Cathay General Bancorp 10-Q Summary: Period Ended June 30, 2009
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2009, for Cathay General Bancorp (the "Bancorp") and its wholly-owned subsidiary, Cathay Bank. The Bancorp operates a network of branches primarily in Southern and Northern California, with additional locations in New York, Texas, Washington, Illinois, Massachusetts, New Jersey, and a branch in Hong Kong. The reporting period reflects the impact of a deteriorating economic environment, characterized by significant increases in non-performing assets and credit losses.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Net Income (Loss) | $(24.7) million | $19.2 million | $(14.4) million | $46.5 million |
| Net Income (Loss) to Common | $(28.8) million | $19.2 million | $(22.6) million | $46.5 million |
| Diluted EPS | $(0.58) | $0.39 | $(0.46) | $0.94 |
| Total Assets | $11.40 billion | $10.56 billion | $11.40 billion | $10.43 billion |
| Total Deposits | $7.38 billion | $6.84 billion | $7.38 billion | $6.84 billion |
| Net Interest Income | $66.0 million | $72.1 million | $136.4 million | $147.3 million |
| Provision for Credit Losses | $93.0 million | $20.5 million | $140.0 million | $28.0 million |
| Non-Interest Expense | $54.0 million | $33.6 million | $91.5 million | $65.4 million |
| Return on Average Assets | -0.87% | 0.73% | -0.26% | 0.90% |
| Return on Average Equity | -7.66% | 7.66% | -2.25% | 9.32% |
Material Changes vs. Prior Period
- Significant Losses: The Bancorp reported a net loss of $24.7 million for Q2 2009, a reversal from the $19.2 million net income in Q2 2008. This was driven primarily by a $93.0 million provision for credit losses, compared to $20.5 million in the prior year.
- Asset Quality Deterioration: Non-performing assets increased 88% to $473.7 million, with non-accrual loans rising 111% to $383.1 million. Net charge-offs for the quarter were $56.0 million, a sharp increase from $2.5 million in Q2 2008.
- Expense Increases: Non-interest expense rose 60.7% year-over-year to $54.0 million. This was largely due to a $13.9 million provision for Other Real Estate Owned (OREO) write-downs and a $6.6 million increase in FDIC and State assessments.
- Net Interest Margin Compression: The net interest margin decreased 45 basis points to 2.49% (Q2 2009) from 2.94% (Q2 2008), reflecting lower yields on earning assets and higher borrowing costs on certain repurchase agreements.
- Deposit Growth: Total deposits increased 8.0% to $7.38 billion, driven by growth in money market accounts and large time deposits, offsetting a decline in brokered deposits.
Guidance, Outlook, and Risks
- Capital Adequacy: Despite the losses, the Bancorp remains "well-capitalized" under regulatory standards. The total capital ratio was 14.09%, significantly above the 10% threshold. Management conducted a stress test simulating a severe economic downturn and concluded the institution would remain well-capitalized.
- Dividend Policy: In light of troubled economic conditions, the Bank did not pay a dividend to the Bancorp in the first half of 2009 and does not expect to do so for the remainder of the year. The Bancorp declared a reduced cash dividend of $0.01 per share for August 2009.
- Key Risks:
- Credit Risk: Continued deterioration in the economy and real estate markets, particularly in construction and commercial real estate sectors.
- Interest Rate Risk: Volatility in interest rates affecting net interest income and the market value of equity.
- Regulatory Risk: Changes in laws, regulations, and accounting rules (e.g., SFAS 115-2 regarding other-than-temporary impairments).
- Goodwill Impairment: While no impairment was recorded in Q2 2009, management noted that market capitalization had fallen below book value, requiring ongoing monitoring.
- Unusual Items: The quarter included a $13.9 million OREO provision and a $5.2 million special FDIC assessment. Non-interest income was boosted by $26.9 million in net gains on the sale of securities.
Investor Verification Checklist
- Allowance Adequacy: Verify the sufficiency of the $169.6 million allowance for loan losses against the rapidly growing $400 million in non-performing loans (coverage ratio dropped to 42.4%).
- OREO Exposure: Review the composition and valuation of the $70.8 million in Other Real Estate Owned, which is concentrated in California and Texas.
- Securities Portfolio: Assess the $29.1 million in gross unrealized losses on available-for-sale securities, specifically the $7.7 million in losses on non-agency mortgage-backed securities.
- Liquidity Position: Confirm the stability of the funding base given the decline in brokered deposits and the reliance on repurchase agreements ($1.56 billion).
- Stress Test Assumptions: Evaluate the assumptions used in management's internal stress test regarding future loan loss rates and economic scenarios.