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

September 30, 2014

 

OR

 

[    ]

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

001-31830

 

CATHAY GENERAL BANCORP

(Exact name of registrant as specified in its charter)

 

Delaware				95-4274680
(State of other jurisdiction of incorporation or organization)				(I.R.S. Employer 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 ☑          No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).          Yes ☑          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 ☑	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 ☑

 

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, 79,704,258 shares outstanding as of October 31, 2014.

 

   

CATHAY GENERAL BANCORP AND SUBSIDIARies

3RD quarter 2014 REPORT ON FORM 10-Q

table of contents

 

PART I –	FINANCIAL INFORMATION	5
Item 1.	FINANCIAL STATEMENTS (Unaudited).	5
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited).	8
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	39
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	65
Item 4.	CONTROLS AND PROCEDURES.	66
PART II - OTHER INFORMATION		67
Item 1.	LEGAL PROCEEDINGS.	67
Item 1A	RISK FACTORS.	67
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	67
Item 3.	DEFAULTS UPON SENIOR SECURITIES.	68
Item 4.	MINE SAFETY DISCLOSURES.	68
Item 5.	OTHER INFORMATION.	68
Item 6.	EXHIBITS.	68
SIGNATURES		70

  

 

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. We intend such forward-looking statements to be covered by the safe harbor provision for forward-looking statements in these provisions. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including statements about anticipated future operating and financial performance, financial position and liquidity, growth opportunities and growth rates, growth plans, acquisition and divestiture opportunities, business prospects, strategic alternatives, business strategies, financial expectations, regulatory and competitive outlook, investment and expenditure plans, financing needs and availability, and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as “aims,” “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “optimistic,” “plans,” “potential,” “possible,” “predicts,” “projects,” “seeks,” “shall,” “should,” “will,” and variations of these words and similar expressions are intended to identify these forward-looking statements. Forward-looking statements by us are based on estimates, beliefs, projections, and assumptions of management and are not guarantees of future performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Such risks and uncertainties and other factors include, but are not limited to, adverse developments or conditions related to or arising from:

 

●

U.S. and international business and economic conditions;

 

●

possible additional provisions for loan losses and charge-offs;

 

●

credit risks of lending activities and deterioration in asset or credit quality;

 

●

extensive laws and regulations and supervision that we are subject to, including potential supervisory action by bank supervisory authorities;

 

●

increased costs of compliance and other risks associated with changes in regulation, including the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”);

 

●

higher capital requirements from the implementation of the Basel III capital standards;

 

●

compliance with the Bank Secrecy Act and other money laundering statutes and regulations;

 

●

potential goodwill impairment;

 

●

liquidity risk;

 

●

fluctuations in interest rates;

 

●

risks associated with acquisitions and the expansion of our business into new markets;

 

●

inflation and deflation;

 

●

real estate market conditions and the value of real estate collateral;

 

●

environmental liabilities;

  

 

●

our ability to compete with larger competitors;

 

●

our ability to retain key personnel;

 

●

successful management of reputational risk;

 

●

natural disasters and geopolitical events;

 

●

general economic or business conditions in Asia, and other regions where the Bank has operations;

 

●

failures, interruptions, or security breaches of our information systems;

 

●

our ability to adapt our systems to technological changes;

 

●

risk management processes and strategies;

 

●

adverse results in legal proceedings;

 

●

certain provisions in our charter and bylaws that may affect acquisition of the Company;

 

●

changes in accounting standards or tax laws and regulations;

 

●

market disruption and volatility;

 

●

restrictions on dividends and other distributions by laws and regulations and by our regulators and our capital structure;

 

●

issuance of preferred stock;

 

●

successfully raising additional capital, if needed, and the resulting dilution of interests of holders of our common stock; and

 

●

the soundness of other financial institutions.

  

These and other factors are further described in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2013 (Item 1A in particular), other reports and registration statements filed with the Securities and Exchange Commission (“SEC”), and other filings it makes 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, readers are cautioned not to place undue reliance on any forward-looking statements, which speak to the date of this report. We have no intention and undertake no obligation to update any forward-looking statement or to publicly announce any revision of any forward-looking statement to reflect future developments or events, except as required by law.

 

Bancorp’s filings with the SEC are available at the website maintained by the SEC at http://www.sec.gov, or by request directed to Cathay General Bancorp, 9650 Flair Drive, El Monte, California 91731, Attention: Investor Relations (626) 279-3286.

