Cathay General Bancorp — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Unaudited consolidated results are for Cathay General Bancorp and subsidiaries, including Cathay Bank. Unless stated otherwise, dollar amounts below are in millions.
Business context and financial results
The company operates a U.S. community banking business with branches across several states and in Hong Kong, serving customers primarily in California and other U.S. markets. It provides commercial, mortgage, deposit, trade-finance, and related services.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Interest and dividend income | $106.7 | $114.4 | $324.5 | $342.5 |
| Net interest income before provision | $80.4 | $81.0 | $240.2 | $234.4 |
| Provision/(credit) for loan losses | $0.0 | $9.0 | $(9.0) | $25.0 |
| Non-interest income | $15.6 | $16.8 | $34.3 | $41.9 |
| Non-interest expense | $47.8 | $48.4 | $143.1 | $141.6 |
| Net income attributable to Bancorp | $30.4 | $26.1 | $89.1 | $72.4 |
| Net income available to common stockholders | $26.2 | $22.0 | $76.8 | $60.1 |
| Diluted EPS | $0.33 | $0.28 | $0.98 | $0.76 |
Q3 return on average assets was 1.14% and return on average equity was 7.62%; the efficiency ratio was 49.82%. Fully taxable-equivalent net interest margin was 3.26% for Q3, versus 3.32% a year earlier; the nine-month margin was 3.28%, versus 3.19%. Q3 net interest income was slightly lower year over year as asset yields declined, partly offset by lower deposit and borrowing costs. Nine-month earnings benefited from lower credit-loss provisions and lower funding costs.
Balance sheet, credit, liquidity, and capital
- Total assets were $10.60 billion at September 30, 2012, down 0.4% from year-end 2011. Gross loans were $7.26 billion, up 2.8%; total deposits were $7.35 billion, up 1.7%.
- Cash and due from banks were $114.6 million; short-term investments and interest-bearing bank deposits were $426.5 million. The reported liquidity ratio was 15.1%, compared with 15.8% at year-end 2011. The company reported $574.1 million of unpledged investment and trading securities and a $1.39 billion FHLB credit line, with $21.2 million drawn.
- Major funding included $1.35 billion of repurchase-agreement borrowings, $21.2 million of FHLB advances, and $171.1 million of long-term debt. Repurchase agreements were reported at a 3.89% weighted-average rate. Long-term debt fair value was estimated at $98.4 million versus its $171.1 million carrying amount.
- The allowance for loan losses was $184.4 million, or 2.54% of gross loans; the reserve for off-balance-sheet commitments was $1.6 million. Combined allowance coverage was 196.0% of nonperforming loans.
- Nonperforming assets fell to $155.6 million from $300.6 million at year-end 2011; nonaccrual loans declined to $94.9 million from $201.2 million, and other real estate owned declined to $60.6 million from $92.7 million. Accruing troubled debt restructurings rose to $170.2 million from $120.0 million.
- For the first nine months, operating cash flow was $126.4 million, investing cash flow was $12.8 million, and financing cash flow was negative $142.4 million. Cash and cash equivalents ended the period at $114.6 million.
- Bancorp’s Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios were 17.08%, 18.96%, and 13.57%; Cathay Bank’s were 16.54%, 18.41%, and 13.14%. The filing states both entities exceeded regulatory minimums and the Bank remained well capitalized.
Changes, outlook, and notable matters
- Q3 net income attributable to Bancorp increased 16.4% year over year, while common-stockholder income increased 19.4%. The improvement reflected no Q3 loan-loss provision versus a $9.0 million provision in Q3 2011 and lower OREO and funding-related expenses, partly offset by lower loan-sale gains and higher legal, salary, and tax expense.
- Nonperforming assets improved substantially, but TDRs on accrual increased. Management reported that accruing TDRs were performing under modified terms and expected continued compliance; that expectation is not a guarantee of repayment.
- A jury verdict awarded $11.2 million in damages against the Bank in a construction-loan lawsuit. The verdict was not final and remained subject to further proceedings. The Bank filed a cross-complaint for the $19 million unpaid loan balance, in which it retained a 50% participation. The company accrued $5.8 million for legal proceedings in Q3.
- The company prepaid a $50 million repurchase agreement in July and incurred a $3.5 million penalty. It also modified repurchase agreements, extending terms and reducing rates. The company’s substantial callable and rate-structured repurchase funding remains relevant to funding-cost and interest-rate risk.
- Management gave no specific earnings or revenue guidance. It expected liquidity sources to be adequate and anticipated minimal deposit outflows at time-deposit maturities, while acknowledging competitive pressure. It said it expected to meet final U.S. Basel III requirements within regulatory timelines.
- The company remained subject to a Federal Reserve memorandum of understanding requiring prior written approval for specified capital actions, including dividends from the Bank to Bancorp and certain debt or stock transactions. The separate Bank MOU with the California DFI and FDIC was terminated on November 7, 2012, after quarter-end. Management reported consulting with regulators about possible installment repayment of Series B preferred stock; timing was uncertain.
- Management identified credit quality, collateral values, interest rates, liquidity, regulatory requirements, goodwill impairment, and economic conditions in California, Asia, and other operating regions as risks. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the sharp decline in nonperforming assets and OREO is sustained, and whether the higher accruing TDR balance continues to perform.
- The adequacy of the allowance as loan growth continues, including sensitivity to collateral valuations, charge-offs, and local real-estate conditions.
- The status and potential financial impact of the $11.2 million jury verdict, related cross-claim, and legal accrual.
- Current regulatory restrictions, dividend permissions, and any developments in the proposed Series B preferred-stock repayment.
- Repurchase-agreement terms, callable features, funding concentration, and the effect of changing rates on net interest margin and liquidity.
- Deposit maturities and actual liquidity availability, including the amount and eligibility of unpledged collateral and access to contingent borrowing facilities.