Cathay General Bancorp — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context and reporting period
Cathay General Bancorp is the holding company for Cathay Bank, a commercial bank operating across several U.S. states and in Hong Kong. The company completed its acquisition of Asia Bancshares, Inc. on July 31, 2015, adding three New York City branches and a Maryland location. Systems integration was completed August 21. Consideration was $139.9 million: $82.9 million in stock and $57.0 million in cash. The acquisition added $418.0 million of loans and $420.6 million of deposits; $56.9 million of goodwill was recorded.
Financial performance and condition
| Metric | Q3 2015 | Prior comparable period |
|---|---|---|
| Net interest income before credit-loss reversal | $97.6 million | $86.8 million |
| Net interest income after credit-loss reversal | $98.9 million | $91.9 million |
| Non-interest income | $9.2 million | $9.0 million |
| Non-interest expense | $57.5 million | $42.6 million |
| Income before taxes | $50.6 million | $58.2 million |
| Net income | $38.5 million | $35.9 million |
| Diluted earnings per share | $0.47 | $0.45 |
For the first nine months, net income was $119.7 million, up 17.0% from $102.3 million; diluted EPS was $1.48 versus $1.28. Net interest income before credit-loss reversals rose 9.9% to $280.3 million. The nine-month effective tax rate fell to 26.5% from 37.3%, contributing to higher net income despite nearly flat pretax income.
- Margins: Q3 net interest margin was reported as 3.36% in management’s narrative (the average-balance table reports 3.37%), versus 3.31% a year earlier. Nine-month margin was 3.43%, versus 3.35%. Q3 efficiency ratio increased to 53.81% from 44.51%; nine-month ratio rose to 49.13% from 46.31%.
- Balance sheet: Total assets were $12.75 billion, up 10.7% from year-end 2014. Gross loans were $10.04 billion, up 12.6%; deposits were $10.24 billion, up 16.6%. Total equity was $1.73 billion, up 8.1%.
- Cash flow: Nine-month operating cash flow was $124.1 million; investing activities used $658.9 million and financing activities provided $554.3 million. Cash and due from banks rose $19.5 million to $196.3 million.
- Debt and liquidity: At quarter-end, repurchase-agreement borrowings were $400 million, FHLB advances $75 million, long-term debt $119.1 million, and other borrowings $18.7 million. The average monthly liquidity ratio was 14.2%. The bank reported a $4.4 billion FHLB credit line, $100.1 million of Federal Reserve discount-window borrowing capacity, and $923.8 million of unpledged investment securities.
- Capital: Cathay Bank reported a 13.55% common equity Tier 1 ratio, 14.80% total risk-based capital ratio, and 11.86% leverage ratio. Management said Bancorp and the Bank exceeded regulatory minimums; the Bank remained well capitalized.
Material changes versus prior periods
- Loan and deposit growth included the Asia Bank acquisition; commercial mortgage loans grew 17.6% and residential mortgage loans 15.7% from December 31, 2014.
- Q3 non-interest expense rose 34.9%, mainly reflecting a $13.8 million increase in amortization of affordable-housing and alternative-energy investments, plus acquisition-related integration and other costs of about $2.0 million. Salaries and benefits declined $1.9 million.
- Q3 net income increased despite lower pretax income, as the effective tax rate declined to 23.9% from 38.3%. Management attributed tax-rate benefits to low-income-housing credits and, in 2015, alternative-energy credits.
- The allowance for loan losses declined to $150.1 million from $161.4 million at year-end 2014. Nine-month net charge-offs were $2.9 million, compared with net recoveries of $4.5 million in the prior-year period.
- The company repurchased approximately 1.7 million shares during Q3 for about $50.7 million. A new program authorized repurchases of up to 2.0 million shares; 915,250 remained available at September 30. Q3 dividend was $0.14 per share.
Outlook, risks, contingencies, and unusual items
- Outlook: No earnings or revenue guidance was provided. Management forecast a 27.0% effective tax rate for full-year 2015. It expected time-deposit maturities—74.6% of time deposits were due within one year—to result in minimal runoff based on historical experience, with replacement through normal deposit growth.
- Credit quality: Non-performing assets were $100.1 million, or 0.8% of assets; non-accrual loans were $71.2 million and other real estate owned was $26.3 million. Accruing troubled-debt restructurings were $89.9 million, down 14% from year-end. Commercial real estate loans equaled 288% of Bank risk-based capital, below the company’s 300% internal limit but near it.
- Interest-rate exposure: The simulation estimated that a 200-basis-point rate increase would raise net interest income 12.3%, above the company’s stated policy tolerance of plus or minus 5%. The modeled net portfolio value increase was 2.2%; a 200-basis-point decrease produced a 4.2% decline. Management cautioned that modeling relies on assumptions and actual results may differ.
- Other risks: Management cited credit deterioration, economic and real-estate conditions, interest rates, liquidity, regulation, competition, technology and cybersecurity, and operations in Asia among forward-looking risk factors. It reported no material change to the risk factors in the 2014 Form 10-K.
- Contingencies and controls: Routine litigation was not expected to materially affect the company, though ultimate legal losses could differ from accrued amounts. Management reported effective disclosure controls and no material Q3 change in internal control over financial reporting.
Important facts for investors to verify
- How the Asia Bank acquisition contributes to loan and deposit growth, earnings, integration costs, and realized synergies.
- Whether elevated amortization of affordable-housing and alternative-energy investments, and related tax credits, continue to materially affect reported expenses and tax rates.
- Trends in non-accrual loans, commercial-loan charge-offs, TDRs, and allowance coverage as the loan portfolio expands.
- Commercial real estate concentration relative to the 300% internal limit, and the extent to which growth is acquisition-driven.
- Whether actual interest-rate sensitivity and liquidity outcomes remain consistent with management’s modeled estimates and stated policy limits.
- Repurchase activity, dividend capacity, and capital ratios as Basel III capital conservation requirements phase in.