 

  

PART I – FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS (UNAUDITED)

 

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In thousands, except share and per share data)		September 30, 2014				December 31, 2013
Assets
Cash and due from banks		$	200,302			$	153,747
Short-term investments and interest bearing deposits			597,747				516,938
Securities available-for-sale (amortized cost of $1,355,056 in 2014 and $1,637,965 in 2013)			1,340,092				1,586,668
Trading securities			-				4,936
Loans			8,858,254				8,084,563
Less:   Allowance for loan losses			(169,198	)			(173,889	)
Unamortized deferred loan fees, net			(12,903	)			(13,487	)
Loans, net			8,676,153				7,897,187
Federal Home Loan Bank stock			34,090				25,000
Other real estate owned, net			29,025				52,985
Affordable housing investments, net			96,504				84,108
Premises and equipment, net			100,673				102,045
Customers’ liability on acceptances			21,820				32,194
Accrued interest receivable			24,986				24,274
Goodwill			316,340				316,340
Other intangible assets, net			3,459				2,230
Other assets			158,275				190,634
Total assets		$	11,599,466			$	10,989,286
Liabilities and Stockholders’ Equity
Deposits
Non-interest-bearing demand deposits		$	1,593,003			$	1,441,858
Interest-bearing deposits:
NOW deposits			766,622				683,873
Money market deposits			1,514,496				1,286,338
Savings deposits			542,454				499,520
Time deposits under $100,000			1,103,634				931,204
Time deposits of $100,000 or more			3,174,460				3,138,512
Total deposits			8,694,669				7,981,305
Securities sold under agreements to repurchase			550,000				800,000
Advances from the Federal Home Loan Bank			555,000				521,200
Other borrowings for affordable housing investments			18,882				19,062
Long-term debt			119,136				121,136
Acceptances outstanding			21,820				32,194
Other liabilities			69,575				55,418
Total liabilities			10,029,082				9,530,315
Commitments and contingencies			-				-
Stockholders’ Equity
Common stock, $0.01 par value, 100,000,000 shares authorized, 83,905,576 issued and 79,698,011 outstanding at September 30, 2014, and 83,797,434 issued and 79,589,869 outstanding at December 31, 2013			839				838
Additional paid-in-capital			787,889				784,489
Accumulated other comprehensive loss, net			(8,835	)			(29,729	)
Retained earnings			916,227				829,109
Treasury stock, at cost (4,207,565 shares at September 30, 2014, and at December 31, 2013)			(125,736	)			(125,736	)
Total equity			1,570,384				1,458,971
Total liabilities and equity		$	11,599,466			$	10,989,286

 

See accompanying notes to unaudited condensed consolidated financial statements 

 

 

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND

COMPREHENSIVE INCOME

(Unaudited)

 

