
net loans; management considers this accounting policy to be a critical
accounting policy. The judgments and assumptions used by management are based
on
historical experience and other factors, which are believed to be reasonable
under the circumstances as described under the heading “Accounting for the
allowance for credit losses” in the Company’s annual report on Form 10-K for the
year ended December 31, 2007.
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, 2007.
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,
2007.
HIGHLIGHTS
·
|
First
quarter earnings decreased $2.7 million, or 8.9%, compared to the
same
quarter a year ago.
|
·
|
Fully
diluted earnings per share was $0.55, decreasing 3.5% compared to
the same
quarter a year ago.
|
·
|
Return
on average assets was 1.07% for the quarter ended March 31, 2008,
compared
to 1.23% for the quarter ended December 31, 2007 and compared to
1.45% for
the same quarter a year ago.
|
·
|
Return
on average stockholders’ equity was 10.99% for the quarter ended March 31,
2008, compared to 12.70% for the quarter ended December 31, 2007,
and
compared to 12.87% for the same quarter a year
ago.
|
·
|
Gross
loans increased by $235.2 million, or 3.5%, for the quarter to $6.9
billion at March 31, 2008, from $6.7 billion at December 31,
2007.
|
·
|
Non-accrual
loans decreased from $58.3 million at December 31, 2007, to $48.6
million
at March 31, 2008.
|
Income
Statement Review
Net
Income
Net
income for the first quarter of 2008 was $27.3 million, or $0.55 per diluted
share, a $2.7 million, or 8.9%, decrease compared with net income of $30.0
million, or $0.57 per diluted share for the same quarter a year ago. Return
on
average assets was 1.07% and return on average stockholders’ equity was 10.99%
for the first quarter of 2008 compared with a return on average assets of 1.45%
and a return on average stockholders’ equity of 12.87% for the first quarter of
2007.
Financial
Performance
|
|
First Quarter 2008
|
|
First Quarter 2007
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
27.3
million
|
|
$
|
30.0
million
|
|
Basic
earnings per share
|
|
$
|
0.55
|
|
$
|
0.58
|
|
Diluted
earnings per share
|
|
$
|
0.55
|
|
$
|
0.57
|
|
Return
on average assets
|
|
|
1.07
|
%
|
|
1.45
|
%
|
Return
on average stockholders’ equity
|
|
|
10.99
|
%
|
|
12.87
|
%
|
Efficiency
ratio
|
|
|
39.11
|
%
|
|
38.44
|
%
|
Net
Interest Income Before Provision for Credit Losses
Net
interest income before provision for credit losses increased to $75.2 million
during the first quarter of 2008, $2.4 million, or 3.4%, higher than the $72.8
million during the same quarter a year ago. The increase was due primarily
to
the strong growth in loans and investment securities offset by the impact of
the
decline in the net interest margin.
The
net
interest margin, on a fully taxable-equivalent basis, was 3.16% for the first
quarter of 2008. The net interest margin decreased 27 basis points from 3.43%
in
the fourth quarter of 2007 and decreased 67 basis points from 3.83% in the
first
quarter of 2007. The decrease in the net interest margin from prior quarters
was
primarily as a result of the lag in the downward repricing of certificates
of
deposit.
For
the
first quarter of 2008, the yield on average interest-earning assets was 6.46%
on
a fully taxable-equivalent basis, and the cost of funds on average
interest-bearing liabilities equaled 3.80%. In comparison, for the first quarter
of 2007, the yield on average interest-earning assets was 7.44% and cost of
funds on average interest-bearing liabilities equaled 4.27%. 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
to 2.66% for the quarter ended March 31, 2008, from 3.17% for the same quarter
a
year ago primarily due to the reasons discussed above.
Average
daily balances, together with the total dollar amounts, on a taxable-equivalent
basis, of interest income and interest expense, and the weighted-average
interest rate and net interest margin are as follows:
Interest-Earning
Assets and Interest-Bearing Liabilities
|
|
|
|
|
|
Three
months ended March 31,
|
|
2008
|
|
2007
|
|
|
|
|
|
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
|
|
$
|
1,484,044
|
|
$
|
24,259
|
|
|
6.57
|
%
|
$
|
1,234,003
|
|
$
|
24,983
|
|
|
8.21
|
%
|
Residential
mortgage
|
|
|
674,909
|
|
|
10,097
|
|
|
5.98
|
|
|
575,240
|
|
|
8,855
|
|
|
6.16
|
|
Commercial
mortgage
|
|
|
3,809,473
|
|
|
67,172
|
|
|
7.09
|
|
|
3,249,671
|
|
|
63,431
|
|
|
7.92
|
|
Real
estate construction loans
|
|
|
810,071
|
|
|
15,165
|
|
|
7.53
|
|
|
699,853
|
|
|
16,595
|
|
|
9.62
|
|
Other
loans and leases
|
|
|
26,102
|
|
|
332
|
|
|
5.12
|
|
|
29,192
|
|
|
315
|
|
|
4.38
|
|
Total
loans and leases (1)
|
|
|
6,804,599
|
|
|
117,025
|
|
|
6.92
|
|
|
5,787,959
|
|
|
114,179
|
|
|
8.00
|
|
Taxable
securities
|
|
|
2,250,823
|
|
|
28,506
|
|
|
5.09
|
|
|
1,578,706
|
|
|
21,815
|
|
|
5.60
|
|
Tax-exempt
securities (3)
|
|
|
69,668
|
|
|
1,549
|
|
|
8.94
|
|
|
75,549
|
|
|
1,148
|
|
|
6.16
|
|
Federal
Home Loan Bank Stock
|
|
|
65,753
|
|
|
753
|
|
|
4.61
|
|
|
44,957
|
|
|
509
|
|
|
4.59
|
|
Interest
bearing deposits
|
|
|
24,885
|
|
|
454
|
|
|
7.34
|
|
|
47,822
|
|
|
786
|
|
|
6.67
|
|
Federal
funds sold & securities purchased under agreements to
resell
|
|
|
419,675
|
|
|
6,480
|
|
|
6.21
|
|
|
217,662
|
|
|
3,802
|
|
|
7.08
|
|
Total
interest-earning assets
|
|
|
9,635,403
|
|
|
154,767
|
|
|
6.46
|
|
|
7,752,655
|
|
|
142,239
|
|
|
7.44
|
|
Non-interest
earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
85,002
|
|
|
|
|
|
|
|
|
93,895
|
|
|
|
|
|
|
|
Other
non-earning assets
|
|
|
658,758
|
|
|
|
|
|
|
|
|
621,767
|
|
|
|
|
|
|
|
Total
non-interest earning assets
|
|
|
743,760
|
|
|
|
|
|
|
|
|
715,662
|
|
|
|
|
|
|
|
Less:
Allowance for loan losses
|
|
|
(66,305
|
)
|
|
|
|
|
|
|
|
(66,308
|
)
|
|
|
|
|
|
|
Deferred
loan fees
|
|
|
(10,563
|
)
|
|
|
|
|
|
|
|
(12,233
|
)
|
|
|
|
|
|
|
Total
assets
|
|
$
|
10,302,295
|
|
|
|
|
|
|
|
$
|
8,389,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand accounts
|
|
$
|
237,611
|
|
$
|
485
|
|
|
0.82
|
|
$
|
232,656
|
|
$
|
723
|
|
|
1.26
|
|
Money
market accounts
|
|
|
701,552
|
|
|
3,841
|
|
|
2.20
|
|
|
666,454
|
|
|
5,065
|
|
|
3.08
|
|
Savings
accounts
|
|
|
330,504
|
|
|
445
|
|
|
0.54
|
|
|
344,336
|
|
|
845
|
|
|
1.00
|
|
Time
deposits
|
|
|
4,180,871
|
|
|
44,332
|
|
|
4.26
|
|
|
3,654,859
|
|
|
42,506
|
|
|
4.72
|
|
Total
interest-bearing deposits
|
|
|
5,450,538
|
|
|
49,103
|
|
|
3.62
|
|
|
4,898,305
|
|
|
49,139
|
|
|
4.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds purchased
|
|
|
43,341
|
|
|
382
|
|
|
3.54
|
|
|
25,244
|
|
|
332
|
|
|
5.33
|
|
Securities
sold under agreements to repurchase
|
|
|
1,559,336
|
|
|
14,625
|
|
|
3.77
|
|
|
616,418
|
|
|
5,717
|
|
|
3.76
|
|
Other
borrowings
|
|
|
1,156,238
|
|
|
12,151
|
|
|
4.23
|
|
|
923,273
|
|
|
11,938
|
|
|
5.24
|
|
Long-term
debt
|
|
|
