Cathay General Bancorp — 2016 Form 10-K
Business and reporting period. Cathay General Bancorp is the holding company for Cathay Bank, a commercial bank serving individuals and businesses, with a concentration in California and additional U.S. and Hong Kong operations. This annual report covers the fiscal year ended December 31, 2016; it also provides unaudited fourth-quarter results. Unless indicated otherwise, financial amounts below are in U.S. dollars.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Interest income | $499.1 million | $453.7 million |
| Net interest income | $417.9 million | $379.7 million |
| Net interest margin | 3.38% | 3.39% |
| Non-interest income | $33.4 million | $32.7 million |
| Non-interest expense | $224.7 million | $202.7 million |
| Net income | $175.1 million | $161.1 million |
| Diluted earnings per share | $2.19 | $1.98 |
| Return on average assets / equity | 1.31% / 9.88% | 1.34% / 9.52% |
| Efficiency ratio | 49.79% | 49.15% |
- Net interest income before credit-loss reversals rose 10.0%, primarily on loan growth. Interest expense increased 9.8%; net interest margin edged down one basis point.
- The company recorded a $15.7 million reversal for credit losses, versus an $11.4 million reversal in 2015. Net charge-offs were $4.3 million, or 0.04% of average loans, compared with $11.1 million, or 0.12%, in 2015.
- Fourth-quarter 2016 net income was $48.0 million and diluted EPS was $0.60, compared with $41.4 million and $0.51 in fourth-quarter 2015. Fourth-quarter net interest income was $109.9 million.
Balance sheet, funding, and capital at December 31
- Total assets were $14.5 billion, up 9.6%; net loans were $11.1 billion, up from $10.0 billion. Gross loans grew 10.2% to $11.2 billion, led by commercial mortgages, residential mortgages, and construction loans.
- Deposits increased 11.1% to $11.7 billion. Non-interest-bearing demand deposits were $2.5 billion; time deposits were $5.0 billion. Brokered deposits were $632.9 million, or 5.4% of deposits.
- Available-for-sale securities were $1.3 billion, down from $1.6 billion. Cash and due from banks were $218.0 million, and short-term investments and interest-bearing deposits were $967.1 million.
- Year-end borrowings included $350 million of repurchase agreements, $350 million of FHLB advances, $17.7 million of other borrowings, and $119.1 million of junior subordinated debt. Total equity was $1.83 billion; book value per common share was $22.80.
- Bancorp common equity Tier 1, total risk-based capital, and leverage ratios were 12.84%, 14.97%, and 11.57%, respectively. Cathay Bank’s corresponding ratios were 13.35%, 14.43%, and 11.16%. Both entities were reported as well-capitalized.
- The December 2016 average monthly liquidity ratio was 12.6%, compared with 15.8% in December 2015. Management said available sources were adequate for the next 12 months; the Bank had a $5.5 billion approved FHLB credit line, with $350 million drawn.
Cash flow and distributions
Consolidated operating cash flow was $234.4 million. Investing activities used $1.284 billion, including $1.052 billion of net loan growth; financing activities provided $1.087 billion, principally from deposit growth. Cash and cash equivalents increased $37.9 million to $218.0 million. The company paid $0.75 per common share in dividends and repurchased approximately $37.5 million of shares under its 2016 buyback program; $7.5 million remained authorized at year-end.
Material changes and notable items
- Net income rose $14.0 million, or 8.7%, and diluted EPS increased 10.6%. Higher net interest income, a larger credit-loss reversal, and securities gains contributed; higher operating expenses and lower other operating income partly offset the improvement.
- Assets grew $1.3 billion. Gross loans increased about $1.0 billion, while deposits rose $1.2 billion. Commercial mortgage loans increased 9.1%, residential mortgage loans 26.5%, and construction loans 24.1%; commercial loans declined 3.0%.
- Non-performing assets declined to $69.8 million from $76.8 million; non-performing assets were 0.62% of gross loans plus OREO, versus 0.75%. The allowance for loan losses fell to $119.0 million from $139.0 million, or 1.09% of gross loans versus 1.38%.
- Non-interest expense increased 10.8%, including higher salaries and benefits and increased amortization of affordable-housing and alternative-energy partnership investments. Such partnership expense was $40.3 million, versus $33.3 million.
- The effective tax rate was 27.7%, versus 27.1%. The company recognized $37.9 million of alternative-energy, low-income-housing, and other tax credits. Management reported no goodwill impairment in 2016.
Outlook, risks, and contingencies
- Acquisition: In July 2016, the company agreed to acquire SinoPac Bancorp for $340 million, subject to adjustments and regulatory approvals. It expected closing in the first half of 2017, followed by the merger of Far East National Bank into Cathay Bank. The transaction had not closed at the reporting date.
- Credit concentration: The loan portfolio is heavily real-estate-backed and concentrated in California; commercial real estate and construction loans totaled approximately $6.3 billion. Management cited uneven local economic recovery and possible effects of higher rates on real estate. Commercial real estate loans equaled 300% of risk-based capital.
- Funding and rate sensitivity: About 91% of time deposits mature within one year. The filing notes competitive deposit markets and exposure to changes in interest rates, deposit pricing, loan performance, and securities values. The company’s model estimated that an immediate 200-basis-point rise would increase next-12-month net interest income 10.0%, while a 200-basis-point decline would reduce it 6.2%; these are model estimates, not guidance.
- Credit-loss estimates: The allowance depends on management estimates and economic, collateral, and portfolio assumptions. In the fourth quarter, management extended its loan-loss look-back period from five to eight years; it said the refinement kept the allowance consistent with the prior quarter. Actual losses may differ from estimates.
- Commitments and contingencies: Off-balance-sheet commitments to extend credit totaled $2.06 billion; standby and commercial letters of credit and bill-of-lading guarantees brought disclosed commitments to $2.17 billion. The company stated that commitments may expire unused. It reported no material pending legal proceeding and said litigation arising in the ordinary course was not expected to materially affect consolidated condition, results, or liquidity.
- Other risks: The filing highlights regulatory and compliance costs, AML and fair-lending obligations, cyber and third-party vendor risks, Asia-related exposures, potential goodwill impairment, and acquisition integration risk. Temporarily impaired securities had $15.0 million of unrealized losses; management considered these temporary and reported no impairment loss on debt securities.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether the SinoPac Bancorp acquisition closed as expected, its final purchase consideration, regulatory approvals, and integration results.
- Whether loan growth—especially in commercial real estate, construction, and residential mortgages—was matched by appropriate underwriting, collateral values, and allowance coverage.
- Subsequent trends in non-performing loans, TDRs, charge-offs, and the allowance after the eight-year look-back change.
- Deposit retention and repricing as the large near-term time-deposit maturities roll over, and the resulting effect on funding costs and net interest margin.
- Whether reported tax-credit benefits and partnership-related expenses continue at similar levels, and whether affordable-housing partnership commitments are funded as scheduled.
- Actual cash flows and capital needs after acquisition, dividends, and repurchases; the filing provides no specific forward earnings or revenue guidance.