		Three months ended September 30,								Nine months ended September 30,
		2014				2013				2014				2013
		(In thousands, except share and per share data)
Interest and Dividend Income
Loans receivable, including loan fees		$	100,151			$	90,838			$	290,337			$	267,557
Investment securities- taxable			5,105				10,868				19,389				34,986
Investment securities- nontaxable			-				-				-				995
Federal Home Loan Bank stock			508				449				1,379				1,041
Deposits with banks			571				307				1,499				796
Total interest and dividend income			106,335				102,462				312,604				305,375
Interest Expense
Time deposits of $100,000 or more			7,107				6,887				20,519				20,466
Other deposits			5,005				3,485				13,462				9,244
Securities sold under agreements to repurchase			5,858				8,402				19,731				29,778
Advances from Federal Home Loan Bank			153				150				849				375
Long-term debt			1,456				930				3,012				2,778
Short-term borrowings			1				-				1
Total interest expense			19,580				19,854				57,574				62,641
Net interest income before provision for credit losses			86,755				82,608				255,030				242,734
Credit for loan losses			(5,100	)			(3,000	)			(8,800	)			(3,000	)
Net interest income after credit for loan losses			91,855				85,608				263,830				245,734
Non-Interest Income
Securities gains, net			361				8,688				6,827				27,157
Letters of credit commissions			1,559				1,698				4,547				4,608
Depository service fees			1,330				1,371				3,999				4,330
Other operating income			5,724				4,963				17,181				15,867
Total non-interest income			8,974				16,720				32,554				51,962
Non-Interest Expense
Salaries and employee benefits			22,630				22,751				69,472				67,192
Occupancy expense			3,934				3,812				11,692				10,966
Computer and equipment expense			2,471				2,446				7,307				7,488
Professional services expense			5,991				5,813				16,410				18,484
FDIC and State assessments			2,261				1,712				6,692				5,431
Marketing expense			639				1,097				2,722				2,703
Other real estate owned (income)/expense			(1,011	)			527				(629	)			886
Operations of affordable housing investments, net			1,672				1,234				5,126				4,952
Amortization of core deposit intangibles			214				1,363				510				4,097
Costs associated with debt redemption			527				6,861				3,348				22,557
Other operating expense			3,279				3,054				10,538				8,758
Total non-interest expense			42,607				50,670				133,188				153,514
Income before income tax expense			58,222				51,658				163,196				144,182
Income tax expense			22,313				19,029				60,944				52,489
Net income			35,909				32,629				102,252				91,693
Less: net income attributable to noncontrolling interest			-				151				-				452
Net income attributable to Cathay General Bancorp			35,909				32,478				102,252				91,241
Dividends on preferred stock and noncash charge from repayment			-				(2,434	)			-				(9,685	)
Net income attributable to common stockholders			35,909				30,044				102,252				81,556
Other comprehensive income/(loss), net of tax
Unrealized holding gain/(loss) on securities available-for-sale			170				(1,074	)			25,014				(5,908	)
Less: reclassification adjustments included in net income			209				5,036				3,957				15,740
Unrealized holding gain/(loss) on cash flow hedge derivatives			100				-				(163	)			-
Less: reclassification adjustments included in net income			-				-				-				-
Total other comprehensive gain/(loss), net of tax			61				(6,110	)			20,894				(21,648	)
Total comprehensive income		$	35,970			$	26,368			$	123,146			$	69,593
Net income per common share:
Basic		$	0.45			$	0.38			$	1.28			$	1.03
Diluted		$	0.45			$	0.38			$	1.28			$	1.03
Cash dividends paid per common share		$	0.07			$	0.01			$	0.19			$	0.03
Average common shares outstanding
Basic			79,677,952				78,894,262				79,639,202				78,853,333
Diluted			80,176,100				79,114,122				80,087,819				78,944,152

 

See accompanying notes to unaudited condensed consolidated financial statements.

  

 