171,136
|
|
|
2,849
|
|
|
6.70
|
|
|
105,156
|
|
|
1,976
|
|
|
7.62
|
|
Total
interest-bearing liabilities
|
|
|
8,380,589
|
|
|
79,110
|
|
|
3.80
|
|
|
6,568,396
|
|
|
69,102
|
|
|
4.27
|
|
Non-interest
bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
780,579
|
|
|
|
|
|
|
|
|
772,268
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
142,210
|
|
|
|
|
|
|
|
|
104,798
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
998,917
|
|
|
|
|
|
|
|
|
944,314
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
10,302,295
|
|
|
|
|
|
|
|
$
|
8,389,776
|
|
|
|
|
|
|
|
Net
interest spread (4)
|
|
|
|
|
|
|
|
|
2.66
|
%
|
|
|
|
|
|
|
|
3.17
|
%
|
Net
interest income (4)
|
|
|
|
|
$
|
75,657
|
|
|
|
|
|
|
|
$
|
73,137
|
|
|
|
|
Net
interest margin (4)
|
|
|
|
|
|
|
|
|
3.16
|
%
|
|
|
|
|
|
|
|
3.83
|
%
|
(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,
|
|
2008-2007
|
|
|
|
Increase
(Decrease) in
|
|
|
|
Net
Interest Income Due to:
|
|
(Dollars
in thousands)
|
|
Changes
in
Volume
|
|
Changes
in
Rate
|
|
Total
Change
|
|
|
|
|
|
|
|
|
|
Interest-Earning
Assets:
|
|
|
|
|
|
|
|
|
|
|
Loans
and leases
|
|
|
19,311
|
|
|
(16,465
|
)
|
|
2,846
|
|
Taxable
securities
|
|
|
8,831
|
|
|
(2,140
|
)
|
|
6,691
|
|
Tax-exempt
securities (2)
|
|
|
(96
|
)
|
|
497
|
|
|
401
|
|
Federal
Home Loan Bank Stock
|
|
|
242
|
|
|
2
|
|
|
244
|
|
Deposits
with other banks
|
|
|
(407
|
)
|
|
75
|
|
|
(332
|
)
|
Federal
funds sold and securities purchased
|
|
|
|
|
|
|
|
|
|
|
under
agreements to resell
|
|
|
3,203
|
|
|
(525
|
)
|
|
2,678
|
|
Total
increase in interest income
|
|
|
31,084
|
|
|
(18,556
|
)
|
|
12,528
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing demand accounts
|
|
|
16
|
|
|
(254
|
)
|
|
(238
|
)
|
Money
market accounts
|
|
|
266
|
|
|
(1,490
|
)
|
|
(1,224
|
)
|
Savings
accounts
|
|
|
(32
|
)
|
|
(368
|
)
|
|
(400
|
)
|
Time
deposits
|
|
|
6,054
|
|
|
(4,228
|
)
|
|
1,826
|
|
Federal
funds purchased
|
|
|
188
|
|
|
(138
|
)
|
|
50
|
|
Securities
sold under agreements to repurchase
|
|
|
8,891
|
|
|
17
|
|
|
8,908
|
|
Other
borrowed funds
|
|
|
2,775
|
|
|
(2,562
|
)
|
|
213
|
|
Long-term
debts
|
|
|
1,139
|
|
|
(266
|
)
|
|
873
|
|
Total
increase in interest expense
|
|
|
19,297
|
|
|
(9,289
|
)
|
|
10,008
|
|
Changes
in net interest income
|
|
$
|
11,787
|
|
$
|
(9,267
|
)
|
$
|
2,520
|
|
|
(1) |
Changes
in interest income and interest expense attributable to changes in
both
volume and rate have been allocated proportionately to changes due
to
volume and changes due to rate.
|
|
(2) |
The
amount of interest earned on certain securities of states and political
subdivisions and other securities held has been adjusted to a fully
taxable-equivalent basis, using a statutory federal income tax rate
of
35%.
|
Provision
for Loan Losses
The
provision for credit losses was $7.5 million for the first quarter of 2008
compared to $1.0 million for the first quarter of 2007 and to $5.7 million
for
the fourth quarter of 2007. The provision for credit losses was based on the
review of the adequacy of the allowance for loan losses at March 31, 2008.
The
provision for credit losses represents the charge or credit against current
earnings that is determined by management, through a credit review process,
as
the amount needed to establish an allowance that management believes to be
sufficient to absorb credit losses inherent in the Company’s loan portfolio. The
following table summarizes the charge-offs and recoveries for the quarters
as
indicated:
|
|
For the three months ended March 31,
|
|
(In
thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
Commercial
loans
|
|
$
|
251
|
|
$
|
3,029
|
|
Construction
loans
|
|
|
4,130
|
|
|
190
|
|
Real
estate loans
|
|
|
514
|
|
|
62
|
|
Total
charge-offs
|
|
|
4,895
|
|
|
3,281
|
|
Recoveries:
|
|
|
|
|
|
|
|
Commercial
loans
|
|
|
187
|
|
|
2,471
|
|
Installment
and other loans
|
|
|
4
|
|
|
6
|
|
Total
recoveries
|
|
|
191
|
|
|
2,477
|
|
Net
Charge-offs
|
|
$
|
4,704
|
|
$
|
804
|
|
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 $6.5 million for the first
quarter of 2008, an increase of $640,000, or 10.9%, compared to the non-interest
income of $5.9 million for the first quarter of 2007.
Letters
of credit commissions increased $148,000, or 11.5%, to $1.4 million in the
first
quarter of 2008 from $1.3 million in the same quarter of 2007 due primarily
to
increases in acceptance commissions.
Other
operating income increased $757,000, or 24.8%, to $3.8 million in the first
quarter of 2008 from $3.1 million in the same quarter a year ago primarily
due
to increases in commissions from foreign currency and exchange transactions
of
$803,000 and increases in venture capital income of $603,000 offset by decreases
in other fees on loans of $453,000 and by decreases in commissions from official
checks sales of $101,000. For the first quarter of 2008, the Company recorded
no
securities gains compared to net securities gains of $191,000 for the first
quarter of 2007.
Non-Interest
Expense
Non-interest
expense increased $1.73 million, or 5.7%, to $32.0 million in the first quarter
of 2008 compared to $30.2 million in the same quarter a year ago. The efficiency
ratio was 39.11% for the first quarter of 2008 compared to 38.44% in the year
ago quarter and 38.62% for the fourth quarter of 2007.
The
increase of non-interest expense from the first quarter a year ago to the first
quarter of 2008 was primarily due to a combination of the
following:
|
· |
Salaries
and employee benefits increased $882,000, or 5.2%, from $17.0 million
in
the first quarter of 2007 to $17.9 million in the first quarter of
2008
due primarily to increases in salaries and payroll taxes of $1.4
million
and employee insurance benefits of $306,000 due to the hiring of
additional staff and the opening of new branches. Partially offsetting
these increases were a $308,000 decrease in bonus expenses, a $204,000
decrease in stock based compensation, and a $152,000 increase in
deferred
loan costs.
|
|
· |
Occupancy
expenses increased $515,000, or 18.6%, primarily due to decreases
in
rental income of $286,000 and increases in rental expenses of
$107,000.
|
|
· |
Professional
service expenses increased $657,000, or 38.0%, primarily due to increases
in appraisal expenses of $201,000, in delivery expense of $165,000,
and in
collection expenses of $135,000.
|
|
· |
Marketing
expenses increased $116,000, or 12.9%, due to higher media expenses
and
donations.
|
Offsetting
the above overall increases was a $261,000 decrease in other real estate owned
expenses, a $119,000 decrease in operation expenses of affordable housing
investments, and a $101,000 decrease in other operating expenses. In the first
quarter of 2008, the Company recorded an $871,000 reduction in operations of
affordable housing investments as a result of a cash distribution compared
to a
$500,000 reduction in the year ago quarter.
