Cathay General Bancorp — Q2 2018 Form 10-Q
Business context and period. Unaudited results cover the quarter and six months ended June 30, 2018. Cathay General Bancorp is the holding company for Cathay Bank, operating across multiple U.S. states and in Hong Kong, with representative offices in Asia. Results include the acquired Far East National Bank business; the acquisition closed in July 2017, so year-over-year comparisons reflect a larger company in 2018.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Change |
|---|---|---|---|
| Net interest income before credit-loss reversal | $140.0 million | $117.4 million | +19.3% |
| Net income | $73.7 million | $51.4 million | +43.4% |
| Diluted EPS | $0.90 | $0.64 | +40.6% |
| Net interest margin | 3.83% | 3.63% | +20 bps |
| Efficiency ratio | 42.69% | 45.88% | Improved |
| Return on average assets | 1.88% | 1.48% | Improved |
| Return on average equity | 14.51% | 10.96% | Improved |
For the six months, net income was $137.5 million, up 37.0%; diluted EPS was $1.68 versus $1.25. Net interest margin was 3.79% versus 3.56%, and the efficiency ratio was 43.01% versus 44.79%. No Q2 provision or reversal for credit losses was recorded; the six-month period included a $3.0 million reversal.
- Revenue, costs and margins: Q2 interest income rose to $167.5 million from $135.6 million, while interest expense increased to $27.5 million from $18.3 million. Higher loan yields and loan growth supported net interest income; increased time-deposit costs partly offset the benefit. Q2 non-interest income was $7.8 million and non-interest expense was $63.1 million.
- Unusual and comparative items: Q2 2018 net income included $1.7 million of acquisition/integration costs and a $1.1 million equity-securities fair-value loss. The 2018 six-month period also included a $5.0 million net loss on equity securities. The lower tax rate—13.0% in Q2 and 17.9% for six months, versus 23.1% and 26.4%—primarily reflected federal tax reform and tax-credit investments.
- Balance sheet at June 30: Total assets were $16.20 billion, up 3.6% from year-end 2017. Gross loans were $13.35 billion, up 3.7%; deposits were $13.10 billion, up 3.3%; and equity was $2.06 billion, up $91.5 million. Cash and cash equivalents were $404.1 million, down from $539.8 million at year-end.
- Funding and debt: Borrowings included $480 million of FHLB advances, $50 million of repurchase agreements, $194.1 million of long-term debt and $53.4 million of other borrowings. $245 million of FHLB advances and the $50 million repurchase agreement were scheduled to mature in July 2018. Long-term debt included the acquisition-related term loan; its rate was 3.75% at quarter-end.
- Cash flow, six months: Operating activities provided $150.1 million; investing activities used $679.7 million, mainly reflecting loan growth and securities purchases; financing activities provided $393.8 million. Cash and cash equivalents decreased $135.7 million. The filing notes that comparative 2017 cash-flow figures were corrected.
- Capital and liquidity: The Bank was reported as “well capitalized”; its common equity Tier 1, total risk-based capital and leverage ratios were 13.61%, 14.54% and 11.85%, respectively. Average monthly liquidity ratio was 12.6%. Management said available funding sources were expected to meet operating needs for the next 12 months.
Material changes and credit quality
- Loan growth was led by residential mortgages, up 10.3% from December 2017, and commercial loans, up 4.7%; construction loans declined 14.3%. Commercial real estate loans were 281% of risk-based capital, below the Bank’s stated internal limit of 400%.
- Non-performing assets increased to $60.9 million from $58.2 million at year-end, though remained 0.4% of total assets. Non-accrual loans rose to $52.7 million from $48.8 million. Accruing troubled debt restructurings increased to $84.5 million from $68.6 million.
- The allowance for loan losses was $121.9 million, or 0.91% of gross loans, versus $123.3 million, or 0.96%, at year-end. The allowance-to-non-performing-loans ratio declined to 231.2% from 252.7%. Management cited trade uncertainty and pending U.S.-China tariffs, as well as higher commercial delinquencies, in explaining the increased commercial-loan reserve allocation.
- Available-for-sale securities had $35.2 million of gross unrealized losses at quarter-end, attributed mainly to interest-rate and spread movements. Management considered the losses temporary and stated it had no intent or requirement to sell the affected securities before recovery.
Outlook, risks and contingencies
The filing provides no quantified earnings or loan-growth guidance. Management anticipated some time-deposit outflow at maturity amid competition, but expected it to be manageable based on historical runoff and normal deposit growth. About 83% of time deposits matured within one year or less. Interest-rate modeling estimated net interest income changes of +7.7% under a 200-basis-point increase and -17.3% under a 200-basis-point decrease; the filing describes a policy tolerance of plus or minus 5% for that rate shock. These are model estimates, not forecasts, and depend on assumptions about rates, prepayments, loan activity and deposit behavior.
Principal disclosed risks include credit deterioration and additional loan-loss provisions, interest-rate and liquidity risk, real-estate collateral values, regulatory requirements, economic and trade conditions, competition, operational and information-security events, and litigation. Management did not expect routine litigation to materially affect the Company. The filing reported no material change to previously disclosed risk factors, no material subsequent event, and effective disclosure controls.
Important facts for investors to verify
- Whether loan growth, deposit pricing and the rise in time-deposit costs sustain the reported margin improvement.
- Developments in non-accrual loans, TDRs, commercial-credit exposure and reserve coverage, particularly in light of trade uncertainty.
- How the July 2018 maturities were refinanced or repaid and whether deposit runoff or funding costs changed after quarter-end.
- The trajectory of unrealized securities losses and the effect of interest-rate changes on earnings and capital.
- How much reported growth and expense reflects the FENB acquisition, and whether integration costs continue.
- The assumptions and management response associated with modeled interest-rate sensitivity that exceeds the stated net-interest-income tolerance.