CATHAY GENERAL BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Nine months ended September 30
		2014				2013
		(In thousands)
Cash Flows from Operating Activities
Net income		$	102,252			$	91,693
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Credit for loan losses			(8,800	)			(3,000	)
Provision/(credit) for losses on other real estate owned			1,693				(675	)
Deferred tax (asset)/liability			13,846				(12,325	)
Depreciation			5,336				4,899
Net gains on sale and transfer of other real estate owned			(3,467	)			(843	)
Net gains on sale of loans			(300	)			(864	)
Proceeds from sales of loans			15,791				41,219
Originations of loans held-for-sale			(15,491	)			(40,356	)
Net change in trading securities			-				(152	)
Income associated with debt redemption			(550	)			-
Write-downs on venture capital investments			317				295
Write-downs on impaired securities			820				-
Net gains on sales and calls of securities			(7,647	)			(27,157	)
Amortization/accretion of security premiums/discounts, net			2,266				3,439
Amortization of other intangible assets			575				4,192
Excess tax short-fall from share-based payment arrangements			1,177				143
Stock based compensation and stock issued to officers as compensation			2,948				2,775
Net change in accrued interest receivable and other assets			1,691				24,875
Net change in other liabilities			(8,377	)			4,195
Net cash provided by operating activities			104,080				92,353
Cash Flows from Investing Activities
(Increase)/decrease in short-term investments			(75,873	)			22,959
Purchase of investment securities available-for-sale			(892,706	)			(1,026,659	)
Proceeds from sale of investment securities available-for-sale			543,305				903,915
Proceeds from repayments, maturities and calls of investment securities available-for-sale			640,478				367,026
Proceeds from repayments, maturities and calls of investment securities held-to-maturity			-				50,973
Purchase of Federal Home Loan Bank stock			(17,736	)			-
Redemptions of Federal Home Loan Bank stock			8,646				12,589
Net increase in loans			(763,211	)			(413,405	)
Purchase of premises and equipment			(4,036	)			(4,734	)
Proceeds from sale of other real estate owned			28,543				9,926
Net increase in investment in affordable housing			(5,617	)			(6,167	)
Net cash used in investing activities			(538,207	)			(83,577	)
Cash Flows from Financing Activities
Net increase in deposits			713,362				534,306
Net decrease in federal funds purchased and securities sold under agreements to repurchase			(250,000	)			(450,000	)
Advances from Federal Home Loan Bank			8,252,400				1,742,396
Repayment of Federal Home Loan Bank borrowings			(8,218,600	)			(1,512,000	)
Cash dividends paid			(15,133	)			(8,631	)
Redemption of series B preferred stock			-				(258,000	)
Repurchase of trust preferred securities			(1,450	)			-
Proceeds from shares issued under Dividend Reinvestment Plan			1,554				202
Taxes paid related to net share settlement of RSUs			(274	)			-
Excess tax short-fall from share-based payment arrangements			(1,177	)			(143	)
Net cash provided by financing activities			480,682				48,130
Increase in cash and cash equivalents			46,555				56,906
Cash and cash equivalents, beginning of the period			153,747				144,909
Cash and cash equivalents, end of the period		$	200,302			$	201,815
Supplemental disclosure of cash flow information
Cash paid during the period:
Interest		$	59,478			$	65,372
Income taxes paid		$	52,864			$	55,537
Non-cash investing and financing activities:
Net change in unrealized holding (loss)/gain on securities available-for-sale, net of tax		$	21,057			$	(21,648	)
Net change in unrealized holding loss on cash flow hedge derivatives		$	(163	)		$	-
Transfers of investment securities to available-for-sale from held-to-maturity		$	-			$	722,466
Transfers of trading securities to short-term investments		$	4,936			$	-
Transfers to other real estate owned from loans held for investment		$	(2,810	)		$	11,877
Loans to facilitate the sale of other real estate owned		$	-			$	75
Transfer of securities sold but not yet settled to other assets		$	-			$	12,469

 

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 (“Bancorp”) is the holding company for Cathay Bank (the “Bank” and, together, the “Company”), 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 September 30, 2014, the Bank operated 21 branches in Southern California, 12 branches in Northern California, nine branches in New York State, three branches in Illinois, three branches in Washington State, two branches in Texas, one branch in Massachusetts, one branch in New Jersey, one branch in Nevada, 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. 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, 2014. For further information, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

The preparation of the condensed 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 estimates subject to change are the allowance for loan losses, goodwill impairment, and other-than-temporary impairment.

 

3. Recent Accounting Pronouncements

  

In January 2014, the FASB issued ASU 2014-01, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects.” ASU No. 2014-01 permits a reporting entity to make an accounting policy election to account for its investments in affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the amount of tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense or benefit. ASU 2014-01 becomes effective for interim and annual periods beginning on or after December 15, 2014. The Company is evaluating whether to adopt ASU 2014-01 or to continue to apply the equity method of accounting for investments in affordable housing projects.

  

 

In January 2014, the FASB issued ASU 2014-04, “Receivables—Trouble Debt Restructurings by Creditors.” ASU No. 2014-04 clarifies that upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement, a creditor is considered to have physical possession of residential real estate property collateralizing a consumer mortgage loan. A reporting entity is required to have interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in process of foreclosure. ASU 2014-04 becomes effective for interim and annual periods beginning on or after December 15, 2014. Adoption of ASU 2014-04 is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements and Property, Plant, and Equipment.” ASU No. 2014-08 defines a discontinued operation as disposal of components of an entity that represent a strategic shift that has or will have a major effect on an entity’s operations. ASU No. 2014-08 also requires a reporting entity to present the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position for each comparative period. ASU 2014-08 becomes effective for interim and annual periods beginning on or after December 15, 2014. Adoption of ASU 2014-08 is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-11, “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” ASU No. 2014-11 expands secured borrowing accounting for certain repurchase agreements. It requires the repurchase agreement be separate from the initial transfer of the financial asset in a repurchase financing arrangement. An entity is required to disclose additional information about certain transactions accounted for as a sale in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets through an agreement with the same counterparty. An entity is also required to disclose information about repurchase agreements, securities lending transactions and repurchase-to-maturity transactions that are accounted for as secured borrowings. ASU 2014-11 becomes effective for interim and annual periods beginning on or after December 15, 2014. Adoption of ASU 2014-11 is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” ASU No. 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. An entity should recognize compensation cost in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. ASU 2014-12 becomes effective for interim and annual periods beginning on or after December 15, 2015. Adoption of ASU 2014-12 is not expected to have a significant impact on the Company’s consolidated financial statements.