Income
Taxes
The
effective tax rate was 35.4% for the first quarter of 2008, compared to 36.8%
for the same quarter a year ago and 36.2% for the full year 2007. The lower
effective tax rate for the first quarter of 2008 was due to increases in low
income housing tax credits, an increased percentage of taxable income
apportioned to lower tax rate jurisdictions, and a lower taxable income in
2008.
Balance
Sheet Review
Assets
Total
assets increased by $40.4 million, or 0.4%, to $10.44 billion at March 31,
2008
from year-end 2007 of $10.40 billion. The increase in total assets was
represented primarily by increases in available- for-sale securities of $103.9
million, or 4.4%, and increases in loans of $235.2 million, or 3.5%, offset
by
decreases of $211.1 million in securities purchased under agreements to resell.
Securities
Total
securities were $2.5 billion, or 23.5%, of total assets at March 31, 2008,
compared with $2.3 billion, or 22.6%, of total assets at December 31, 2007.
The
increase of $103.9 million, or 4.4%, was primarily due to purchases of callable
agency securities and agency mortgage backed securities which provided
collateral for securities sold under agreements to repurchase.
The
net
unrealized gains on securities available-for-sale, which represents the
difference between fair value and amortized cost, totaled $12.8 million at
March
31, 2008, compared to net unrealized losses of $941,000 at year-end 2007. The
increase in unrealized gain on securities available-for-sale was caused by
the
decrease in market interest rates during the first quarter of 2008. Net
unrealized gains/losses in the securities available-for-sale are included in
accumulated other comprehensive income or loss, net of tax, as part of total
stockholders’ equity.
The
average taxable-equivalent yield on securities available-for-sale decreased
42
basis points to 5.21% for the three months ended March 31, 2008, compared with
5.63% for the same period a year ago, as securities matured, prepaid, or were
called and proceeds were reinvested at lower interest rates.
The
following tables summarize the composition, amortized cost, gross unrealized
gains, gross unrealized losses, and fair value of securities available-for-sale,
as of March 31, 2008, and December 31, 2007:
|
|
March
31, 2008
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
|
|
(In
thousands)
|
|
U.S.
government sponsored entities
|
|
$
|
732,997
|
|
$
|
3,910
|
|
$
|
31
|
|
$
|
736,876
|
|
State
and municipal securities
|
|
|
31,300
|
|
|
426
|
|
|
22
|
|
|
31,704
|
|
Mortgage-backed
securities
|
|
|
1,375,299
|
|
|
20,426
|
|
|
1,978
|
|
|
1,393,747
|
|
Commercial
mortgage-backed securities
|
|
|
8,367
|
|
|
-
|
|
|
266
|
|
|
8,101
|
|
Collateralized
mortgage obligations
|
|
|
207,917
|
|
|
624
|
|
|
5,629
|
|
|
202,912
|
|
Asset-backed
securities
|
|
|
575
|
|
|
-
|
|
|
5
|
|
|
570
|
|
Corporate
bonds
|
|
|
36,133
|
|
|
193
|
|
|
525
|
|
|
35,801
|
|
Preferred
stock of government sponsored entities
|
|
|
36,114
|
|
|
175
|
|
|
4,571
|
|
|
31,718
|
|
Trust
preferred securities
|
|
|
10,000
|
|
|
120
|
|
|
|
|
|
10,120
|
|
Total
|
|
$
|
2,438,702
|
|
$
|
25,874
|
|
$
|
13,027
|
|
$
|
2,451,549
|
|
|
|
December
31, 2007
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
|
|
(In
thousands)
|
|
U.S.
government sponsored entities
|
|
|
532,894
|
|
|
1,735
|
|
|
19
|
|
|
534,610
|
|
State
and municipal securities
|
|
|
33,657
|
|
|
388
|
|
|
24
|
|
|
34,021
|
|
Mortgage-backed
securities
|
|
|
1,320,963
|
|
|
9,920
|
|
|
5,835
|
|
|
1,325,048
|
|
Commercial
mortgage-backed securities
|
|
|
9,189
|
|
|
-
|
|
|
271
|
|
|
8,918
|
|
Collateralized
mortgage obligations
|
|
|
215,015
|
|
|
89
|
|
|
3,867
|
|
|
211,237
|
|
Asset-backed
securities
|
|
|
603
|
|
|
-
|
|
|
2
|
|
|
601
|
|
Corporate
bonds
|
|
|
126,535
|
|
|
-
|
|
|
841
|
|
|
125,694
|
|
Preferred
stock of government sponsored entities
|
|
|
34,750
|
|
|
403
|
|
|
2,785
|
|
|
32,368
|
|
Foreign
corporate bonds
|
|
|
75,000
|
|
|
168
|
|
|
-
|
|
|
75,168
|
|
Total
|
|
$
|
2,348,606
|
|
$
|
12,703
|
|
$
|
13,644
|
|
$
|
2,347,665
|
|
The
following table summarizes the scheduled maturities by security type of
securities available-for-sale, as of March 31, 2008:
|
|
As
of March 31, 2008
|
|
|
|
One
Year
or
Less
|
|
After
One
Year
to
Five
Years
|
|
After
Five
Years
to
Ten
Years
|
|
Over
Ten
Years
|
|
Total
|
|
|
|
(In
thousands)
|
|
Maturity
Distribution:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government sponsored entities
|
|
$
|
2,078
|
|
$
|
684,003
|
|
$
|
50,545
|
|
$
|
250
|
|
$
|
736,876
|
|
State
and municipal securities
|
|
|
986
|
|
|
10,374
|
|
|
17,516
|
|
|
2,828
|
|
|
31,704
|
|
Mortgage-backed
securities (1)
|
|
|
2,045
|
|
|
18,471
|
|
|
9,912
|
|
|
1,363,319
|
|
|
1,393,747
|
|
Commercial
mortgage-backed securities (1)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8,101
|
|
|
8,101
|
|
Collateralized
mortgage obligations (1)
|
|
|
-
|
|
|
-
|
|
|
38,313
|
|
|
164,599
|
|
|
202,912
|
|
Asset-backed
securities (1)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
570
|
|
|
570
|
|
Corporate
bonds
|
|
|
879
|
|
|
236
|
|
|
24,496
|
|
|
10,190
|
|
|
35,801
|
|
Preferred
stock of government sponsored entities (2)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
31,718
|
|
|
31,718
|
|
Trust
preferred securities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,120
|
|
|
10,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,988
|
|
$
|
713,084
|
|
$
|
140,782
|
|
$
|
1,591,695
|
|
$
|
2,451,549
|
|
(1)
Securities reflect stated maturities and do not reflect the impact of
anticipated prepayments.
(2)
These
is no stated maturity for equity securities.
Between
2002 and 2004, the Company purchased a number of collateralized mortgage
obligations comprised of interests in non-agency guaranteed residential
mortgages. At March 31, 2008, the remaining par value of these securities was
$192.9 million which represents 7.7% of the fair value of securities
available-for-sale and 1.8% of total assets. At March 31, 2008, the unrealized
loss for these securities was $6.1 million which represented 3.2% of the par
amount of these non-agency guaranteed residential mortgages. Based on the
Company’s analysis at March 31, 2008, there was no “other-than-temporary”
impairment in these securities due to the low loan to value ratio for the loan
underlying these securities, the credit support provided by junior tranches
of
these securitizations, and the continued AAA rating of these securities. At
March 31, 2008, equity securities included $11.8 million, at book value, and
$7.8 million, at market, of variable rate preferred stock issued by the Federal
National Mortgage Association and Federal Home Loan Mortgage Corporation. These
issues of preferred stock are tied to various short term indexes ranging from
the three-month LIBOR interest rate to the two year U.S. treasury rate. These
securities have AA-credit ratings from the securities rating agencies and are
callable by the issuer at par. At March 31, 2008, the unrealized loss on these
securities totaled $4.0 million compared to $2.8 million at December 31, 2007,
as a result of an increase in the spreads compared to U.S. Treasury securities
for these securities. The Company has the ability and intent to hold the
securities, including the non-agency collateralized mortgage obligation
securities discussed above with unrealized losses of $6.1 million, the agency
preferred stock with unrealized losses of $4.0 million, and $1.39 billion of
agency mortgage-backed securities with unrealized losses of $2.0 million, for
a
period of time sufficient for a recovery of cost for those issues with
unrealized losses.
