Cathay General Bancorp — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. The unaudited filing covers Cathay General Bancorp and subsidiaries, including Cathay Bank, a commercial bank operating across several U.S. states and in Hong Kong, with representative offices in Shanghai and Taipei. Unless stated otherwise, amounts below are in U.S. dollars.
Financial results and key metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net income | $30.0 million | $24.5 million | $59.1 million | $46.7 million |
| Net income available to common stockholders | $25.7 million | $20.2 million | $50.5 million | $38.2 million |
| Diluted earnings per common share | $0.33 | $0.26 | $0.64 | $0.49 |
| Net interest income before provision | $79.1 million | $78.3 million | $159.8 million | $153.4 million |
| Non-interest income | $9.9 million | $12.5 million | $18.7 million | $25.1 million |
| Non-interest expense | $47.3 million | $45.4 million | $95.2 million | $93.2 million |
- Profitability: Q2 net income rose 22.9% year over year; common earnings increased 27.5%. Six-month common earnings increased 32.5%. Q2 return on average assets was 1.13% versus 0.91%; return on average equity was 7.72% versus 6.64%.
- Margins: Fully taxable-equivalent net interest margin was 3.24% in Q2, up 5 basis points year over year but down 9 basis points sequentially. For the six months it was 3.28%, compared with 3.13% a year earlier. Q2 efficiency ratio was 53.21%, versus 50.03%.
- Credit costs and asset quality: The Q2 provision for loan losses was a $5.0 million credit, compared with a $10.0 million expense in Q2 2011. Q2 net loan recoveries were $2.6 million, versus $21.8 million of net charge-offs a year earlier. Six-month net charge-offs were $5.6 million. Non-performing assets declined to $198.0 million from $300.6 million at year-end 2011; non-accrual loans fell to $122.8 million from $201.2 million. The allowance for loan losses was $192.3 million, or 2.75% of gross loans.
- Balance sheet and liquidity: Total assets were $10.66 billion at June 30, 2012, nearly unchanged from year-end. Gross loans were $7.04 billion, down 0.2% from year-end; deposits rose 2.1% to $7.38 billion. Cash and due from banks was $134.7 million. The reported liquidity ratio increased to 17.5% from 15.8% at year-end. Management said it expected liquidity sources to meet operating needs and anticipated minimal time-deposit runoff, while noting that about 90% of time deposits mature within one year.
- Cash flow: For the first six months, operating cash flow was $8.1 million, investing cash flow was positive $66.0 million, and financing cash flow was negative $57.2 million. Cash and cash equivalents increased $16.9 million to $134.7 million.
- Debt and capital: Repurchase-agreement borrowings were $1.40 billion; FHLB advances were $21.2 million, down from $225.0 million at year-end; long-term debt was $171.1 million. Total equity was $1.57 billion. Cathay Bank reported Tier 1 risk-based capital of 16.42%, total risk-based capital of 18.30%, and Tier 1 leverage of 12.89%; the filing describes the Bank as well capitalized.
Material changes versus comparable periods
- Earnings improved primarily with lower credit-loss provisions, lower funding costs and higher net interest income. These benefits were partly offset by higher OREO expense, increased salaries and professional-services expense, and lower securities-sale gains.
- Q2 non-interest income fell 20.9% year over year, mainly because securities-sale gains were lower. Q2 OREO expense increased to $7.1 million from $2.3 million, reflecting higher write-down provisions and other OREO costs and lower gains on OREO sales and transfers.
- Commercial loans increased from year-end, while commercial mortgage and construction loans declined. Non-performing assets improved, but accruing troubled debt restructurings increased to $153.2 million from $120.0 million at year-end.
- Investment securities’ carrying value declined to $2.19 billion from $2.45 billion at year-end. Net unrealized losses on available-for-sale securities narrowed to $6.4 million from $15.0 million.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or revenue guidance. Management stated it expected available funding sources to support liquidity needs and expected deposit runoff at maturity to be minimal.
- The Company remained subject to Federal Reserve and state/FDIC memoranda of understanding, including restrictions on dividends and certain capital actions, regulatory review requirements, and obligations relating to capital, asset quality, CRE concentrations and wholesale funding. Management stated it believed the Company was complying with the memoranda. The Bank paid a $23.9 million dividend to Bancorp on May 10, 2012; future distributions remain subject to regulatory limitations and approvals.
- Commercial real estate exposure was 213% of risk-based capital, below the Bank’s 300% internal limit. Credit quality, collateral values, economic conditions, interest rates and regulatory actions remain material risks. The filing also identifies liquidity, market, operational, regulatory and goodwill-impairment risks.
- Management considered $30.7 million of unrealized losses on temporarily impaired investment securities not other-than-temporary, stating it did not intend to sell and did not expect to be required to sell the securities before recovery. Corporate debt securities accounted for most of the unrealized losses.
- Q2 2011 included $5.2 million of debt-redemption costs, compared with none in Q2 2012. Six-month 2012 results included $2.8 million of FHLB prepayment penalties, recorded in the first quarter. The Company reported routine litigation that management did not expect to have a material adverse effect; no material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether improved non-performing assets and net recoveries persist, and whether the allowance remains adequate as accruing TDRs rise.
- Future OREO write-downs, carrying values and sale proceeds, given the sharp increase in Q2 OREO expense.
- Deposit retention and refinancing needs as large time deposits mature, and the availability and terms of pledged collateral and contingent funding.
- Regulatory status of the memoranda of understanding, dividend restrictions and any required approvals for future Bank-to-parent distributions.
- The quality and recoverability of temporarily impaired securities, especially corporate debt holdings, and the potential effect of interest-rate or credit-spread changes.