  

 

ASU 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, issued by the FASB in August 2014, requires an entity’s management to evaluate and disclose conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.  In addition, an entity’s management is to disclose management’s plans that alleviated or that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.  ASU 2014-15 becomes effective for interim and annual periods beginning on or after December 15, 2016.  Adoption of ASU 2014-15 is not expected to have a significant impact on the Company’s consolidated financial statements.

  

4. 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 earnings per common share calculations:

  

		Three months ended September 30,								Nine months ended September 30,
(Dollars in thousands, except share and per share data)		2014				2013				2014				2013
Net income attributable to Cathay General Bancorp		$	35,909			$	32,478			$	102,252			$	91,241
Dividends on preferred stock and noncash charge from repayment			-				(2,434	)			-				(9,685	)
Net income available to common stockholders		$	35,909			$	30,044			$	102,252			$	81,556
Weighted-average shares:
Basic weighted-average number of common shares outstanding			79,677,952				78,894,262				79,639,202				78,853,333
Dilutive effect of weighted-average outstanding common share equivalents
Warrants			346,101				171,426				306,306				57,771
Options			109,803				-				103,022				-
Restricted stock units			42,244				48,434				39,289				33,048
Diluted weighted-average number of common shares outstanding			80,176,100				79,114,122				80,087,819				78,944,152
Average stock options and warrants with anti-dilutive effect			1,990,358				3,668,285				1,993,384				4,958,218
Earnings per common share:
Basic		$	0.45			$	0.38			$	1.28			$	1.03
Diluted		$	0.45			$	0.38			$	1.28			$	1.03

 

 

5. Stock-Based Compensation

  

Under the Company’s equity incentive plans, directors and eligible employees may be granted incentive or non-statutory stock options and/or restricted stock units, or awarded non-vested stock. As of September 30, 2014, the only options granted by the Company 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 certain options granted to the Chief Executive Officer of the Company in 2005 and 2008. If such options expire or terminate without having been exercised, any shares not purchased will again be available for future grants or awards. There were no options granted during the first nine months of 2014 or the year ended December 31, 2013.

 

Option compensation expense was zero for the three months ended September 30, 2014, and for the three months ended September 30, 2013. For the nine months ended September 30, option compensation expense totaled zero for 2014 and $129,000 for 2013. Stock-based compensation is recognized ratably over the requisite service period for all awards.

  

 

No stock options were exercised in the first nine months of 2014 or in the first nine months of 2013. The table below summarizes stock option activity for the periods indicated:

 

						Weighted-average				Weighted-average Remaining Contractual Life				Aggregate Intrinsic Value
		Shares				exercise price				(in years)				(in thousands)
Balance, December 31, 2013			2,812,874			$	31.81				1.9			$	2,119
Forfeited			(438,000	)			28.70
Balance, March 31, 2014			2,374,874			$	32.38				2.0			$	1,148
Forfeited			(10,000	)			32.26
Balance, June 30, 2014			2,364,874			$	32.38				1.7			$	4,083
Forfeited			-				-
Balance, September 30, 2014			2,364,874			$	32.38				1.5			$	3,487
Exercisable, September 30, 2014			2,364,874			$	32.38				1.5			$	3,487

  

At September 30, 2014, 3,070,663 shares were available under the Company’s 2005 Incentive Plan for future grants.

 

The Company granted restricted stock units for 17,601 shares at an average closing price of $24.66 per share in the first nine months of 2014 and 25,037 shares at an average closing price of $20.68 per share in the year ended December 31, 2013. The restricted stock units granted in 2014 and 2013 are scheduled to vest two years from grant date.

