Cathay General Bancorp — Q2 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2017. Cathay Bank operates across multiple U.S. markets and in Hong Kong, with lending concentrated in commercial and real estate loans. The figures below exclude Far East National Bank (FENB), acquired after quarter-end.
Financial performance and position
| Metric | Q2 2017 | Prior-year comparison |
|---|---|---|
| Net interest income before credit-loss provision/reversal | $117.4 million | $101.8 million; up 15.3% |
| Net income | $51.4 million | $34.8 million; up 47.6% |
| Diluted earnings per share | $0.64 | $0.44 |
| Net interest margin | 3.63% | 3.38% |
| Return on average assets / equity | 1.48% / 10.96% | 1.07% / 8.00% |
| Efficiency ratio | 45.88% | 62.15% |
For the six months, net income was $100.4 million versus $81.0 million, diluted EPS was $1.25 versus $1.01, and net interest margin was 3.56% versus 3.40%. Net interest income before credit-loss provision/reversal increased to $229.5 million from $204.1 million.
- Balance sheet at June 30: assets $14.34 billion; gross loans $11.57 billion; deposits $11.46 billion; shareholders’ equity $1.90 billion.
- Cash flow, six months: operating cash flow was $130.2 million versus $91.5 million. Cash and cash equivalents fell $57.5 million to $160.5 million. Investing activities provided $135.0 million, while financing activities used $322.8 million.
- Funding and liquidity: repurchase-agreement funding was $150 million, FHLB advances were $475 million, other affordable-housing borrowings were $17.6 million, and long-term debt was $119.1 million. Average monthly liquidity ratio was 12.3%, versus 12.6% at year-end 2016. The Bank reported a $5.6 billion FHLB credit line and $46.6 million of Federal Reserve borrowing capacity.
- Capital: Bancorp’s common equity Tier 1 ratio was 13.26% and total risk-based capital ratio was 15.35%; the Bank’s corresponding ratios were 13.80% and 14.85%. The Bank was classified as well-capitalized.
Material changes versus comparable periods
- Loan growth drove higher interest income: gross loans rose $370 million, or 3.3%, from December 31, 2016. Residential mortgages increased 12.8% and commercial mortgages 1.7%.
- Q2 non-interest expense declined 17.7% to $56.7 million, mainly because amortization of affordable-housing and alternative-energy investments fell $21.2 million year over year. Salary and benefits rose $4.6 million; other operating expense rose $2.8 million.
- Q2 non-interest income decreased 32.1% to $6.2 million, mainly because the prior-year quarter included $1.7 million in securities gains.
- The Q2 credit-loss provision was zero, compared with a $5.2 million reversal in Q2 2016. For the first half, the reversal was $2.5 million versus $15.7 million in 2016.
- Deposits declined $211 million, or 1.8%, from year-end, including an 8.8% decline in time deposits; savings deposits rose 22.8%. Total assets decreased 1.3%, chiefly as short-term investments fell $573 million.
Outlook, risks, contingencies, and unusual items
- Acquisition: On July 14, 2017, the Company completed its $351.6 million acquisition of SinoPac Bancorp, parent of FENB, issuing 926,192 shares and paying the remainder in cash, subject to specified deferred and holdback amounts. FENB reported $1.2 billion in assets, including $733 million in loans, and $799 million in deposits at June 30. Purchase accounting was incomplete at filing, and FENB’s results are not included in this 10-Q.
- Credit quality: Non-performing assets rose 20.1% from year-end to $83.8 million, and non-accrual loans rose 28.9% to $64.0 million. Impaired loans increased to $143.9 million from $115.1 million; accruing troubled debt restructurings rose to $79.8 million from $65.4 million. The allowance for loan losses was $115.8 million, or 1.00% of gross loans; coverage was 179.4% of non-performing loans by the filing’s stated measure.
- Real estate exposure: Commercial real estate loans were 287% of total risk-based capital, below the cited 300% supervisory criterion and the Bank’s 400% internal limit. Construction, land development, and other land loans were 38% of risk-based capital. Loan losses remain sensitive to collateral values and economic conditions.
- Investment securities: Unrealized losses were $8.7 million, attributed mainly to interest-rate movements and wider liquidity and credit spreads. Management considered these losses temporary and said it did not intend, and would not be required, to sell affected debt securities before anticipated recovery.
- Taxes and other items: The six-month effective tax rate was 26.4% versus 30.1%; share-based payment accounting generated a $2.6 million tax benefit. Management reported no goodwill impairment trigger at June 30. Routine litigation was not expected by management to materially affect the Company; no material change to previously disclosed risk factors was reported.
- Guidance: The filing provides no specific earnings or operating guidance. Management said liquidity sources should meet operating needs, while noting potential time-deposit runoff at maturity amid competition. Interest-rate simulations estimated net interest income would rise 8.2% in a +200 basis-point scenario and fall 3.6% in a −200 basis-point scenario; management cautioned that model assumptions may differ from actual results.
Important facts for investors to verify
- Post-acquisition purchase accounting, integration costs, and the acquired bank’s contribution to earnings, capital, and credit quality.
- Whether rising non-accrual loans, impaired loans, and TDR balances lead to higher provisions, charge-offs, or lower allowance coverage.
- Whether loan growth and net interest margin gains persist as deposit competition, funding costs, and interest rates change.
- The sustainability of the lower expense base, given the sizeable year-over-year reduction in partnership amortization and the tax benefit from share-based awards.
- Deposit retention and liquidity after maturities, along with the effects of the acquisition on capital and funding needs.