The
temporarily impaired securities represent 17.6% of the fair value of securities
available-for-sale as of March 31, 2008. Unrealized
losses for securities with unrealized losses for less than twelve months
represent 4.9%, and securities with unrealized losses for twelve months or
more
represent 2.2% of the historical cost of these securities and generally resulted
from increases in interest rates subsequent to the date that these securities
were purchased.
Except
for one corporate bond issue with fair value of $130,000, all of these
securities are investment grade, as of March 31, 2008. At March 31, 2008, 55
issues of securities had unrealized losses for 12 months or longer and 33 issues
of securities had unrealized losses of less than 12 months.
At
March
31, 2008, 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, 2008, of the temporarily impaired securities in the
Company’s available-for-sale securities portfolio:
|
|
Temporarily
Impaired Securities as of March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than 12 months
|
|
12
months or longer
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
No.
of
|
|
Fair
|
|
Unrealized
|
|
No.
of
|
|
Fair
|
|
Unrealized
|
|
No.
of
|
|
|
|
Value
|
|
Losses
|
|
Issuances
|
|
|
|
Losses
|
|
Issuances
|
|
Value
|
|
Losses
|
|
Issuances
|
|
|
|
(In
thousands, except no. of issuances)
|
|
Description of securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government sponsored entities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
469
|
|
|
31
|
|
|
2
|
|
|
469
|
|
|
31
|
|
|
2
|
|
State
and municipal securities
|
|
|
347
|
|
|
6
|
|
|
1
|
|
|
1,111
|
|
|
16
|
|
|
2
|
|
|
1,458
|
|
|
22
|
|
|
3
|
|
Mortgage-backed
securities
|
|
|
41,662
|
|
|
123
|
|
|
15
|
|
|
162,269
|
|
|
1,855
|
|
|
28
|
|
|
203,931
|
|
|
1,978
|
|
|
43
|
|
Commercial
mortgage-backed securities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8,101
|
|
|
266
|
|
|
1
|
|
|
8,101
|
|
|
266
|
|
|
1
|
|
Collateralized
mortgage obligations
|
|
|
24,757
|
|
|
656
|
|
|
7
|
|
|
146,276
|
|
|
4,973
|
|
|
21
|
|
|
171,033
|
|
|
5,629
|
|
|
28
|
|
Asset-backed
securities
|
|
|
502
|
|
|
4
|
|
|
1
|
|
|
68
|
|
|
1
|
|
|
1
|
|
|
570
|
|
|
5
|
|
|
2
|
|
Corporate
bonds
|
|
|
25,261
|
|
|
525
|
|
|
5
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
25,261
|
|
|
525
|
|
|
5
|
|
Preferred
stock of government sponsored entities
|
|
|
21,554
|
|
|
4,571
|
|
|
4
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
21,554
|
|
|
4,571
|
|
|
4
|
|
Total
|
|
$
|
114,083
|
|
$
|
5,885
|
|
|
33
|
|
$
|
318,294
|
|
$
|
7,142
|
|
|
55
|
|
$
|
432,377
|
|
$
|
13,027
|
|
|
88
|
|
Loans
Gross
loans were $6.9 billion as of March 31, 2008, compared to $6.7 billion as of
December 31, 2007, representing an increase of $235.2 million, or 3.5%.
Commercial
mortgage loans increased $127.8 million, or 3.4%, to $3.9 billion at March
31,
2008, compared to $3.8 billion at year-end 2007. At March 31, 2008, this
portfolio represented approximately 56.2% of the Bank’s gross loans compared to
56.3% at year-end 2007. Commercial loans increased $53.7 million, or 3.7%,
to
$1.49 billion at March 31, 2008, compared to $1.44 billion at year-end 2007.
In
addition, construction loans increased $31.9 million, or 4.0%, and residential
mortgage loans increased $15.9 million, or 2.9%, during the first quarter of
2008.
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, 2008
|
|
% of Gross Loans
|
|
December 31, 2007
|
|
% of Gross Loans
|
|
% Change
|
|
Type
of Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,489,524
|
|
|
21.5
|
%
|
$
|
1,435,861
|
|
|
21.5
|
%
|
|
3.7
|
%
|
Residential
mortgage
|
|
|
571,609
|
|
|
8.3
|
|
|
555,703
|
|
|
8.3
|
|
|
2.9
|
|
Commercial
mortgage
|
|
|
3,890,492
|
|
|
56.2
|
|
|
3,762,689
|
|
|
56.3
|
|
|
3.4
|
|
Equity
lines
|
|
|
119,438
|
|
|
1.7
|
|
|
108,004
|
|
|
1.6
|
|
|
10.6
|
|
Real
estate construction
|
|
|
831,126
|
|
|
12.0
|
|
|
799,230
|
|
|
12.0
|
|
|
4.0
|
|
Installment
|
|
|
12,432
|
|
|
0.2
|
|
|
15,099
|
|
|
0.2
|
|
|
(17.7
|
)
|
Other
|
|
|
4,228
|
|
|
0.1
|
|
|
7,059
|
|
|
0.1
|
|
|
(40.1
|
)
|
Gross
loans and leases
|
|
$
|
6,918,849
|
|
|
100
|
%
|
$
|
6,683,645
|
|
|
100
|
%
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
(67,428
|
)
|
|
|
|
|
(64,983
|
)
|
|
|
|
|
3.8
|
|
Unamortized
deferred loan fees
|
|
|
(10,020
|
)
|
|
|
|
|
(10,583
|
)
|
|
|
|
|
(5.3
|
)
|
Total
loans and leases, net
|
|
$
|
6,841,401
|
|
|
|
|
$
|
6,608,079
|
|
|
|
|
|
3.5
|
%
|
Asset
Quality Review
Non-performing
Assets
Non-performing
assets to gross loans and other real estate owned was 1.01% at March 31, 2008,
compared to 1.25% at December 31, 2007. Total non-performing assets decreased
$13.8 million, or 16.4%, to $69.9 million at March 31, 2008, compared with
$83.7
million at December 31, 2007, primarily due to a $9.6 million decrease in
non-accrual loans and a $4.7 million decrease in accruing loans past due 90
days
or more offset by a $552,000 increase in OREO.
The
following table sets forth the breakdown of non-performing assets by category
as
of the dates indicated:
(Dollars
in thousands)
|
|
March 31, 2008
|
|
December 31, 2007
|
|
%
Change
|
|
Non-performing
assets
|
|
|
|
|
|
|
|
|
|
|
Accruing
loans past due 90 days or more
|
|
$
|
4,609
|
|
$
|
9,265
|
|
|
(50
|
)
|
Non-accrual
loans:
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
21,050
|
|
|
29,677
|
|
|
(29
|
)
|
Commercial
real estate
|
|
|
21,293
|
|
|
19,963
|
|
|
7
|
|
Commercial
|
|
|
4,416
|
|
|
6,664
|
|
|
(34
|
)
|
Real
estate mortgage
|
|
|
1,879
|
|
|
1,971
|
|
|
(5
|
)
|
Total
non-accrual loans:
|
|
$
|
48,638
|
|
$
|
58,275
|
|
|
(17
|
)
|
Total
non-performing loans
|
|
|
53,247
|
|
|
67,540
|
|
|
(21
|
)
|
Other
real estate owned
|
|
|
16,699
|
|
|
16,147
|
|
|
3
|
|
Total
non-performing assets
|
|
$
|
69,946
|
|
$
|
83,687
|
|
|
(16
|
)
|
Troubled
debt restructurings
|
|
$
|
12,591
|
|
$
|
12,601
|
|
|
(0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
gross loans outstanding, at period-end
|
|
$
|
6,918,849
|
|
$
|
6,683,645
|
|
|
4
|
|
Non-performing
assets as a percentage of gross loans and OREO
|
|
|
1.01
|
%
|
|
1.25
|
%
|
|
|
|
Non-accrual
Loans
During
the first quarter of 2008, $8.6 million of loans were placed on non-accrual
status. The new non-accruals included a $2.1 million loan secured by an office
building in San Jose, California, a $1.9 million construction loan in Texas,
a
$1.5 million commercial land loan in Seattle, Washington, a $1.0 million loan
secured by a commercial real estate in Southern California, $1.5 million of
commercial loans and $0.6 million of residential mortgage loans. During the
first quarter, charge-offs of non-accrual loans totaled $4.5 million comprised
of $2.0 million for a construction loan in the Central Valley, $1.6 million
for
a construction loan in the San Fernando Valley, $0.5 million for a construction
loan in Texas, and $0.4 million for a construction loan in Palmdale, California.