 

The following table presents information relating to the restricted stock units as of September 30, 2014:

  

		Units
Balance at December 31, 2013			143,433
Granted			17,601
Forfeited			-
Vested			(42,520	)
Balance at September 30, 2014			118,514

   

The compensation expense related to the restricted stock units was $1.0 million for the three months ended September 30, 2014, compared to $476,000 for the three months ended September 30, 2013. For the nine months ended September 30, compensation expense recorded related to the restricted stock units was $2.9 million in 2014 and $1.6 million in 2013. Unrecognized stock-based compensation expense related to restricted stock units was $4.7 million at September 30, 2014, and is expected to be recognized over the next 2.0 years.

 

In December 2013, the Company granted performance-based restricted stock units in which the number of units earned is calculated based on the relative total stockholder return (“TSR”) of the Company’s common stock as compared to the TSR of the KBW Regional Banking Index. In addition, the Company granted performance stock units in which the number of units earned is determined by comparison to the targeted earnings per share (“EPS”) for the three years ending December 31, 2016. Performance TSR restricted stock units for 119,840 shares and performance EPS restricted stock units for 116,186 shares were granted to eight executive officers. Both the performance TSR and EPS stock units are scheduled to vest on December 31, 2016. In the first nine months of 2014, the Company did not grant any performance stock units.

  

 

The following table summarizes the tax excess (short-fall) from share-based payment arrangements: 

 

		Three months ended September 30,								Nine months ended September 30,
(Dollars in thousands)		2014				2013				2014				2013
Short-fall of tax deductions in excess of grant-date fair value		$	-			$	(63	)		$	(1,177	)		$	(143	)
Benefit of tax deductions on grant-date fair value			-				95				1,177				702
Total benefit of tax deductions		$	-			$	32			$	-			$	559

  

6. Investment Securities

 

Investment securities were $1.34 billion at September 30, 2014, compared to $1.59 billion at December 31, 2013. During the first quarter of 2013, due to the ongoing discussions regarding corporate income tax rates which could have a negative impact on the after-tax yields and fair values of the Company’s portfolio of municipal securities, the Company determined it may sell such securities in response to market conditions. As a result, the Company reclassified its municipal securities from securities held-to-maturity to securities available-for-sale. Concurrent with this reclassification, the Company also reclassified all other securities held-to-maturity, which together with the municipal securities had an amortized cost on the date of transfer of $722.5 million, to securities available-for-sale. At the reclassification date, a net unrealized gain was recorded in other comprehensive income for these securities totaling $40.5 million.

 

The following tables reflect the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of investment securities as of September 30, 2014, and December 31, 2013:

 

		September 30, 2014
						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
		(In thousands)
Securities Available-for-Sale
U.S. treasury securities		$	539,919			$	198			$	29			$	540,088
Mortgage-backed securities			703,312				1,085				21,073				683,324
Collateralized mortgage obligations			80				-				34				46
Corporate debt securities			94,941				751				1,355				94,337
Mutual funds			6,000				-				183				5,817
Preferred stock of government sponsored entities			7,196				2,056				-				9,252
Other equity securities			3,608				3,620				-				7,228
Total		$	1,355,056			$	7,710			$	22,674			$	1,340,092

  

  

		December 31, 2013
						Gross				Gross
		Amortized				Unrealized				Unrealized
		Cost				Gains				Losses				Fair Value
		(In thousands)
Securities Available-for-Sale
U.S. treasury securities		$	460,095			$	99			$	1			$	460,193
Mortgage-backed securities			1,010,294				7,049				64,529				952,814
Collateralized mortgage obligations			5,929				231				54				6,106
Asset-backed securities			123				-				-				123
Corporate debt securities			154,955				298				4,949				150,304
Mutual funds			6,000				-				275				5,725
Preferred stock of government sponsored entities			569				10,834				-				11,403
Total		$	1,637,965			$	18,511			$	69,808			$	1,586,668

 

The amortized cost and fair value of investment securities at September 30, 2014, by contractual maturities, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties.   

