Business Context and Reporting Period
Cathay General Bancorp (the "Bancorp") and its subsidiary, Cathay Bank, filed this Form 10-Q for the quarterly period ended June 30, 2010. The Bancorp operates as a holding company for a commercial bank with branches primarily in California, New York, and other select U.S. states, as well as a branch in Hong Kong. The reporting period reflects the second quarter of 2010, a time when the company was navigating a weak economic environment, high levels of non-performing assets, and regulatory oversight.
Key Financial Metrics
| Metric | Q2 2010 (Three Months) | Q2 2009 (Three Months) | YTD 2010 (Six Months) | YTD 2009 (Six Months) |
|---|---|---|---|---|
| Net Income/(Loss) | $1.9 million | $(24.7) million | $(23.5) million | $(14.1) million |
| Net Loss Attributable to Common Stockholders | $(2.2) million | $(28.8) million | $(32.0) million | $(22.6) million |
| Loss Per Common Share | $(0.03) | $(0.58) | $(0.42) | $(0.46) |
| Net Interest Income (Pre-Provision) | $74.6 million | $66.0 million | $149.3 million | $136.4 million |
| Provision for Credit Losses | $45.0 million | $93.0 million | $129.0 million | $140.0 million |
| Net Charge-offs | $22.6 million | $56.0 million | $85.6 million | $94.0 million |
| Total Assets | $11.41 billion | $11.59 billion (Dec 31, 2009) | N/A | |
| Total Deposits | $7.29 billion | $7.51 billion (Dec 31, 2009) | N/A | |
| Allowance for Credit Losses | $260.5 million | $217.1 million (Dec 31, 2009) | N/A | |
| Non-Performing Assets | $415.3 million | $351.7 million (Dec 31, 2009) | N/A | |
| Net Interest Margin | 2.73% | 2.49% | 2.73% | 2.59% |
Material Changes vs. Prior Period
- Return to Profitability: The Bancorp reported a net income of $1.9 million for Q2 2010, a significant improvement from the $24.7 million net loss in Q2 2009. This was driven by a substantial reduction in the provision for credit losses and lower expenses related to Other Real Estate Owned (OREO).
- Asset Quality Deterioration: Despite the earnings improvement, non-performing assets increased to $415.3 million (3.6% of total assets) from $351.7 million at year-end 2009. This increase was primarily due to a $32.7 million rise in non-accrual loans and a $30.0 million increase in OREO.
- Allowance Strengthening: The allowance for credit losses increased to $260.5 million, or 3.80% of total loans, up from 3.15% at December 31, 2009. Management refined its loan loss reserve methodology in Q2, increasing the provision by $19.5 million to better reflect recent charge-off trends.
- Capital Raise: On February 1, 2010, the company raised $125.2 million through the sale of 15.0 million shares of common stock, bolstering its capital position.
- Non-Interest Income Decline: Non-interest income dropped to $7.4 million in Q2 2010 from $32.4 million in Q2 2009, largely due to a decrease in securities gains and a $3.4 million loss on interest rate swaps.
Guidance, Outlook, Risks, and Contingencies
- Regulatory Oversight: The Bancorp and the Bank are subject to Memoranda of Understanding (MOU) with the Federal Reserve Bank of San Francisco, the FDIC, and the California Department of Financial Institutions. These agreements restrict dividends, capital distributions, and new business lines without prior approval. The company must submit plans to reduce commercial real estate (CRE) concentrations and improve asset quality.
- Capital Targets: The company has submitted a Three-Year Capital and Strategic Plan. As of June 30, 2010, it exceeded its target capital ratios (e.g., actual Tier 1 risk-based capital ratio of 14.89% vs. a target of 11.50%).
- Commercial Real Estate Concentration: CRE loans represented 315% of total risk-based capital. The Bank has set an internal limit to reduce this to 300% by December 2011 and expects to achieve this without selling performing loans.
- Dividend Policy: Due to regulatory restrictions and the need to rebuild capital, the company does not expect to pay dividends exceeding $0.01 per share until it returns to sustained profitability. The Bank is not expected to pay dividends to the Bancorp in 2010.
- Market Risks: The company faces risks related to interest rate volatility, credit losses, and the soundness of other financial institutions. The net interest income simulation model indicates the company is within its tolerance levels for interest rate changes of +/- 200 basis points.
Investor Verification Checklist
- Asset Quality Trends: Verify the trajectory of non-accrual loans and OREO balances, which increased significantly in Q2 despite lower charge-offs.
- Provision Methodology: Review the specific changes to the loan loss reserve methodology implemented in Q2 that added $19.5 million to the provision.
- Regulatory Compliance: Monitor the company's progress in meeting the specific targets outlined in its MOUs with the Federal Reserve and FDIC, particularly regarding CRE concentration reduction.
- Liquidity Position: Assess the reliance on wholesale funding (securities sold under agreements to repurchase and FHLB advances) versus core deposits.
- Capital Adequacy: Confirm that the company continues to meet the "well-capitalized" definition and its internal strategic plan targets.