At March 31, 2008, total residential construction loans were $367.1 million
of
which $26.6 million were in San Bernardino and Riverside counties in
California.
At
March
31, 2008, total non-accrual loans of $48.6 million were comprised of eight
construction loans totaling $21.0 million, twenty commercial real estate loans
totaling $21.3 million, thirteen commercial loans totaling $4.4 million and
nine
residential mortgage loans totaling $1.9 million. The $21.3 million of
non-accrual commercial real estate loans were comprised of $6.9 million of
land
loans, loans of $4.4 million and $2.1 million secured by office buildings in
the
San Jose, California area, $3.1 million in loans secured by multi-family
residences, a $2.2 million loan secured by a motel in Texas, and $2.6 million
in
loans secured variously by industrial buildings, a retail store, and a
restaurant.
Non-accrual
loans decreased by $9.64 million, or 16.5%, to $48.6 million at March 31, 2008,
from $58.3 million at December 31, 2007. The following table presents
non-accrual loans by type of collateral securing the loans, as of the dates
indicated:
|
|
March
31, 2008
|
|
December
31, 2007
|
|
|
|
Real
Estate
(1)
|
|
Commercial
|
|
Real
Estate
(1)
|
|
Commercial
|
|
|
|
(In
thousands)
|
|
Type
of Collateral
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single/
multi-family residence
|
|
$
|
22,828
|
|
$
|
196
|
|
$
|
26,916
|
|
$
|
163
|
|
Commercial
real estate
|
|
|
11,336
|
|
|
209
|
|
|
14,885
|
|
|
-
|
|
Land
|
|
|
10,058
|
|
|
-
|
|
|
9,810
|
|
|
-
|
|
Personal
Property (UCC)
|
|
|
-
|
|
|
3,988
|
|
|
-
|
|
|
6,487
|
|
Unsecured
|
|
|
-
|
|
|
23
|
|
|
-
|
|
|
14
|
|
Total
|
|
$
|
44,222
|
|
$
|
4,416
|
|
$
|
51,611
|
|
$
|
6,664
|
|
(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, 2008
|
|
December
31, 2007
|
|
|
|
Real
Estate
(1)
|
|
Commercial
|
|
Real
Estate
(1)
|
|
Commercial
|
|
|
|
(In
thousands)
|
|
Type
of Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
estate development
|
|
$
|
42,110
|
|
$
|
242
|
|
$
|
48,794
|
|
$
|
-
|
|
Wholesale/Retail
|
|
|
233
|
|
|
2,786
|
|
|
845
|
|
|
1,318
|
|
Food/Restaurant
|
|
|
-
|
|
|
50
|
|
|
-
|
|
|
92
|
|
Import/Export
|
|
|
-
|
|
|
1,338
|
|
|
-
|
|
|
5,254
|
|
Other
|
|
|
1,879
|
|
|
-
|
|
|
1,972
|
|
|
-
|
|
Total
|
|
$
|
44,222
|
|
$
|
4,416
|
|
$
|
51,611
|
|
$
|
6,664
|
|
(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, excluding those on non-accrual status, was comprised of
five loans totaling $12.6 million at March 31, 2008, compared to four loans
totaling $12.6 million at December 31, 2007. Included in troubled debt
restructured loans at March 31, 2008, is an $11.1 million condominium conversion
construction loan for a project in San Diego County where the interest rate
has
been reduced to 6.0%. At March 31, 2008, the restructured loans were performing
under their revised terms.
Impaired
Loans
A
loan is
considered impaired when it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan agreement
based on current circumstances and events. The assessment for impairment occurs
when and while such loans are on non-accrual, or the loan has been restructured.
Those loans less than our defined selection criteria, generally the loan amount
less than $100,000, are treated as a homogeneous portfolio. If loans meeting
the
defined criteria are not collateral dependent, we measure the impairment based
on the present value of the expected future cash flows discounted at the loan’s
effective interest rate. If loans meeting the defined criteria are collateral
dependent, we measure the impairment by using the loan’s observable market price
or the fair value of the collateral. If the measurement of the impaired loan
is
less than the recorded amount of the loan, we then recognize impairment by
creating or adjusting an existing valuation allowance with a corresponding
charge to the provision for loan losses.
The
Company identified impaired loans with a recorded investment of $59.7 million
at
March 31, 2008, compared with $70.0 million at year-end 2007, a decrease of
$10.3 million, or 14.6%. The Company considers all non-accrual loans to be
impaired.
At
March 31, 2008, one troubled debt restructured loan of $11.1 million was
impaired but still accruing. The following table presents impaired loans and
the
related allowance, as of the dates indicated:
|
|
At March 31, 2008
|
|
At December 31, 2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
Balance
of impaired loans with no allocated allowance
|
|
$
|
36,845
|
|
$
|
50,249
|
|
Balance
of impaired loans with an allocated allowance
|
|
|
22,898
|
|
|
19,701
|
|
Total
recorded investment in impaired loans
|
|
$
|
59,743
|
|
$
|
69,950
|
|
Amount
of the allowance allocated to impaired loans
|
|
$
|
1,378
|
|
$
|
4,937
|
|
Loan
Concentration
Most
of
the Company’s business activity is with customers located in the predominantly
Asian areas of Southern and Northern California; New York City, New York; Dallas
and Houston, Texas; Seattle, Washington; Boston, Massachusetts; Chicago,
Illinois; and Edison, New Jersey. The Company has no specific industry
concentration, and generally its loans are collateralized with real property
or
other pledged collateral of the borrowers. Loans are generally expected to
be
paid off from the operating profits of the borrowers, refinancing by another
lender, or through sale by the borrowers of the secured collateral.
There
were no loan concentrations to multiple borrowers in similar activities which
exceeded 10% of total loans as of March 31, 2008, and as of December 31,
2007.
Allowance
for Credit Losses
The
Bank
maintains the allowance for credit losses at a level that is considered to
be
equal to the estimated and known risks in the loan portfolio and off-balance
sheet unfunded credit commitments. Allowance for credit losses is comprised
of
allowance for loan losses and reserve for off-balance sheet unfunded credit
commitments. With this risk management objective, the Bank’s management has an
established monitoring system that is designed to identify impaired and
potential problem loans, and to permit periodic evaluation of impairment and
the
adequacy level of the allowance for credit losses in a timely manner.
In
addition, our Board of Directors has established a written credit policy that
includes a credit review and control system which it believes should be
effective in ensuring that the Bank maintains an adequate allowance for credit
losses. The Board of Directors provides oversight for the allowance evaluation
process, including quarterly evaluations, and determines whether the allowance
is adequate to absorb losses in the credit portfolio. The determination of
the
amount of the allowance for credit losses and the provision for credit losses
is
based on management’s current judgment about the credit quality of the loan
portfolio and takes into consideration known relevant internal and external
factors that affect collectibility when determining the appropriate level for
the allowance for credit losses. The nature of the process by which the Bank
determines the appropriate allowance for credit losses requires the exercise
of
considerable judgment. Additions to the allowance for credit losses are made
by
charges to the provision for credit losses. While management utilizes its best
judgment and information available, the ultimate adequacy of the allowance
is
dependent upon a variety of factors beyond the Bank’s control, including the
performance of the Bank’s loan portfolio, the economy, changes in interest
rates, and the view of the regulatory authorities toward loan classifications.
Identified credit exposures that are determined to be uncollectible are charged
against the allowance for credit losses. Recoveries of previously charged off
amounts, if any, are credited to the allowance for credit losses. A weakening
of
the economy or other factors that adversely affect asset quality could result
in
an increase in the number of delinquencies, bankruptcies, or defaults, and
a
higher level of non-performing assets, net charge-offs, and provision for credit
losses in future periods.
The
allowance for loan losses were $67.4 million and the reserve for off-balance
sheet unfunded credit commitments were $4.9 million at March 31, 2008, and
represented the amount that the Company believes to be sufficient to absorb
credit losses inherent in the Company’s loan portfolio. The allowance for credit
losses, the sum of allowance for loan losses and reserve for off-balance sheet
unfunded credit commitments, was $72.4 million at March 31, 2008, compared
to
$69.6 million at December 31, 2007. The allowance for credit losses represented
1.05% of period-end gross loans and 136% of non-performing loans at March 31,
2008. The comparable ratios were 1.04% of gross loans and 103% of non-performing
loans at December 31, 2007.