 

		Securities Available-For-Sale
		Amortized cost				Fair value
		(In thousands)
Due in one year or less		$	115,047			$	115,156
Due after one year through five years			446,739				447,662
Due after five years through ten years			85,693				84,983
Due after ten years (1)			707,577				692,291
Total		$	1,355,056			$	1,340,092
(1) Equity securities are reported in this category

 

Proceeds from sales of mortgage-backed securities were $458.4 million and from repayments, maturities and calls of mortgage-backed securities were $54.7 million during the first nine months of 2014 compared to proceeds from sales of $348.7 million and proceeds of $237.9 million from repayments, maturities, and calls during the same period a year ago. Proceeds from sales of other investment securities were $84.9 million during the first nine months of 2014 compared to $555.2 million during the same period a year ago. Proceeds from maturities and calls of other investment securities were $585.8 million during the first nine months of 2014 compared to $180.1 million during the same period a year ago. Gains of $17.1 million and losses of $9.5 million were realized on sales and calls of investment securities during the first nine months of 2014 compared to gains of $27.2 million and no losses realized during the same period a year ago.

 

  

At September 30, 2014, all of the Company’s mortgage-backed securities were rated as investment grade except for one non-agency issue. Total unrealized losses of $21.1 million from all mortgage-backed securities resulted from increases in interest rates subsequent to the date that these securities were purchased. Total unrealized losses of $1.4 million on corporate bonds relates to four issues of investments in bonds of financial institutions, all of which were investment grade at the date of acquisition and as of September 30, 2014. The unrealized losses were primarily caused by the widening of credit and liquidity spreads since the dates of acquisition. The contractual terms of those investments do not permit the issuers to settle the security at a price less than the amortized cost of the investment. The Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments. Therefore, it is expected that these mortgage-backed securities and corporate bonds would not be settled at a price less than the amortized cost of the investment. Because the Company does not intend to sell and would not be required to sell these investments until a recovery of fair value, which may be maturity, it does not consider its investments in these mortgaged-backed securities and corporate bonds to be other-than-temporarily impaired at September 30, 2014.

 

The temporarily impaired securities represent 66.3% of the fair value of investment securities as of September 30, 2014. Unrealized losses for securities with unrealized losses for less than twelve months represent 0.07%, and securities with unrealized losses for twelve months or more represent 3.5%, of the historical cost of these securities. Unrealized losses on these securities generally resulted from increases in interest rates or spreads subsequent to the date that these securities were purchased. During the third quarter of 2014, the Company wrote down the carrying value of its portfolio of agency preferred stock by $820,000..

 

At September 30, 2014, management believed the impairment was temporary and, accordingly, no impairment loss on debt securities has been recognized in our condensed consolidated statements of operations. The Company expects to recover the amortized cost basis of its debt securities, and has no intent to sell and will not be required to sell available-for-sale debt securities that have declined below their cost before their anticipated recovery.

 

The tables below show the fair value and unrealized losses of the temporarily impaired securities in our investment securities portfolio as of September 30, 2014, and December 31, 2013:

 

		September 30, 2014
		Temporarily impaired securities
		Less than 12 months								12 months or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(Dollars in thousands)
Securities Available-for-Sale
U.S. treasury securities		$	174,959			$	29			$	-			$	-			$	174,959			$	29
Mortgage-backed securities			92,436				151				551,854				20,922				644,290				21,073
Collateralized mortgage obligations			-				-				46				34				46				34
Corporate debt securities			-				-				63,645				1,355				63,645				1,355
Mutual funds			-				-				5,817				183				5,817				183
Total		$	267,395			$	180			$	621,362			$	22,494			$	888,757			$	22,674

  

  

		December 31, 2013
		Temporarily impaired securities
		Less than 12 months								12 months or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
		(Dollars in thousands)
Securities Available-for-Sale
U.S. treasury securities		$	75,064			$	1			$	-			$	-			$	75,064			$	1
Mortgage-backed securities			792,012				64,526				272				2				792,284				64,528
Mortgage-backed securities-Non-agency			94				1				-				-				94				1
Collateralized mortgage obligations			68				4				301				50				369				54
Corporate debt securities			9,970				30				100,081				4,919				110,051				4,949
Mutual funds			-				-				5,724				275				5,724				275
Total securities available-for-sale		$	877,208			$	64,562			$	106,378			$	5,246			$	983,586			$	69,808
Total investment securities		$	877,208			$	64,562			$	106,378			$	5,246			$	983,586			$	69,808

 

Investment securities having a carrying value of $703.6 million at September 30, 2014, and $926.5 million at December 31, 2013, were pledged to secure public deposits, other borrowings, treasury tax and loan, and securities sold under agreements to repurchase. 

