Cathay General Bancorp — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet figures are as of March 31, 2012, unless noted. Cathay General Bancorp is the bank holding company for Cathay Bank, with lending and deposit operations across several U.S. states and in Hong Kong. Figures below are in U.S. dollars.
Financial results and position
- Earnings: Net income was $29.1 million, including $28.9 million attributable to Bancorp; net income available to common stockholders was $24.8 million, or $0.32 per basic and diluted share. A conventional total-revenue figure is not presented; net interest income before provision was $80.7 million and non-interest income was $8.8 million.
- Net interest and margins: Net interest income before provision rose 7.4% year over year to $80.7 million. Fully taxable-equivalent net interest margin was 3.33%, versus 3.06% a year earlier. Average earning-asset yield was 4.54%; cost of funds was 1.51%.
- Credit costs and expenses: The provision for loan losses was a $4.0 million credit, compared with a $6.0 million provision in Q1 2011. Net charge-offs were $8.1 million, or 0.47% of average loans. Non-interest expense was $47.9 million; the efficiency ratio was 53.50%.
- Balance sheet and liquidity: Total assets were $10.57 billion; deposits were $7.36 billion, up 1.8% from year-end 2011. Cash and due from banks were $119.1 million. The reported liquidity ratio was 18.5%, up from 15.8% at year-end. The Bank reported an unused $1.54 billion FHLB credit line and $220.7 million of Federal Reserve borrowing capacity.
- Loans and asset quality: Gross loans were $6.91 billion, down 2.1% from December 31, 2011; commercial real estate loans were 53.0% of gross loans. Non-accrual loans declined to $131.5 million from $201.2 million at year-end. Non-performing assets were $220.7 million, or 2.1% of total assets. The allowance for loan losses was $194.7 million, 2.82% of gross loans.
- Debt and capital: Repurchase-agreement borrowings were $1.40 billion, with a 4.14% weighted-average rate. There were no FHLB advances at quarter-end, versus $225.0 million at year-end; long-term debt was $171.1 million. Total equity was $1.55 billion. Bancorp’s Tier 1 and total risk-based capital ratios were 16.71% and 18.62%; Cathay Bank’s were 16.42% and 18.31%. The Bank was categorized as well-capitalized.
- Cash flow: Operating activities used $26.0 million, compared with providing $25.1 million in Q1 2011. Investing activities provided $126.3 million and financing activities used $99.0 million. Cash and cash equivalents increased $1.2 million to $119.1 million.
Material changes versus comparable periods
- Common-stockholder income increased 38.1% year over year, and diluted EPS rose from $0.23 to $0.32. Management cited stronger net interest income and lower credit provisions, FHLB prepayment penalties, and FDIC assessments; lower securities gains and higher OREO, compensation, and professional-services expenses partly offset improvement.
- Non-interest income fell 30.1% to $8.8 million, primarily because securities gains declined. Net securities gains were $2.2 million versus $6.2 million in Q1 2011.
- Non-accrual loans fell 34.6% from year-end 2011. Accruing TDRs increased to $143.2 million from $120.0 million, while non-accrual TDRs declined to $21.5 million from $50.9 million.
- Gross loans decreased $150.7 million during the quarter, including a 20.8% decline in construction loans. Trading securities increased to $104.5 million from $4.5 million at year-end.
Outlook, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management said accruing TDRs were performing under modified terms and expected continued compliance; this is management’s expectation, not a guarantee.
- The Bank and Bancorp remained subject to regulatory memoranda of understanding. Bank dividends to Bancorp and certain capital actions require prior regulatory approval; the company planned to seek approval for a $23.9 million Bank dividend in Q2 2012 and subsequent quarterly dividends to maintain a specified holding-company cash level.
- Approximately 90% of time deposits were due within one year or less. Management anticipated some maturity-related outflows amid competition, but expected them to be limited and replenishable through normal deposit growth.
- Real estate collateral and credit quality remain important risks. OREO was $87.8 million, and OREO expense was $4.7 million in Q1. The allowance is based on estimates and judgment; a new minimum loss rate for certain substandard loans increased the allowance by $9.3 million in Q1.
- Investment securities had $24.2 million of gross unrealized losses at quarter-end; management considered impairments temporary and reported no impairment loss. The filing cites interest-rate, economic, liquidity, regulatory, real-estate, and operational risks, including a planned core-system conversion.
- Q1 included $2.8 million of FHLB prepayment penalties. The company also disclosed five $300 million interest-rate swaps that were not structured as hedges of its balance-sheet interest-rate exposure; the swaps produced a $1.1 million reduction to non-interest income in the quarter.
Important facts for investors to verify
- Whether the improvement in non-accrual loans and non-performing assets is sustained, and how much reflects cures, repayments, charge-offs, or asset sales.
- Performance and subsequent defaults of accruing TDRs, especially as accruing TDR balances rose during the quarter.
- Adequacy of the loan-loss allowance against real-estate exposures, collateral values, and the stated substandard-loan loss-rate methodology.
- Deposit retention and replacement funding as large time deposits mature; availability and cost of secured wholesale funding.
- Regulatory status and approval conditions for the planned Bank-to-Bancorp dividend and other restricted capital actions.
- Valuation and recovery assumptions for securities with unrealized losses, OREO, and goodwill, as well as execution and costs of the core-system conversion.