Cathay General Bancorp — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet amounts are as of March 31, 2013, compared with December 31, 2012 unless otherwise noted. Cathay General Bancorp is the holding company for Cathay Bank, a commercial bank operating in the United States and Asia. Financial statements are unaudited.
Financial results and condition
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior date |
|---|---|---|
| Net interest income, before credit-loss provision | $80.1 million | $80.7 million in Q1 2012 |
| Net interest margin, fully taxable-equivalent | 3.35% | 3.33% in Q1 2012; 3.28% in Q4 2012 |
| Non-interest income | $14.9 million | $8.8 million in Q1 2012 |
| Non-interest expense | $49.1 million | $47.9 million in Q1 2012 |
| Net income / income available to common stockholders | $29.0 million / $23.7 million | $29.1 million / $24.8 million in Q1 2012 |
| Diluted earnings per common share | $0.30 | $0.32 in Q1 2012 |
| Return on average assets / equity | 1.12% / 7.20% | 1.10% / 7.62% in Q1 2012 |
| Efficiency ratio | 51.71% | 53.50% in Q1 2012 |
| Total assets | $10.52 billion | $10.69 billion at Dec. 31, 2012 |
| Gross loans / net loans | $7.36 billion / $7.18 billion | $7.43 billion / $7.24 billion at Dec. 31, 2012 |
| Total deposits | $7.43 billion | $7.38 billion at Dec. 31, 2012 |
| Total equity | $1.55 billion | $1.63 billion at Dec. 31, 2012 |
| Cash and due from banks | $155.5 million | $144.9 million at Dec. 31, 2012 |
- Earnings and margins: Net interest income declined 0.6% year over year as lower yields on loans and securities offset reduced funding costs. Lower deposit and repurchase-agreement costs helped lift the margin. Securities gains were $6.3 million, versus $2.2 million in Q1 2012, and management also cited higher wealth-management commissions.
- Cash flow: Operating activities provided $39.8 million, investing activities provided $180.7 million, and financing activities used $210.0 million. Cash and cash equivalents increased $10.6 million during the quarter.
- Borrowings: Repurchase-agreement funding was $1.15 billion, FHLB advances were $126.2 million, and long-term debt was $171.1 million. The company prepaid $100 million of repurchase agreements and incurred $5.6 million in prepayment penalties; reported debt-redemption costs were $5.645 million.
- Capital: Bancorp Tier 1 risk-based, total risk-based, and leverage ratios were 16.38%, 18.16%, and 13.06%, respectively. The Bank was classified as well capitalized, with corresponding ratios of 15.97%, 17.73%, and 12.73%.
Material changes versus prior periods
- Common-stockholder income fell 4.6% year over year. The filing attributes the decline primarily to the prior-year $4.0 million credit to loan-loss provision, higher salaries and debt-redemption costs, and a $1.3 million noncash charge associated with preferred-stock repayment; higher securities gains and wealth-management commissions partly offset these items.
- Non-interest income increased 68.5% year over year, chiefly from securities-sale gains. Non-interest expense rose 2.6%; higher compensation and professional costs were partly offset by lower OREO expense, marketing expense, and regulatory assessments.
- Gross loans declined 0.9% from year-end, including a 4.5% decline in commercial loans; residential mortgage loans increased 3.2%. Deposits rose 0.6%.
- Total equity decreased $79.9 million, primarily reflecting the March 20 redemption of $129 million, or half, of Series B preferred stock issued under TARP, partly offset by quarterly net income and other comprehensive income.
- The company transferred all remaining held-to-maturity securities, with $722.5 million amortized cost, to available-for-sale after deciding it might sell municipal securities in response to market conditions. It recorded a $40.5 million net unrealized gain at transfer in other comprehensive income. By quarter-end, investment securities had a $23.5 million net unrealized gain, net of tax.
- Asset quality improved in several measures: nonperforming assets were $146.4 million, down 3.0% from year-end and 34% from March 2012. Non-accrual loans were $100.3 million, down 3.4% from year-end. Net charge-offs were $2.7 million, compared with $8.1 million in Q1 2012.
Outlook, risks and unusual items
- Outlook: The filing provides no numerical earnings or revenue guidance. Management said liquidity sources should be adequate for daily needs and expected any runoff of maturing time deposits to be minimal based on historical experience. Results for this interim period are not necessarily indicative of full-year results.
- Regulatory: The Federal Reserve Bank of San Francisco lifted the Bancorp’s memorandum of understanding effective April 5, 2013, after quarter-end. The Bank’s separate regulatory agreement had ended in November 2012. The company said it intended to pursue redemption of the remaining Series B preferred stock, subject to regulatory approval, and remained subject to supervisory consultation on capital actions.
- Credit and real estate: The loan-loss allowance was $178.7 million, or 2.43% of gross loans; the off-balance-sheet credit-commitment reserve was $3.3 million. Impaired loans totaled $230.5 million, including $130.2 million in accruing TDRs and $100.3 million in non-accrual loans. Commercial real estate loans were 220% of risk-based capital, below the Bank’s stated 300% internal limit. Management cautions that economic, collateral-value, and borrower conditions could increase future losses.
- Liquidity and funding: The liquidity ratio was 15.9%, versus 15.3% at year-end. About 90% of time deposits were due within one year or less. The Bank had a $1.21 billion approved FHLB line and $104.1 million of borrowing capacity under the Federal Reserve discount-window program. Securities available for additional liquidity totaled $836.6 million after pledged securities.
- Market and regulatory capital risk: Proposed Basel III rules could require higher capital and affect capital distributions; timing and final requirements were uncertain. Management’s interest-rate simulation estimated that a 200-basis-point rise would increase modeled 12-month net interest income 5.7%, while a 200-basis-point decline would increase it 1.9%; the filing cautions that simulations rely on assumptions and actual outcomes may differ.
- Other risks and contingencies: Foreign-country net exposures totaled $735.4 million, including $233.5 million to Hong Kong and $132.3 million to China. Off-balance-sheet commitments included $1.76 billion to extend credit and $45.8 million in standby letters of credit; contractual amounts are not estimates of expected losses. Management did not expect routine litigation to have a material effect, but noted ultimate legal losses could differ from accruals. The filing also identifies economic conditions, credit quality, interest rates, regulation, real-estate collateral, liquidity, technology and systems, and goodwill impairment as risks.
- Operations: Additional temporary staffing and compensation expense related in part to the upcoming core-system conversion. No material change in reported risk factors or internal controls was disclosed.
Important facts for investors to verify
- Whether credit quality continues to improve, particularly non-accrual loans, TDR performance, construction and commercial-real-estate exposures, and allowance adequacy.
- Whether the available-for-sale securities reclassification, unrealized gains, and securities-sale gains affect future earnings, capital, or liquidity.
- The remaining TARP preferred-stock balance, timing and approvals for any further redemption, and effects on common-stockholder earnings and capital.
- Deposit retention and funding costs as large time deposits mature, alongside repurchase-agreement obligations and collateral requirements.
- Actual costs, execution, and operational risks from the planned core-system conversion, and any eventual Basel III capital requirements.