The
following table sets forth information relating to the allowance for credit
losses for the periods indicated:
|
|
For the three months ended
|
|
For the year ended
|
|
|
|
March 31, 2008
|
|
December 31, 2007
|
|
Allowance
for Loan Losses
|
|
(Dollars
in thousands)
|
|
Balance
at beginning of period
|
|
$
|
64,983
|
|
$
|
60,220
|
|
Provision
for credit losses
|
|
|
7,500
|
|
|
11,000
|
|
Transfers
to reserve for off-balance sheet credit commitments
|
|
|
(351
|
)
|
|
(107
|
)
|
Charge-offs
:
|
|
|
|
|
|
|
|
Commercial
loans
|
|
|
(251
|
)
|
|
(7,503
|
)
|
Construction
loans
|
|
|
(4,130
|
)
|
|
(978
|
)
|
Real
estate loans
|
|
|
(514
|
)
|
|
(1,570
|
)
|
Installment
loans and other loans
|
|
|
-
|
|
|
(23
|
)
|
Total
charge-offs
|
|
|
(4,895
|
)
|
|
(10,074
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
Commercial
loans
|
|
|
187
|
|
|
3,025
|
|
Construction
loans
|
|
|
-
|
|
|
190
|
|
Real
estate loans
|
|
|
-
|
|
|
265
|
|
Installment
loans and other loans
|
|
|
4
|
|
|
32
|
|
Total
recoveries
|
|
|
191
|
|
|
3,512
|
|
Allowance
from acquisitions
|
|
|
-
|
|
|
432
|
|
Balance
at end of period
|
|
$
|
67,428
|
|
$
|
64,983
|
|
Reserve
for off-balance sheet credit commitments
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
4,576
|
|
$
|
4,469
|
|
Provision
for credit losses/transfers
|
|
|
351
|
|
|
107
|
|
Balance
at end of period
|
|
$
|
4,927
|
|
$
|
4,576
|
|
|
|
|
|
|
|
|
|
Average
loans outstanding
|
|
|
|
|
|
|
|
during
period ended
|
|
$
|
6,804,599
|
|
$
|
6,170,505
|
|
Total
gross loans outstanding, at period-end
|
|
$
|
6,918,849
|
|
$
|
6,683,645
|
|
Total
non-performing loans, at period-end
|
|
$
|
53,247
|
|
$
|
67,540
|
|
Ratio
of net charge-offs to average loans outstanding during the period
|
|
|
0.28
|
%
|
|
0.11
|
%
|
Provision
for credit losses to average loans outstanding during the period
|
|
|
0.44
|
%
|
|
0.18
|
%
|
Allowance
for credit losses to non-performing loans at period-end
|
|
|
135.89
|
%
|
|
102.99
|
%
|
Allowance
for credit losses to gross loans at period-end
|
|
|
1.05
|
%
|
|
1.04
|
%
|
Our
allowance for loan losses consists of the following:
|
•
|
Specific
allowance: For impaired loans, we provide specific allowances based
on an
evaluation of impairment, and for each criticized loan, we allocate
a
portion of the general allowance to each loan based on a loss percentage
assigned. The percentage assigned depends on a number of factors
including
loan classification, the current financial condition of the borrowers
and
guarantors, the prevailing value of the underlying collateral, charge-off
history, management’s knowledge of the portfolio, and general economic
conditions. During the third quarter of 2007, we revised our minimum
loss
rates for loans rated Special Mention and Substandard to incorporate
the
results of a classification migration model reflecting actual losses
beginning in 2003.
|
|
•
|
General
allowance: The unclassified portfolio is segmented on a group basis.
Segmentation is determined by loan type and by identifying risk
characteristics that are common to the groups of loans. The allowance
is
provided to each segmented group based on the group’s historical loan loss
experience, the trends in delinquency and non-accrual, and other
significant factors, such as national and local economy, trends and
conditions, strength of management and loan staff, underwriting standards,
and the concentration of credit. Beginning in the third quarter of
2007,
minimum loss rates have been assigned for loans graded Minimally
Acceptable instead of grouping these loans with the unclassified
portfolio.
|
To
determine the adequacy of the allowance in each of these two components, the
Bank employs two primary methodologies, the classification migration methodology
and the individual loan review analysis methodology. These methodologies support
the basis for determining allocations between the various loan categories and
the overall adequacy of the Bank’s allowance to provide for probable losses
inherent in the loan portfolio. These methodologies are further supported by
additional analysis of relevant factors such as the historical losses in the
portfolio, trends in the non-performing/non-accrual loans, loan delinquencies,
the volume of the portfolio, peer group comparisons, and federal regulatory
policy for loan and lease losses. Other significant factors of portfolio
analysis include changes in lending policies/underwriting standards, portfolio
composition, and concentrations of credit, and trends in the national and local
economy.
With
these methodologies, a general allowance is for those loans internally
classified and risk graded Pass, Special Mention, Substandard, Doubtful, or
Loss
based on historical losses in the portfolio. Additionally, the Bank’s management
allocates a specific allowance for “Impaired Credits,” in accordance with SFAS
No. 114, “Accounting by Creditors for Impairment of a Loan.” The level of the
general allowance is established to provide coverage for management’s estimate
of the credit risk in the loan portfolio by various loan segments not covered
by
the specific allowance.
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, 2008
|
|
December
31, 2007
|
|
|
|
Amount
|
|
Percentage
of
Loans
in Each Category
to
Average
Gross
Loans
|
|
Amount
|
|
Percentage
of
Loans
in Each Category
to
Average
Gross
Loans
|
|
Type
of Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
loans
|
|
$
|
26,586
|
|
|
21.8
|
%
|
$
|
24,081
|
|
|
21.1
|
%
|
Residential
mortgage loans
|
|
|
1,472
|
|
|
9.9
|
|
|
1,314
|
|
|
9.9
|
|
Commercial
mortgage loans
|
|
|
28,179
|
|
|
56.0
|
|
|
26,646
|
|
|
56.4
|
|
Real
estate construction loans
|
|
|
11,157
|
|
|
11.9
|
|
|
12,906
|
|
|
12.1
|
|
Installment
loans
|
|
|
34
|
|
|
0.2
|
|
|
36
|
|
|
0.3
|
|
Other
loans
|
|
|
-
|
|
|
0.2
|
|
|
-
|
|
|
0.2
|
|
Total
|
|
$
|
67,428
|
|
|
100
|
%
|
$
|
64,983
|
|
|
100
|
%
|
The
allowance allocated to commercial loans increased to $26.6 million at March
31,
2008, from $24.1 million at December 31, 2007, due to increases in loans risk
graded Special Mention due in part to weakness in the economy. Non-accrual
commercial loans were $4.4 million, or 9.1% of non-accrual loans at March 31,
2008, compared to $6.7 million, or 11.4% at December 31, 2007.
The
allowance allocated to residential mortgage loans increased $158,000 from $1.3
million at December 31, 2007, to $1.5 million at March 31, 2008.
The
allowance allocated to commercial mortgage loans increased from $26.6 million
at
December 31, 2007, to $28.2 million at March 31, 2008, due to growth in
commercial mortgage loans and increases in loans risk graded Special Mention
or
Substandard due in part to the weakness in the economy. As of March 31, 2008,
there were $21.3 million commercial mortgage loans on non-accrual status
compared to $19.9 million at December 31, 2007. Non-accrual commercial mortgage
loans comprised 43.8% of non-accrual loans at March 31, 2008, compared to 34.3%
at December 31, 2007.
The
allowance allocated to construction loans has decreased from $12.9 million
at
December 31, 2007, to $11.2 million at March 31, 2008, due primarily to
charge-offs of problem construction loans during the first quarter of 2008
against reserves established in prior periods. The allowance allocated to
construction loans as a percentage of total construction loans was 1.4% of
construction loans at March 31, 2008 compared to 1.6% at December 31, 2007.
At
March 31, 2008, construction loans totaling $21.1 million were on non-accrual
status which comprised 43.3% of non-accrual loans compared to $29.7 million,
or
50.9% at December 31, 2007.
