Cathay General Bancorp — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; balance-sheet comparisons are to December 31, 2010 unless noted. The company is a bank holding company whose principal subsidiary, Cathay Bank, operates across several U.S. states and in Hong Kong, with representative offices in Shanghai and Taipei. Figures below are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance and condition
| Metric | Q1 2011 / March 31, 2011 | Comparable period / prior date |
|---|---|---|
| Interest and dividend income | $113.8 | $126.5 in Q1 2010 |
| Net interest income before credit-loss provision | $75.1 | $74.7 in Q1 2010 |
| Provision for credit losses | $6.0 | $84.0 in Q1 2010 |
| Non-interest income | $12.6 | $4.8 in Q1 2010 |
| Non-interest expense | $47.8 | $44.2 in Q1 2010 |
| Net income attributable to Bancorp | $22.1 | Net loss of $25.7 in Q1 2010 |
| Net income available to common shareholders; diluted EPS | $18.0; $0.23 | Net loss of $29.8; loss per share of $0.41 in Q1 2010 |
| Net interest margin (fully taxable-equivalent) | 3.06% | 2.72% in Q1 2010; 2.88% in Q4 2010 |
| Efficiency ratio; return on average assets | 54.47%; 0.83% | 55.55%; negative 0.88% in Q1 2010 |
| Operating cash flow | $25.1 | $64.7 in Q1 2010 |
At quarter-end, total assets were $10.61 billion, loans net of allowance and deferred fees were $6.65 billion, deposits were $7.08 billion, and total equity was $1.45 billion. Cash and cash equivalents were $87.1 million. The company reported a 17.1% liquidity ratio, down from 20.3% at year-end. It also reported $1.4 billion of unused FHLB borrowing capacity and $241.5 million of borrowing capacity under the Federal Reserve Discount Window program.
Major funding balances included $1.46 billion of repurchase agreements, $350 million of FHLB advances, and $171.1 million of long-term debt. The Bank and Bancorp exceeded regulatory capital minimums; the Bank’s Tier 1 risk-based, total risk-based, and leverage ratios were 14.90%, 16.80%, and 11.44%, respectively. The Bank was categorized as well-capitalized.
Changes versus comparable periods
- Profitability returned to positive territory versus Q1 2010, chiefly reflecting a substantially lower credit-loss provision, lower OREO expense, higher securities gains, and reduced interest costs. Lower interest income partly offset these benefits.
- Net charge-offs fell to $10.4 million from $63.1 million in Q1 2010 and $22.8 million in Q4 2010. The provision was $6.0 million, versus $84.0 million a year earlier and $10.0 million in Q4 2010.
- Gross loans rose 0.4% from year-end to $6.89 billion. Commercial and residential mortgage lending increased, while construction and commercial mortgage balances declined.
- Deposits increased 1.3% from year-end. Total assets declined 1.7%, largely due to the runoff of resale agreements and a reduction in investment securities. Securities held-to-maturity increased to $1.23 billion from $840.1 million, while available-for-sale securities declined to $1.54 billion from $2.00 billion.
- Non-performing assets were $350.4 million, up 7.8% from year-end but down 15.2% from Q1 2010. Non-accrual loans increased to $274.5 million from $242.3 million at year-end; impaired loans rose to $412.2 million from $382.0 million. Allowance for credit losses was $243.2 million, and its coverage of non-performing loans fell to 88.6% from 100.1% at year-end.
Outlook, risks, and unusual items
- The filing provides no specific earnings or growth guidance. Management said it believed available liquidity sources were adequate for daily needs and expected time-deposit runoff at maturity to be minimal based on historical experience.
- The Bank was not expected to pay a dividend to the Bancorp during 2011. The Bancorp’s dividend and other capital distributions are subject to regulatory restrictions and prior approval under its Federal Reserve memorandum of understanding.
- The Bancorp and Bank remained subject to separate regulatory memoranda requiring, among other things, capital and liquidity planning, improvements in asset-quality and credit-risk management, reduced CRE concentration and wholesale-funding dependence, and regulatory approval or notice for specified actions. Management reported compliance with the applicable capital-plan targets; failure to meet the memoranda could lead to further regulatory action.
- The company incurred an $8.8 million penalty after prepaying $200 million of FHLB advances. It also extended $50 million of subordinated debt for one year; the interest spread increased to LIBOR plus 330 basis points for 2011 and 2012, then returns to LIBOR plus 110 basis points.
- Management considered investment-security unrealized losses temporary and recorded no impairment charge. Gross unrealized losses were $33.9 million at quarter-end; management stated it did not intend, and did not expect to be required, to sell affected available-for-sale debt securities before recovery.
- Key disclosed risks include credit deterioration and real-estate conditions, economic and market volatility, interest-rate and liquidity risk, regulatory change and supervisory actions, capital availability, and potential goodwill impairment. Management reported no material change to the risk factors in the 2010 Form 10-K. Routine litigation was not expected to have a material adverse effect. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether rising non-accrual and impaired loans, especially commercial real estate exposures, lead to higher future charge-offs or provisions; assess collateral values, TDR performance, and allowance coverage.
- Whether the lower credit provision and net charge-offs are sustainable, and how earnings respond if credit costs rise again.
- The composition, credit quality, unrealized losses, and liquidity of the securities portfolio, including the securities pledged against funding and other commitments.
- Deposit retention and refinancing needs, including the large share of time deposits maturing within one year and the callable or puttable features of borrowings.
- Compliance with regulatory memoranda and capital-plan targets, restrictions on dividends and capital actions, and the effects of changing capital rules.
- The effect of the $8.8 million FHLB prepayment charge and higher subordinated-debt rate on future margins and earnings.