Cathay General Bancorp — Q2 2013 Form 10-Q
Business context and period. Unaudited results for the quarter and six months ended June 30, 2013; balance-sheet comparisons are with December 31, 2012. The company operates Cathay Bank, serving customers in the U.S. and Asia. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
- Q2 earnings: Net income was $30.1 million, essentially unchanged from $30.0 million a year earlier. Net income available to common stockholders rose 8.2% to $27.8 million; diluted EPS was $0.35 versus $0.33.
- Six-month earnings: Net income was $59.1 million versus $59.1 million; common earnings were $51.5 million versus $50.5 million. Diluted EPS was $0.65 versus $0.64.
- Interest income and margin: Q2 net interest income before credit provision was $80.0 million, up 1.1% year over year. Tax-equivalent net interest margin was 3.30%, versus 3.24% in Q2 2012 and 3.35% in Q1 2013. For the first half, margin was 3.33% versus 3.28%.
- Noninterest income and expenses: Q2 noninterest income increased to $20.4 million from $9.9 million, mainly on $12.2 million of securities gains. Noninterest expense rose to $53.7 million from $47.3 million, including $10.1 million of debt-redemption costs. The efficiency ratio was 53.53% versus 53.21%.
- Assets and loans: Total assets were $10.60 billion, down 0.8% from year-end. Gross loans grew 3.6% to $7.69 billion; management cited $330 million, or 4.5%, of growth from March 31 to June 30. Deposits increased 4.4% to $7.71 billion.
- Credit quality: Nonperforming assets were $144.8 million, down 4.1% from year-end; non-accrual loans were $95.6 million. The allowance for loan losses was $179.7 million, 2.34% of gross loans. No provision for loan losses was recorded in Q2, compared with a $5.0 million credit in Q2 2012. First-half net charge-offs were $1.7 million.
- Cash flow and liquidity: For the first half, operating cash flow was $73.8 million versus $8.1 million; investing cash flow was $42.4 million versus $66.0 million, and financing cash flow was negative $128.1 million versus negative $57.2 million. Cash and due from banks ended at $133.0 million. The reported liquidity ratio was 14.8%, versus 15.3% at year-end; available unpledged investment and trading securities were $906.8 million. The Bank had a $1.21 billion FHLB credit line, with $126.2 million drawn.
- Debt and capital: Repurchase-agreement funding was $950.0 million, down from $1.25 billion; FHLB advances were $126.2 million. Long-term debt was $171.1 million. Total equity declined 5.5% to $1.54 billion, chiefly after redeeming $129 million of Series B TARP preferred stock and recording securities-related other comprehensive losses. The Bank’s Tier 1 and total risk-based capital ratios were 15.73% and 17.47%, respectively; it remained well-capitalized.
Material changes and unusual items
- The company prepaid $300 million of repurchase agreements in the first half, incurring $15.7 million in penalties, including $10.1 million in Q2. Securities gains, lower OREO costs, and lower funding costs supported results; debt-redemption penalties, lower securities interest income, and higher personnel and professional expenses offset those benefits.
- In Q1, the company transferred $722.5 million of held-to-maturity securities to available-for-sale after deciding it might sell municipal securities in response to market conditions. The transfer generated a $40.5 million pretax unrealized gain in other comprehensive income. By June 30, available-for-sale securities had a $15.1 million net unrealized loss, and Q2 comprehensive income was a loss of $8.6 million despite positive net income.
- The company redeemed half of its TARP Series B preferred stock in March 2013; management intended to pursue redemption of the remainder, subject to regulatory approval.
- The new core processing system conversion was completed July 15, 2013. Management cited temporary staffing and consulting costs associated with the conversion; the filing does not quantify subsequent operating effects.
Outlook, commentary, and risks
The filing provides no specific earnings, revenue, or margin guidance. Management expected liquidity to remain adequate, while noting that deposit maturities could produce some outflow; approximately 87% of time deposits matured within one year. Management believed the company and Bank would meet Basel III capital requirements on a fully phased-in basis; the rules were scheduled to begin taking effect in 2015. The Federal Reserve memorandum of understanding was terminated in April 2013, but supervisory consultation requirements for capital actions remained.
Key disclosed risks include credit and real-estate collateral deterioration, interest-rate and liquidity risk, regulatory and capital changes, economic conditions in the company’s U.S. and Asian markets, information-system disruption, and legal proceedings. Management said routine litigation was not expected to materially affect the company, while noting that ultimate legal losses could differ from accrued amounts. The filing reported no material change to previously disclosed risk factors. Interest-rate simulations estimated that a 200-basis-point rate increase would raise net interest income 4.6% and net portfolio value 1.0%; management cautioned that model assumptions may not predict actual outcomes.
Important facts for investors to verify
- Whether loan growth continues without weakening underwriting or increasing problem loans, and whether TDR and non-accrual trends improve.
- Whether securities-related unrealized losses recover or result in realized losses, particularly given the large mortgage-backed securities exposure.
- Whether recurring earnings can sustain performance after securities gains and one-time debt-prepayment penalties are excluded.
- The operating and expense effects of the July core-system conversion, and any further TARP redemption or related regulatory approvals.
- Deposit retention and funding costs as time deposits mature, and the company’s capital position as Basel III rules phase in.