Deposits
At
March
31, 2008, total deposits were $6.29 billion, an increase of $10.1 million,
or
0.2%, from $6.28 billion at December 31, 2007. In the first quarter of 2008,
time deposits of $100,000 or more increased $119.6 million, or 4.1%, offset
primarily by a decrease of $109.3 million in brokered deposits which were
included in time deposit accounts under $100,000. Non-interest-bearing demand
deposits, interest-bearing demand deposits, and savings deposits comprised
32.9%
of total deposits at March 31, 2008, time deposit accounts of less than $100,000
comprised 18.5% of total deposits, while the remaining 48.6% 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, 2008
|
|
% of Total
|
|
December 31, 2007
|
|
% of Total
|
|
Deposits
|
|
(Dollars
in thousands)
|
|
Non-interest-bearing
demand
|
|
$
|
768,419
|
|
|
12.2
|
%
|
$
|
785,364
|
|
|
12.5
|
%
|
NOW
|
|
|
254,198
|
|
|
4.1
|
|
|
231,583
|
|
|
3.7
|
|
Money
market
|
|
|
712,503
|
|
|
11.3
|
|
|
681,783
|
|
|
10.8
|
|
Savings
|
|
|
332,182
|
|
|
5.3
|
|
|
331,316
|
|
|
5.3
|
|
Time
deposits under $100,000
|
|
|
1,164,561
|
|
|
18.5
|
|
|
1,311,251
|
|
|
20.9
|
|
Time
deposits of $100,000 or more
|
|
|
3,056,641
|
|
|
48.6
|
|
|
2,937,070
|
|
|
46.8
|
|
Total
deposits
|
|
$
|
6,288,504
|
|
|
100.0
|
%
|
$
|
6,278,367
|
|
|
100.0
|
%
|
At
March
31, 2008, brokered deposits decreased $109.3 million to $523.3 million from
$632.6 million at December 31, 2007.
Borrowings
Borrowings
include Federal funds purchased, securities sold under agreements to repurchase,
funds obtained as advances from the Federal Home Loan Bank (“FHLB”) of San
Francisco, and borrowings from other financial institutions.
Federal
funds purchased were $37.0 million with a weighted average rate of 2.25% as
of
March 31, 2008, compared to $41.0 million with a weighted average rate of 4.00%
as of December 31, 2007.
Securities
sold under agreements to repurchase were $1.6 billion with a weighted average
rate of 3.77% at March 31, 2008, compared to $1.4 billion with a weighted
average rate of 3.57% at December 31, 2007. Seventeen floating-to-fixed rate
agreements totaling $900.0 million are with initial floating rates for a period
of time ranging from six months to one year, with the floating rates ranging
from the three-month LIBOR minus 100 basis points to the three-month LIBOR
minus
340 basis points. Thereafter, the rates are fixed for the remainder of the
term,
with interest rates ranging from 4.29% to 5.07%. After the initial floating
rate
term, the counterparties have the right to terminate the transaction at par
at
the fixed rate reset date and quarterly thereafter. Thirteen fixed-to-floating
rate agreements totaling $650.0 million are with initial fixed rates ranging
from 1.00% and 3.50% with initial fixed rate terms ranging from six months
to
eighteen months. For the remainder of the seven year term, the rates float
at 8%
minus the three-month LIBOR rate with a maximum rate ranging from 3.25% to
3.75%
and minimum rate of 0.0%. After the initial fixed rate term, the counterparties
have the right to terminate the transaction at par at the floating rate reset
date and quarterly thereafter. In addition, there were two short term repurchase
agreements totaling $30.2 million which matured before April 1, 2008, with
a
weighted average interest rate of 3.48% at March 31, 2008.
At
March
31, 2008, included in long-term transactions are nineteen repurchase agreements
totaling $1.0 billion that were callable but which had not been called. Two
fixed-to-floating rate repurchase agreements of $50.0 million each have variable
interest rates currently at 3.75% maximum rate until their final maturities
in
September 2014. Four floating-to-fixed rate repurchase agreements of $50.0
million each have fixed interest rates ranging from 4.89% to 5.07%, until their
final maturities in January 2017. Ten floating-to-fixed rate repurchase
agreements totaled $550.0 million have fixed interest rates ranging from 4.29%
to 4.78%, until their final maturities in 2014. Two floating-to-fixed rate
repurchase agreements of $50.0 million each have fixed interest rates ranging
at
4.75% and 4.79%, until their final maturities in 2011. One floating-to-fixed
rate repurchase agreement of $50.0 million has fixed interest rate at 4.83%
until its final maturities in 2012.
Total
advances from the FHLB of San Francisco decreased $185.9 million to $1.2 billion
at March 31, 2008 from $1.4 billion at December 31, 2007. Non-puttable advances
totaled $489.3 million with a weighted rate of 3.42% and puttable advances
totaled $700.0 million with a weighted average rate of 4.42% at March 31, 2008.
The FHLB has the right to terminate the puttable transaction at par at the
first
anniversary date in the first quarter of 2008 and quarterly thereafter for
$300.0 million of the advances, and on the second anniversary date in 2009
for
$400.0 million of the advances
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, 2008, $50.0 million was outstanding with a rate
of
3.80% under this note compared to $50.0 million at a rate of 5.93% at December
31, 2007.
The
Bancorp established three special purpose trusts in 2003 and two in 2007 for
the
purpose of issuing trust preferred securities to outside investors (Capital
Securities). The trusts exist for the purpose of issuing the Capital Securities
and investing the proceeds thereof, together with proceeds from the purchase
of
the common stock of the trusts by the Bancorp, in junior subordinated notes
issued by the Bancorp. The five special purpose trusts are considered variable
interest entities under FIN 46R. Because the Bancorp is not the primary
beneficiary of the trusts, the financial statements of the trusts are not
included in the consolidated financial statements of the Company. At
March
31, 2008, junior subordinated debt securities totaled $121.1 million with a
weighted average interest rate of 4.97% compared to $121.1 million with a
weighted average rate of 7.13% at December 31, 2007. The junior subordinated
debt securities have a stated maturity term of 30 years and are
currently included in the Tier 1 capital of the Bancorp for regulatory capital
purposes.
Off-Balance-Sheet
Arrangements and Contractual Obligations
The
following table summarizes the Company’s contractual obligations to make future
payments as of March 31, 2008. 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
|
|
|
|
1
year
or
less
|
|
More
than
1
year but
less
than
3
years
|
|
3
years or
more
but
less
than
5
years
|
|
5
years
or
more
|
|
Total
|
|
|
|
(In
thousands)
|
|
Contractual
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
with stated maturity dates
|
|
$
|
4,135,079
|
|
$
|
84,307
|
|
$
|
1,785
|
|
$
|
31
|
|
$
|
4,221,202
|
|
Federal
funds purchased
|
|
|
37,000
|
|
|
|
|
|
|
|
|
|
|
|
37,000
|
|
Securities
sold under agreements to repurchase (1)
|
|
|
30,162
|
|
|
100,000
|
|
|
50,000
|
|
|
1,400,000
|
|
|
1,580,162
|
|
Advances
from the Federal Home Loan Bank (2)
|
|
|
255,000
|
|
|
601,587
|
|
|
332,700
|
|
|
|
|
|
1,189,287
|
|
Other
borrowings
|
|
|
20,629
|
|
|
|
|
|
|
|
|
19,654
|
|
|
40,283
|
|
Long-term
debt
|
|
|
-
|
|
|
|
|
|
|
|
|
171,136
|
|
|
171,136
|
|
Operating
leases
|
|
|
7,217
|
|
|
9,109
|
|
|
5,949
|
|
|
5,124
|
|
|
27,399
|
|
Total
contractual obligations and other commitments
|
|
$
|
4,485,087
|
|
$
|
795,003
|
|
$
|
390,434
|
|
$
|
1,595,945
|
|
$
|
7,266,469
|
|
(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, one year, or 18 months for the 7-year term and one year for
the
5-year and 10-year term.
|
(2) |
FHLB
advances of $700.0 million that mature in 2012 have a callable option.