 

7. Loans 

 

Most of the Company’s business activity is with Asian customers located in Southern and Northern California; New York City, New York; Houston and Dallas, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Edison, New Jersey; Las Vegas, Nevada, and Hong Kong. The Company has no specific industry concentration, and generally its loans are secured by real property or other collateral of the borrowers. Loans are generally expected to be paid off from the operating profits of the borrowers, from refinancing by other lenders, or through sale by the borrowers of the secured collateral.

 

The components of loans in the condensed consolidated balance sheets as of September 30, 2014, and December 31, 2013, were as follows:

 

		September 30, 2014				December 31, 2013
		(In thousands)
Type of Loans:
Commercial loans		$	2,450,118			$	2,298,724
Residential mortgage loans			1,516,711				1,355,255
Commercial mortgage loans			4,414,067				4,023,051
Equity lines			172,223				171,277
Real estate construction loans			301,459				221,701
Installment and other loans			3,676				14,555
Gross loans			8,858,254				8,084,563
Less:
Allowance for loan losses			(169,198	)			(173,889	)
Unamortized deferred loan fees			(12,903	)			(13,487	)
Total loans, net		$	8,676,153			$	7,897,187

 

  

At September 30, 2014, recorded investment in impaired loans totaled $188.3 million and was comprised of non-accrual loans of $65.2 million and accruing troubled debt restructured loans (“TDRs) of $123.1 million. At December 31, 2013, recorded investment in impaired loans totaled $200.8 million and was comprised of non-accrual loans of $83.2 million and accruing TDRs of $117.6 million. For impaired loans, the amounts previously charged off represent 12.6% at September 30, 2014, and 23.9% at December 31, 2013, of the contractual balances for impaired loans. The following table presents the average balance and interest income recognized related to impaired loans for the periods indicated:

 

		Impaired Loans
		Average Recorded Investment																Interest Income Recognized
		Three months ended								Nine months ended								Three months ended								Nine months ended
		September 30,								September 30,								September 30,								September 30,
		2014				2013				2014				2013				2014				2013				2014				2013
														(In thousands)
Commercial loans		$	21,706			$	32,187			$	26,741			$	24,873			$	205			$	166			$	636			$	395
Real estate construction loans			33,276				34,946				33,459				39,014				66				67				198				199
Commercial mortgage loans			119,611				132,921				114,663				145,380				1,153				730				3,310				3,289
Residential mortgage and equity lines			16,151				16,884				17,889				17,574				128				106				363				227
Total impaired loans		$	190,744			$	216,938			$	192,752			$	226,841			$	1,552			$	1,069			$	4,507			$	4,110

 

 

The following tables present impaired loans and the related allowance for credit losses as of the dates indicated:

 

		Impaired Loans
		September 30, 2014												December 31, 2013
		Unpaid Principal Balance				Recorded Investment				Allowance				Unpaid Principal Balance				Recorded Investment				Allowance
		(In thousands)
With no allocated allowance
Commercial loans		$	19,792			$	18,764			$	-			$	20,992			$	18,905			$	-
Real estate construction loans			37,403				16,133				-				25,401				15,097				-
Commercial mortgage loans			84,274				82,586				-				105,593				78,930				-
Residential mortgage loans and equity lines			2,541				2,541				-				4,892				4,892				-
Subtotal		$	144,010			$	120,024			$	-			$	156,878			$	117,824			$	-
With allocated allowance
Commercial loans		$	8,951			$	6,985			$	2,730			$	22,737			$	13,063			$	2,519
Real estate construction loans			15,377				15,377				2,604				28,475				19,323				3,460
Commercial mortgage loans			33,749				32,973				7,999				39,223				35,613				6,584
Residential mortgage loans and equity lines			13,422				12,988				481				16,535				14,957				721
Subtotal		$	71,499			$	68,323			$	13,814			$	106,970			$	82,956			$	13,284
Total impaired loans		$	215,509			$	188,347			$	13,814			$	263,848			$	200,780			$	13,284

  

  

The following tables present the aging of the loan portfolio by type as of September 30, 2014, and as of December 31, 2013:

 

		September 30, 2014
		30-59 Days Past Due				60-89 Days Past Due				90 Days or More Past Due				Non-accrual Loans				Total Past Due				Loans Not Past Due				Total
		(In thousands)
Type of Loans:
Commercial loans		$	8,307			$	3,920			$	662			$	8,851			$	21,740