Cathay General Bancorp — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing; selected Q4 figures are included below. Cathay General Bancorp is a bank holding company whose principal business is Cathay Bank, serving consumers and businesses across multiple U.S. states and Hong Kong.
Financial performance and condition
| Metric | 2014 | 2013 |
|---|---|---|
| Interest income | $418.6 million | $407.0 million |
| Net interest income, before credit-loss provision | $342.8 million | $324.7 million |
| Net interest margin, taxable-equivalent | 3.35% | 3.33% |
| Net income attributable to common stockholders | $137.8 million | $113.5 million |
| Diluted earnings per share | $1.72 | $1.43 |
| Return on average assets / equity | 1.26% / 8.95% | 1.17% / 8.00% |
| Efficiency ratio | 45.48% | 50.35% |
| Total assets | $11.52 billion | $10.99 billion |
| Deposits | $8.78 billion | $7.98 billion |
| Equity | $1.60 billion | $1.46 billion |
- Q4: Net income available to common stockholders was $35.6 million, or $0.44 diluted per share, versus $31.9 million, or $0.40, in Q4 2013. Net interest income was $87.8 million versus $82.0 million.
- Lending and credit: Gross loans grew 10.3% to $8.91 billion. Commercial mortgages were $4.49 billion, approximately half of gross loans. The company recorded a $10.8 million reversal of credit-loss provision; net charge-offs were $1.3 million, or 0.02% of average loans. The allowance for loan losses was $161.4 million; including off-balance-sheet commitments, the allowance for credit losses was $163.4 million.
- Asset quality: Non-performing assets declined 25.9% to $101.6 million, or 1.14% of gross loans plus OREO, from $137.2 million and 1.69% a year earlier. Accruing troubled debt restructurings remained significant at $104.4 million; non-accrual TDRs were $41.6 million.
- Cash flow: Operating activities provided $150.1 million. Investing activities used $459.4 million, primarily reflecting net loan growth and securities activity. Financing activities provided $332.4 million, including deposit growth; cash and cash equivalents ended the year at $176.8 million.
- Funding and liquidity: Deposits increased 10.1%. Brokered deposits were $497.4 million, or 5.7% of deposits; time deposits of $100,000 or more were $3.11 billion, and approximately 83.8% of those matured within one year. The liquidity ratio was 14.9%. The Bank had a $3.76 billion FHLB credit line, with $425 million drawn, and $727.7 million of securities available for additional liquidity or collateral.
- Borrowings and capital: At year-end, repurchase agreements were $450 million, FHLB advances $425 million, other borrowings $19.9 million, and junior subordinated debt $119.1 million. Bancorp regulatory capital ratios were 14.96% Tier 1 risk-based, 16.22% total risk-based, and 12.99% leverage; the Bank’s corresponding ratios in the regulatory-capital table were 14.42%, 15.68%, and 12.52%. Both were reported as well capitalized under the applicable framework.
Material changes versus 2013
- Common-stockholder net income rose $24.4 million, or about 21.5%; diluted EPS increased 20.3%. Management attributed the improvement to higher net interest income, lower credit-loss provision, reduced debt-redemption costs, and lower core-deposit amortization and OREO expense, among other items.
- Net interest income increased 5.6%, driven mainly by loan growth and lower repurchase-agreement expense. The average loan yield declined to 4.58% from 4.72%, while the average yield on interest-earning assets fell to 4.10% from 4.17%.
- Non-interest income fell to $40.5 million from $60.3 million, chiefly because net securities gains declined to $6.7 million from $27.4 million. Non-interest expense fell 10.1% to $174.3 million, including a decrease in debt-redemption costs to $3.3 million from $22.6 million.
- Investment securities declined to $1.32 billion from $1.59 billion, while deposits, loans, assets, and equity increased. The common dividend rose to $0.29 per share for 2014 from $0.08 in 2013.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said available liquidity sources were expected to meet operating needs over the next twelve months and anticipated no significant runoff of maturing time deposits, while noting competitive deposit conditions.
- In January 2015, the company signed an agreement to acquire Asia Bancshares, Inc., with $533.3 million of assets and four branches at December 31, 2014; closing was expected in Q2 2015. Completion and integration remain subject to risks and approvals.
- Basel III capital rules began taking effect January 1, 2015, with phased-in requirements and a capital conservation buffer that can constrain dividends, repurchases, and discretionary bonuses. The company also held approximately $5.5 million in covered-fund partnership interests subject to required sale or restructuring before July 21, 2017.
- Principal disclosed risks include real-estate and construction credit concentration, changing interest rates, deposit competition and liquidity, regulatory and compliance costs, cybersecurity and system disruptions, and economic conditions in the company’s U.S. markets and Asia. Management reported no material pending legal proceeding; routine litigation was not expected to materially affect the company as a whole.
- Unusual items included the $10.8 million credit-loss reversal, $6.7 million of net securities gains (down substantially year over year), and an $820,000 write-down of agency preferred stock. Management considered the remaining disclosed debt-security unrealized losses temporary and reported no debt-security impairment charge.
Important facts for investors to verify
- Loan growth and commercial real-estate exposure, including construction lending, collateral values, and the direction of non-performing loans, TDRs, charge-offs, and allowance coverage.
- Whether recurring earnings can sustain the improvement despite lower securities gains, declining loan yields, and potential deposit-cost increases.
- The composition, pricing, and renewal behavior of jumbo and brokered deposits, particularly the large volume of time deposits maturing within one year.
- Capital and liquidity after Basel III phase-in, including restrictions on dividends and the reliance of the holding company on Bank dividends.
- Asia Bancshares acquisition terms, approvals, integration costs, and realized benefits; also the required disposition or restructuring of covered-fund investments by the stated deadline.