CATHAY GENERAL BANCORP quarterly report, Q2 FY2011

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Cathay General Bancorp — Q2 2011 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2011; balance-sheet comparisons are to December 31, 2010. Amounts below are in U.S. dollars unless stated otherwise. Cathay Bank operates across several U.S. states and in Hong Kong, with a representative office in Shanghai and Taipei.

Financial performance and condition

  • Q2 earnings: Net income was $24.5 million; net income attributable to Bancorp was $24.3 million, or $0.26 per diluted share. Common-stockholder income was $20.2 million. In Q2 2010, Bancorp net income was $1.9 million, while common-stockholder results were a $2.2 million loss.
  • First-half earnings: Net income attributable to Bancorp was $46.4 million, or $0.49 per diluted share, versus a $23.8 million loss in the first half of 2010. Common-stockholder income was $38.2 million versus a $32.0 million loss.
  • Interest income and margins: Q2 interest and dividend income was $114.3 million; net interest income before provision was $78.3 million, up 5.0% year over year. Fully taxable-equivalent net interest margin was 3.19%, compared with 2.73% a year earlier. First-half margin was 3.13%, versus 2.73%.
  • Credit costs and fees: Q2 provision for credit losses was $10.0 million versus $45.0 million in Q2 2010; first-half provision was $16.0 million versus $129.0 million. Q2 non-interest income was $12.5 million, up from $7.4 million; non-interest expense was $45.4 million, up from $40.3 million. Q2 efficiency ratio was 50.03%, versus 49.16%.
  • Cash flow: For the first half, operating cash flow was $77.2 million, investing cash flow was $291.9 million, and financing cash flow was negative $327.8 million. Cash and cash equivalents increased $41.2 million to $128.6 million.
  • Balance sheet and funding: Total assets were $10.54 billion, down 2.5% from year-end 2010. Gross loans were $6.92 billion, up 0.8%; deposits were $7.11 billion, up 1.7%. Stockholders’ equity totaled $1.48 billion.
  • Debt and liquidity: Repurchase-agreement borrowings were $1.41 billion; FHLB advances were $250 million, down from $550 million at year-end. Long-term debt was $171.1 million. The reported liquidity ratio was 17.0%, versus 20.3% at year-end. The Bank had $1.4 billion of unused capacity on its $1.6 billion FHLB line and $252.8 million of borrowing capacity under the Federal Reserve Discount Window program.
  • Capital: At June 30, Bancorp’s Tier 1 risk-based, total risk-based, and Tier 1 leverage ratios were 15.75%, 17.67%, and 12.19%, respectively. Cathay Bank’s respective ratios were 15.38%, 17.28%, and 11.90%. The filing states the Bank remained “well capitalized.”

Material changes and notable items

  • Profitability improved substantially year over year, primarily reflecting lower credit-loss provisions, lower funding costs, reduced FDIC assessments, and higher net interest income. Lower net losses on interest-rate swaps and higher fee income also contributed.
  • Commercial loans increased $196.0 million during the first half. Construction loans fell 24.6% and commercial mortgage loans fell 3.4% from year-end; residential mortgage loans increased 10.4%.
  • Credit quality showed mixed movement: non-performing assets were $330.7 million, or 3.1% of assets, slightly above year-end but 20.4% below June 2010. Non-accrual loans increased to $256.4 million from $242.3 million at year-end. Net charge-offs were $32.1 million in the first half, down from $85.6 million a year earlier.
  • The allowance for loan losses declined to $229.9 million from $245.2 million at year-end. Allowance for credit losses equaled 3.34% of gross loans and 90.3% of non-performing loans, compared with 3.60% and 100.1%, respectively, at year-end.
  • Total accruing and non-accrual troubled debt restructurings were $116.3 million and $38.2 million, respectively. The latter increased from $28.1 million at year-end; the filing reports new non-accrual TDRs during the first half.
  • Management reallocated securities: available-for-sale securities fell to $1.18 billion from $2.00 billion, while held-to-maturity securities rose to $1.27 billion from $840.1 million. Temporarily impaired securities represented 30.7% of investment-securities fair value; management considered impairment temporary and recorded no impairment loss.

Outlook, risks, and contingencies

  • No specific earnings or revenue guidance is provided. Management forecast a 34.1% effective tax rate for the remainder of 2011, based on projected full-year net income.
  • Q2 non-interest expense included $5.2 million in debt-redemption costs. First-half costs associated with debt redemption were $14.0 million, largely reflecting prepayment penalties on FHLB advances and a repurchase agreement. The company prepaid $300 million of FHLB advances during the first half.
  • The Bancorp and Bank remained subject to separate regulatory memoranda of understanding. These impose capital and liquidity planning, asset-quality and commercial-real-estate concentration requirements, restrictions on dividends and certain transactions, and prior-approval or notification requirements. Management stated it believed the companies were complying and that actual capital ratios exceeded plan targets.
  • The Bank was not expected to pay a dividend to Bancorp in 2011. Bancorp dividends and other capital distributions require Federal Reserve approval under its agreement; the common dividend was $0.01 per share in each of Q1 and Q2.
  • Management cited risks including economic and real-estate conditions, credit losses, liquidity and interest-rate exposure, regulatory changes including Dodd-Frank and Basel III, and potential goodwill impairment. Goodwill was not tested for impairment in the first half because management reported no triggering event.
  • Commitments to extend credit were $1.47 billion; standby and other letters of credit totaled about $133.4 million. These are off-balance-sheet exposures, not expected loss estimates. Ordinary-course litigation was disclosed; management did not expect it to materially affect results or financial condition.

Important facts for investors to verify

  • Whether the decline in loan-loss provisions and net charge-offs is sustainable, given rising non-accrual loans and the lower allowance-to-non-performing-loan coverage ratio.
  • The performance, collateral values, and subsequent status of non-accrual loans, TDRs, and other real estate owned, including the two loans totaling $13.7 million noted as becoming OREO shortly after quarter-end.
  • The risks and liquidity terms of the $1.41 billion in repurchase agreements, including callable structures, collateral requirements, and exposure to changing rates.
  • Compliance with both regulatory memoranda, continued access to funding, and any effects of restrictions on dividends, debt, or other capital actions.
  • Whether the securities reclassification and management’s temporary-impairment assumptions remain appropriate, particularly for the two lower-rated whole-loan securities with $8.3 million par value.