What the Market Missed About Cathay General Bancorp's Earnings

Yes, we know that Cathay General Bancorp (NASDAQ: CATY  ) reported $0.31 in earnings per share in its fourth-quarter earnings report last week. These results caused the bank's shares to retreat late last week, though it did end the week with positive monemtum. But while the market seems to be focusing on that number, it is missing what was really important in Cathay General's quarter.

What you missed
There was one major thing that jumped out at me while I was taking a look at the earnings report. One of the bulleted "full year highlights" casually mentions that nonperforming assets at the bank decreased by 49.7% over the course of the past year. I had to read it twice to make sure that's what it said. Sure enough, on December 31, 2011, nonperforming assets were $300.6 million; at the end of 2012, they were down to $150.9 million. It is not very often you see this kind of decline over the course of the year, especially considering that the fourth quarter only accounted for about $4.5 million of the decline.

The nature of the loans that have been coming off the nonperforming rolls could indicate the direction the bank has been taking to clear up its nonperforming assets. The largest decline during the year came from residential construction loans, which declined 88% during the year, though they did see slight growth during the recent quarter. Another big decrease was seen in commercial real estate loans, which saw a decline of 69% during the year, but also saw the largest decline during the quarter. In fact, a decline in five of six of its loan categories were probably responsible for the near 50% decline in nonperforming assets.

What does this mean going forward?
Obviously, this kind of decline in nonperforming assets is good for any bank, but it is even better for a bank that is trying to get out from under the weight of TARP. By ridding the balance sheet of toxic assets, the bank can return to lending, which is the primary revenue driver for a bank like Cathay General.

The bank wasted little time in 2012, reporting an increase of 13.9% in commercial loans and 17.9% in residential loans. This increase in loan activity was the primary reason why the bank's net interest margin was flat over the course of the year, and how the bank was able to grow net interest income by 15.2% during 2012. 

Foolish bottom line
Cathay General still has some work to do before it can truly take its place as a strong performing regional bank the Pacific region, and repaying its TARP obligations would be a start. That said, should the bank's 2013 be similar to its 2012, it could be on its way to being one of the best performing banks in its region, if not nationwide.

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