Cathay General Bancorp — FY2017 Form 10-K
Reporting period: Year ended December 31, 2017; filed March 1, 2018. Cathay General Bancorp is the holding company for Cathay Bank, a commercial bank focused primarily on individuals and small-to-medium-sized businesses, with a substantial California presence and additional U.S. and Hong Kong operations.
Financial results and condition
| Metric | FY2017 / Dec. 31, 2017 | FY2016 / Dec. 31, 2016 |
|---|---|---|
| Interest income | $576.2 million | $499.1 million |
| Net interest income before credit-loss reversal | $495.7 million | $417.9 million |
| Net interest margin | 3.63% | 3.38% |
| Net income | $176.0 million | $175.1 million |
| Diluted EPS | $2.17 | $2.19 |
| Return on average assets / equity | 1.19% / 9.10% | 1.31% / 9.88% |
| Efficiency ratio | 44.40% | 49.79% |
| Total assets | $15.64 billion | $14.52 billion |
| Gross loans / deposits | $12.87 billion / $12.69 billion | $11.20 billion / $11.67 billion |
| Total equity | $1.97 billion | $1.83 billion |
Net interest income rose 18.6%, mainly from loan growth and higher yields; average interest-earning asset yield increased to 4.22% from 4.04%. Interest expense edged down to $80.4 million from $81.2 million, as lower repurchase-agreement costs offset higher deposit and borrowing costs. The $2.5 million credit-loss reversal was smaller than the $15.7 million reversal in 2016. Net recoveries were $6.8 million, versus $4.3 million of net charge-offs in 2016.
Net income was nearly flat despite stronger pre-tax income: the effective tax rate rose to 41.0% from 27.7%. The 2017 tax expense included $23.4 million to revalue deferred tax assets after U.S. tax reform and a $2.6 million pre-tax write-down of low-income housing tax-credit investments. Management said the federal corporate rate reduction to 21% beginning in 2018 is expected to benefit earnings, though deduction limits and other effects may offset part of the benefit.
Quarterly net income was $25.9 million in Q4 2017, down from $49.7 million in Q3; Q4 tax expense was $51.2 million. The filing attributes the tax-law-related deferred-tax revaluation to 2017 results, but does not give a clear quarterly allocation of that charge.
Consolidated cash flows were $248.9 million provided by operating activities, $224.7 million used in investing activities, and $4.8 million provided by financing activities. Cash and cash equivalents increased $29.0 million to $247.1 million. These flows reflect substantial loan growth and acquisition-related activity.
The allowance for loan losses was $123.3 million; including $4.6 million for unfunded commitments, total credit-loss allowances were $127.9 million. Non-performing assets declined to $58.2 million from $69.8 million, or 0.45% of gross loans plus OREO versus 0.62%. The allowance was 0.99% of gross loans and 262.1% of non-performing loans.
At year-end, cash and due from banks were $247.1 million, short-term investments and interest-bearing deposits $292.7 million, and available-for-sale securities $1.33 billion. The Bank reported a December average monthly liquidity ratio of 12.1%, an FHLB credit line of $5.7 billion, and $1.1 billion of securities available for liquidity or collateral after existing pledges. Management said liquidity was adequate for the next 12 months.
Capital ratios remained above regulatory well-capitalized thresholds. Bancorp ratios were 12.19% common equity Tier 1, 14.11% total risk-based capital, and 10.35% leverage; Bank ratios were 13.46%, 14.45%, and 11.82%, respectively. Total year-end debt included $194.1 million of long-term debt, $430.0 million of FHLB advances, and $100.0 million of repurchase-agreement borrowings. Crossing $15 billion in assets meant junior subordinated notes no longer qualified as Tier 1 regulatory capital.
Material changes and unusual items
- In July 2017, the company acquired SinoPac Bancorp, parent of Far East National Bank (FENB), for stated aggregate consideration of $351.6 million plus post-closing payments. Accounting disclosures report total consideration of $354.5 million and a $5.6 million acquisition gain. FENB brought $1.21 billion of assets, including $705.8 million of loans and $813.9 million of deposits; it merged into Cathay Bank on October 27. Purchase accounting remained preliminary and subject to the measurement-period process.
- Year-end gross loans grew 14.9%; commercial mortgage loans were $6.48 billion, residential mortgages and equity lines $3.24 billion, commercial loans $2.46 billion, and construction loans $678.8 million. The company cited acquisition contribution and organic growth; commercial real estate and construction loans together were approximately $7.2 billion.
- Deposits increased 8.7% to $12.69 billion. Time deposits were 42.5% of deposits, and brokered deposits were $756.1 million, or 6.0%. Approximately 88% of time deposits matured within one year.
- Non-interest expense increased 5.1% to $236.2 million, including $4.1 million of acquisition and integration costs. Salaries, occupancy, data processing, and professional-service costs rose, partly offset by lower affordable-housing and alternative-energy partnership amortization.
- Common dividends declared totaled $0.87 per share, up from $0.75. The fourth-quarter dividend increased to $0.24 per share. The Bank’s dividend capacity to the parent was restricted to approximately $39.3 million immediately after year-end, absent regulatory approval.
- The 2017 full-year financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting. The auditor excluded specified acquired FENB balances and activity from its internal-control assessment.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management described expected benefit from the lower federal tax rate and stated that available liquidity should meet operating needs over the next 12 months. The company’s interest-rate simulation projected net interest income up 3.8% under an immediate +100-basis-point shock and up 7.5% under +200 basis points; it projected declines of 4.5% and 10.0% under −100 and −200 basis points, respectively. These are model estimates, not forecasts.
- Key exposures include concentrated California lending and significant commercial real estate and construction lending. Commercial real estate loans equaled 293% of Bank risk-based capital at year-end, near the 300% supervisory criterion described in the filing. Real estate values, borrower performance, and higher rates could affect credit quality and collateral.
- Other material risks include interest-rate and deposit-funding competition, acquisition integration and preliminary purchase accounting, regulatory and compliance costs (including AML and consumer protection), cyber and third-party service-provider risks, and economic or political conditions in Asia.
- Commitments to extend credit totaled $2.37 billion; standby and commercial letters of credit and bill-of-lading guarantees brought total off-balance-sheet commitments to $2.53 billion. Many commitments may expire unused or be only partially drawn. The company reported no material expected effect from ordinary-course litigation.
- Unrealized losses on available-for-sale securities were $16.7 million, which management considered temporary; it reported no intent or expected requirement to sell the affected securities before recovery.
- New expected-credit-loss accounting (CECL) was scheduled for adoption in 2020. The company anticipated that the change from an incurred-loss to expected-loss model would likely increase the allowance, but said the impact could not yet be reasonably estimated.
Important facts for investors to verify
- How much of loan and deposit growth, earnings, and efficiency improvement is sustainable after separating FENB acquisition effects and one-time acquisition gains and costs.
- The final purchase accounting and any remaining post-closing payments for FENB, along with integration costs and realized synergies.
- Credit trends in commercial real estate, construction, and residential lending; the adequacy of the allowance; and the status and performance of restructured loans.
- Deposit repricing, the maturity and retention of time deposits, brokered-deposit reliance, and liquidity under stressed funding conditions.
- The continuing effect of tax reform, including the deferred-tax revaluation and the expected benefit from the lower federal rate.
- Capital and dividend capacity, particularly the loss of Tier 1 treatment for junior subordinated notes and limits on Bank dividends to the parent.