On
a quarterly basis, $300.0 million are callable at the first anniversary
date and $400.0 million are callable at the second anniversay
date.
|
Capital
Resources
Stockholders’
equity of $1.0 billion at March 31, 2008, increased by $32.5 million, or 3.3%,
compared to $971.9 million at December 31, 2007. The following table summarizes
the activity in stockholders’ equity:
|
|
Three months ended
|
|
(In
thousands)
|
|
March 31, 2008
|
|
Net
income
|
|
$
|
27,299
|
|
Proceeds
from shares issued to the Dividend Reinvestment Plan
|
|
|
616
|
|
Proceeds
from exercise of stock options
|
|
|
356
|
|
Tax
short-fall from stock-based compensation expense
|
|
|
(226
|
)
|
Share-based
compensation
|
|
|
1,830
|
|
Changes
in other comprehensive income
|
|
|
7,990
|
|
Cumulative
effect adjustment as a result of adoption of EITF No. 06-4
|
|
|
|
|
Accounting
for Deferred Compensation and Postretirement Benefit
|
|
|
|
|
Aspects
of Endorsement Split-Dollar Life Insurance Arrangements
|
|
|
(147
|
)
|
Cash
dividends paid
|
|
|
(5,181
|
)
|
Net
increase in stockholders' equity
|
|
$
|
32,537
|
|
On
November 2007, the Company announced that its Board of Directors had approved
a
new stock repurchase program to buy back up to an aggregate of one million
shares of the Company’s common stock following the completion of the stock
repurchase program of May 2007. During 2007, the Company repurchased 2,829,203
shares of common stock for $92.4 million, or an average price of $32.67 per
share. No shares were purchased during the first quarter of 2008. At March
31,
2008, 622,500 shares remain under the Company’s November 2007 repurchase
program.
The
Company declared a cash dividend of 10.5 cents per share for distribution in
January 2008 on 49,342,991 shares outstanding and in April 2008 on 49,382,350
shares outstanding. Total cash dividends paid in 2008, including the $5.2
million paid in April, amounted to $10.4 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 in a
private placement transaction. This instrument matures on September 29, 2016.
The subordinated debt was issued through the Bank and qualifies as Tier 2
capital for regulatory reporting purposes.
The
Bancorp established five special purpose trusts for the purpose of issuing
trust
preferred securities to outside investors (Capital Securities). The trusts
exist
for the purpose of issuing the Capital Securities and investing the proceeds
thereof, together with proceeds from the purchase of the common stock of the
trusts by the Bancorp, in junior subordinated notes issued by the Bancorp.
The
junior subordinated debt of $121.1 million as of March 31, 2008, were included
in the Tier 1 capital of the Bancorp for regulatory capital purposes.
Both
the
Bancorp’s and the Bank’s regulatory capital continued to exceed the regulatory
minimum requirements as of March 31, 2008. 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, 2008, and December 31, 2007:
|
|
Cathay
General Bancorp
|
|
Cathay
Bank
|
|
|
|
March 31, 2008
|
|
December 31, 2007
|
|
March 31, 2008
|
|
December 31, 2007
|
|
(Dollars
in thousands)
|
|
Balance
|
|
%
|
|
Balance
|
|
%
|
|
Balance
|
|
%
|
|
Balance
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital (to risk-weighted assets)
|
|
$
|
780,414
|
|
|
9.41
|
|
$
|
755,431
|
|
|
9.09
|
|
$
|
772,228
|
|
|
9.32
|
|
$
|
750,698
|
|
|
9.04
|
|
Tier
1 capital minimum requirement
|
|
|
331,621
|
|
|
4.00
|
|
|
332,384
|
|
|
4.00
|
|
|
331,275
|
|
|
4.00
|
|
|
332,014
|
|
|
4.00
|
|
Excess
|
|
$
|
448,793
|
|
|
5.41
|
|
$
|
423,047
|
|
|
5.09
|
|
$
|
440,953
|
|
|
5.32
|
|
$
|
418,684
|
|
|
5.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital (to risk-weighted assets)
|
|
$
|
901,835
|
|
|
10.88
|
|
$
|
874,056
|
|
|
10.52
|
|
$
|
894,583
|
|
|
10.80
|
|
$
|
870,257
|
|
|
10.49
|
|
Total
capital minimum requirement
|
|
|
663,242
|
|
|
8.00
|
|
|
664,768
|
|
|
8.00
|
|
|
662,549
|
|
|
8.00
|
|
|
664,027
|
|
|
8.00
|
|
Excess
|
|
$
|
238,593
|
|
|
2.88
|
|
$
|
209,288
|
|
|
2.52
|
|
$
|
232,034
|
|
|
2.80
|
|
$
|
206,230
|
|
|
2.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
– Leverage
ratio
|
|
$
|
780,414
|
|
|
7.83
|
|
$
|
755,431
|
|
|
7.83
|
|
$
|
772,228
|
|
|
7.76
|
|
$
|
750,698
|
|
|
7.79
|
|
Minimum
leverage requirement
|
|
|
398,491
|
|
|
4.00
|
|
|
385,812
|
|
|
4.00
|
|
|
397,960
|
|
|
4.00
|
|
|
385,269
|
|
|
4.00
|
|
Excess
|
|
$
|
381,923
|
|
|
3.83
|
|
$
|
369,619
|
|
|
3.83
|
|
$
|
374,268
|
|
|
3.76
|
|
$
|
365,429
|
|
|
3.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-weighted
assets
|
|
$
|
8,290,520
|
|
|
|
|
$
|
8,309,598
|
|
|
|
|
$
|
8,281,866
|
|
|
|
|
$
|
8,300,343
|
|
|
|
|
Total
average assets (1)
|
|
$
|
9,962,282
|
|
|
|
|
$
|
9,645,310
|
|
|
|
|
$
|
9,948,990
|
|
|
|
|
$
|
9,631,720
|
|
|
|
|
(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, 2008, our
liquidity ratio (defined as net cash, short-term and marketable securities
to
net deposits and short-term liabilities) was at 15.3% compared to 15.8% at
year-end 2007.
To
supplement its liquidity needs, the Bank maintains a total credit line
of
$303.0
million
for federal funds with six 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, 2008, the Bank had an approved credit line with the FHLB of San
Francisco totaling $1.5 billion. The total advances outstanding with the FHLB
of
San Francisco at March 31, 2008, was $1.2 billion. 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, 2008, investment
securities available-for-sale at
fair
value totaled $2.5 billion, with $2.4 billion pledged
as collateral for borrowings and other commitments. The remaining $81.9 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, 2008. 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.
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, 2008:
|
|
Net
Interest
Income
Volatility
(1)
|
|
Market
Value
of
Equity
Volatility
(2)
|
|
Change
in Interest Rate (Basis Points)
|
|
March 31, 2008
|
|
March 31, 2008
|
|
+200
|
|
|
-0.8
|
|
|
-6.0
|
|
+100
|
|
|
1.7
|
|
|
-0.6
|
|
-100
|
|
|
-2.6
|
|
|
0.5
|
|
-200
|
|
|
-10.1
|
|
|
-12.7
|
|
|
(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
2007 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, 2008 - January 31, 2008)
|
|
|
0
|
|
$
|
0
|
|
|
0
|
|
|
622,500
|
|
Month
#2 (February 1, 2008 - February 29, 2008)
|
|
|
0
|
|
$
|
0
|
|
|
0
|
|
|
622,500
|
|
Month
#3 (March 1, 2008 - March 31, 2008)
|
|
|
0
|
|
$
|
0
|
|
|
0
|
|
|
622,500
|
|
Total
|
|
|
0
|
|
$
|
0
|
|
|
0
|
|
|
622,500
|
|
On
November 2007, the Company announced that its Board of Directors had approved
a
new stock repurchase program to buy back up to an aggregate of one million
shares of the Company’s common stock following the completion of the stock
repurchase program of May 2007. During 2007, the Company repurchased 2,829,203
shares of common stock for $92.4 million, or an average price of $32.67 per
share. No shares were purchased during the first quarter of 2008. At March
31,
2008, 622,500 shares remain under the Company’s November 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.
|
Exhibit
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
(ii)
|
Exhibit
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
(iii)
|
Exhibit
32.1 Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
(iv)
|
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 8, 2008
|
By:
|
/s/
Dunson K. Cheng
|
|
|
|
Dunson
K. Cheng |
|
Chairman,
President, and |
|
Chief
Executive Officer |
Date:
May 8, 2008
|
By:
|
/s/
Heng W. Chen
|
|
|
|
Heng
W. Chen |
|
Executive
Vice President and |
|
Chief
Financial Officer |