Cathay General Bancorp — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 1, 2013. The filing also reports unaudited fourth-quarter results. Cathay Bank is the company’s principal operating subsidiary, serving consumers and businesses through a U.S. and Hong Kong branch network.
Financial performance and condition
| Metric | 2012 | 2011 |
|---|---|---|
| Net income attributable to Bancorp | $117.4 million | $100.2 million |
| Net income available to common shareholders | $101.0 million; $1.28 diluted EPS | $83.7 million; $1.06 diluted EPS |
| Net interest income, before credit provision | $321.3 million | $313.7 million |
| Tax-equivalent net interest margin | 3.28% | 3.21% |
| Provision/(reversal) for credit losses | $(9.0) million | $27.0 million |
| Operating cash flow | $164.6 million | $174.1 million |
| Total assets | $10.69 billion | $10.64 billion |
| Total equity | $1.63 billion | $1.52 billion |
- Fourth-quarter common income was $24.2 million, or $0.31 per diluted share, versus $23.6 million, or $0.30, in Q4 2011.
- Interest income declined 5.2% to $429.7 million as asset yields fell; interest expense declined 22.4% to $108.5 million. Net interest income rose 2.4% to $321.3 million. The efficiency ratio worsened to 52.37% from 50.90%.
- Non-interest income was $46.5 million, down 8.6%, largely reflecting lower securities and loan-sale gains. Non-interest expense increased 3.8% to $192.6 million. Return on average assets was 1.11%, and return on average equity was 7.48%.
- Loans, net, were $7.24 billion; gross loans grew 5.2% to $7.43 billion. Deposits increased 2.1% to $7.38 billion. Securities declined to $2.07 billion from $2.45 billion.
- Cash and cash equivalents ended the year at $144.9 million. Cash flows were $164.6 million from operations, $(46.5) million from investing, and $(91.0) million from financing, for a $27.0 million increase in cash. Liquidity ratio was 15.3%, versus 15.8%.
- Funding included $1.25 billion of repurchase-agreement borrowings, $146.2 million of FHLB advances, and $171.1 million of long-term debt. The Bank also had a $1.23 billion approved FHLB line and $193.9 million of Federal Reserve discount-window borrowing capacity.
- At year-end, Bancorp capital ratios were 17.36% Tier 1 risk-based, 19.12% total risk-based, and 13.82% leverage; Bank ratios were 15.33%, 17.08%, and 12.22%, respectively. Both were reported above “well-capitalized” thresholds.
Material changes versus 2011
- Common earnings rose 20.6%, primarily as credit-loss provisions fell by $36.0 million, alongside higher net interest income and lower funding and FDIC assessment costs. Higher taxes, compensation, OREO costs, and litigation expense partly offset those gains.
- Non-performing assets fell 49.8% to $150.9 million; non-accrual loans declined to $103.9 million from $201.2 million, and OREO fell to $46.4 million from $92.7 million. Net charge-offs decreased to $14.7 million from $66.2 million.
- The allowance for loan losses declined to $183.3 million from $206.3 million. It equaled 2.49% of gross loans and 176.7% of non-performing loans, versus 2.95% and 100.2% a year earlier.
- Commercial loans increased 13.9% and residential mortgage loans 17.9%; construction loans declined 23.8%. Commercial mortgage loans remained the largest loan category at 50.7% of gross loans.
- The Bank’s DFI/FDIC memorandum of understanding was terminated November 7, 2012. The Bancorp remained subject to its Federal Reserve Bank of San Francisco memorandum of understanding.
Outlook, risks, contingencies, and unusual items
- No quantified earnings or growth guidance is provided. Management said it expected available funding sources to meet the Bank’s operating liquidity needs for the next 12 months, while noting that deposit competition could cause runoff as time deposits mature.
- Credit risk remains material given real-estate concentration, slow recovery in some California markets, and $4.0 billion of commercial real estate and construction loans identified in the risk discussion. CRE loans were 228% of total risk-based capital, below the Bank’s 300% internal limit. Accruing troubled debt restructurings increased to $144.7 million; non-accrual TDRs were $47.7 million.
- The company recorded a $5.8 million accrual related to a jury verdict in a lender-liability case involving a construction loan in which the Bank held a 50% interest. The filing separately says there was no material pending legal proceeding; other litigation accruals and outcomes remain uncertain.
- The company received $258 million of TARP preferred capital. Its 5% preferred dividend rate was scheduled to rise to 9% in December 2013 if the preferred stock remained outstanding. Management contemplated partial or full redemption in 2013, subject to earnings and regulatory approvals. The Bank paid $154.7 million in dividends to Bancorp in 2012, including a $125 million special dividend.
- Federal Reserve restrictions continue to limit Bancorp dividends, debt actions, and share repurchases without prior approval. The filing reports Federal Reserve approval in February 2013 for payments on Series B preferred stock and junior subordinated notes; future approvals are not assured.
- Debt prepayments and modifications were notable: the company incurred $9.4 million of repurchase-agreement prepayment penalties and $2.8 million of FHLB prepayment penalties in 2012. It also modified $200 million of repurchase agreements, extending maturities and reducing rates.
- A core banking-system conversion was planned for July 2013; related staffing and technology costs increased in 2012. Other risks include interest-rate exposure, regulatory and capital-rule changes, deposit concentration, goodwill impairment, cyber/security events, and real-estate collateral values.
- The company judged $14.2 million of investment-security unrealized losses to be temporary and recognized no impairment charge. The auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Key facts for investors to verify
- Whether the Federal Reserve MOU remains in effect and what approvals are needed for preferred-stock redemption, dividends, and other capital distributions.
- Credit trends underlying the large year-over-year decline in non-performing assets, including TDR performance, collateral valuations, and the adequacy of the lower loan-loss allowance.
- Exposure to commercial real estate, construction lending, and near-term maturities of time deposits and repurchase-agreement funding.
- Resolution and any further costs from the lender-liability verdict, along with the timing and expense of the planned core-system conversion.
- Progress on TARP preferred-stock repayment before the dividend rate steps up to 9% and any resulting effect on common earnings and capital.