Cathay General Bancorp — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; the filing also reports fourth-quarter results. Cathay General Bancorp is a bank holding company whose principal business is Cathay Bank, a commercial bank with operations concentrated in California and additional U.S. and Hong Kong locations.
Financial results and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Net interest income before provision | $313.7 million | $297.9 million |
| Provision for credit losses | $27.0 million | $156.9 million |
| Net income attributable to Bancorp | $100.2 million | $11.6 million |
| Net income (loss) available to common stockholders | $83.7 million; $1.06 per share | $(4.8) million; $(0.06) per share |
| Net interest margin, taxable-equivalent | 3.21% | 2.77% |
| Return on average assets | 0.94% | 0.10% |
| Efficiency ratio | 50.90% | 53.22% |
Fourth-quarter 2011 net income attributable to Bancorp was $27.7 million, or $0.30 per common share, versus $18.1 million, or $0.18 per share, in fourth-quarter 2010.
- Income and expenses: Interest and dividend income was $453.6 million, down from $489.6 million, while interest expense fell to $139.9 million from $191.7 million. Non-interest income rose to $50.9 million from $32.3 million, including $21.1 million of securities gains. Non-interest expense increased to $185.6 million from $175.7 million; the 2011 total included $20.2 million in debt-redemption costs, mainly FHLB prepayment penalties.
- Cash flow: Operating activities provided $174.1 million; investing activities provided $127.1 million; financing activities used $270.6 million. Cash and cash equivalents ended the year at $117.9 million, up from $87.3 million.
- Balance sheet: Total assets were $10.64 billion, down 1.5%; gross loans were $7.06 billion, up 2.8%; deposits were $7.23 billion, up 3.4%; and total equity was $1.52 billion. Investment securities declined to $2.45 billion from $2.84 billion.
- Debt and funding: Year-end borrowings included $1.40 billion of securities sold under repurchase agreements, $225 million of FHLB advances, and $171.1 million of long-term debt. The Bank prepaid $450 million of FHLB advances during 2011 and incurred $18.5 million of penalties. Brokered deposits fell to $138.9 million, or 1.9% of deposits, from $417.8 million, or 6.0%.
- Liquidity and capital: The liquidity ratio was 15.8%, down from 20.3%. Management said available funding sources were expected to meet the Bank’s operating needs for the next 12 months. The Bancorp’s cash on hand was $19.8 million. At year-end, Bancorp total risk-based capital, Tier 1 risk-based capital, and leverage ratios were 17.85%, 15.97%, and 12.93%; Bank ratios were 17.51%, 15.64%, and 12.66%.
Material changes and credit quality
- Earnings rebounded primarily because the credit-loss provision fell by $129.9 million and net interest income improved. Net charge-offs declined to $66.2 million, or 0.95% of average loans, from $126.4 million, or 1.84%.
- Commercial loans grew 29.6% to $1.87 billion; residential mortgage loans and equity lines also increased. Commercial mortgage loans declined 4.9% to $3.75 billion, and construction loans declined 42.1% to $237.4 million.
- Non-performing assets decreased to $300.6 million from $325.1 million, and were 4.20% of gross loans plus OREO versus 4.68%. Non-accrual portfolio loans fell to $201.2 million from $242.3 million. However, OREO increased 19.3% to $92.7 million.
- The allowance for loan losses was $206.3 million; with the $2.1 million reserve for unfunded commitments, the allowance for credit losses was $208.3 million. It equaled 2.95% of gross loans and 100.2% of non-performing portfolio loans. Accruing troubled debt restructurings were $120.0 million; non-accrual TDRs increased to $50.9 million from $28.1 million.
- Commercial real estate and construction loans totaled approximately $4.0 billion. CRE loans were 236% of risk-based capital, down from 285%; construction, land-development, and other land loans were 23% of risk-based capital.
Outlook, risks, and unusual items
- The filing provides no formal earnings or revenue guidance. Management described the economic recovery and real estate markets as uncertain and said it anticipated that deposit maturities could produce some runoff, though it expected normal deposit growth to replenish it.
- The Bancorp and Bank remained subject to regulatory memoranda of understanding. Requirements include capital and strategic plans, improved asset quality and risk management, reduced CRE concentration and wholesale-funding dependence, and restrictions on dividends, certain personnel changes, new branches and business lines. Management reported substantial progress and hoped the MOUs could be terminated within the next several quarters; termination was not assured.
- The Bank paid no dividend to the Bancorp in 2009–2011. Management expected to request approval for a Bank dividend in the second quarter of 2012 and further distributions thereafter, subject to regulatory approval. The filing also reports Federal Reserve approval in February 2012 for payments on Series B preferred stock and junior subordinated notes.
- The Company had received $258 million through TARP in exchange for Series B preferred stock, carrying a 5% annual dividend for the first five years and 9% thereafter. Management contemplated partial or full repayment in 2012 or 2013, dependent on earnings and regulatory approval. The associated warrant covers 1,846,374 common shares at $20.96 per share.
- Material risks include real-estate collateral and credit losses, economic weakness in key markets, interest-rate and liquidity exposure, refinancing and funding needs, regulatory and compliance costs, potential goodwill impairment, and successful implementation of a core-system conversion. A $300 million interest-rate swap position was outstanding; the swaps were not structured as hedges of balance-sheet interest-rate exposure.
- Management reported no material pending legal proceeding and no material impact from the year’s accounting-pronouncement adoptions. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether credit improvement persists, particularly in non-accrual loans, TDRs, charge-offs, OREO, and the adequacy of the allowance.
- Whether CRE and construction exposure, collateral values, and regulatory concentration targets remain manageable.
- Whether the MOUs are lifted, and what restrictions remain on dividends, funding, growth, and management changes.
- Whether liquidity remains adequate as large time deposits mature and repurchase-agreement funding is renewed or repriced.
- Whether earnings can be sustained without unusually low credit provisions and securities gains, and how TARP preferred dividends and potential warrant dilution affect common shareholders.