Cathay General Bancorp — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Cathay General Bancorp is the holding company for Cathay Bank, with banking operations across several U.S. states and in Hong Kong. Financial statements are unaudited.
Financial performance
| Metric | Q1 2016 | Comparable period / change |
|---|---|---|
| Net interest income, before credit-loss provision | $102.4 million | Up 16.4% from $87.9 million in Q1 2015 |
| Net interest margin | 3.42% | 3.41% in Q1 2015; 3.30% in Q4 2015 |
| Net income | $46.2 million | Up 28.3% from $36.0 million |
| Diluted EPS | $0.57 | $0.45 in Q1 2015 |
| Non-interest income | $7.5 million | Down 11.8% from $8.5 million |
| Non-interest expense | $51.6 million | Up 16.9% from $44.1 million |
| Efficiency ratio | 46.92% | 45.74% in Q1 2015 |
| Net cash from operations | $41.1 million | $55.8 million in Q1 2015 |
Net interest income growth reflected higher loan and securities income, partly offset by increased deposit interest expense. Average interest-earning assets grew to $12.03 billion from $10.44 billion year over year; the net interest spread was unchanged at 3.20%. Return on average assets was 1.43% and return on average equity was 10.66%, versus 1.30% and 8.97%, respectively, in Q1 2015.
Balance sheet, funding and capital
- Assets and loans: Total assets were $13.26 billion at quarter-end, essentially unchanged from December 31, 2015. Gross loans rose 2.0% to $10.36 billion, led by commercial mortgage and residential mortgage growth. Net loans were $10.22 billion.
- Deposits: Deposits declined $185.0 million to $10.32 billion, primarily due to a $187.6 million reduction in brokered time deposits. Non-interest-bearing deposits were 20.0% of total deposits.
- Borrowings and debt: FHLB advances were $475 million, up from $275 million at year-end; $350 million was due to mature in April 2016. Repurchase-agreement funding was $400 million. Long-term debt was $119.1 million.
- Liquidity: The March average monthly liquidity ratio was 13.0%, down from 15.8% at year-end. The Bank reported a $4.8 billion approved FHLB credit line, $53.8 million of Federal Reserve Discount Window capacity, and approximately $1.0 billion of unpledged investment securities. Management expected liquidity sources to cover operating needs, while noting potential competition-related outflows as time deposits mature; 76.1% of time deposits matured within one year.
- Capital: The Bank was described as “well capitalized.” At March 31, its common equity Tier 1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios were 13.27%, 13.27%, 14.52% and 11.40%, respectively. Bancorp’s corresponding ratios were 12.60%, 13.67%, 14.93% and 11.73%.
- Shareholder returns: The company paid $14.2 million in dividends at $0.18 per share and spent $54.4 million repurchasing shares. A new $45 million repurchase authorization had $7.5 million remaining at quarter-end.
Credit quality and material changes
- The company recorded a $10.5 million reversal of credit losses, compared with a $5.0 million reversal in Q1 2015. Recoveries were $8.4 million and charge-offs were $2.3 million, producing net recoveries of $6.1 million; construction-loan recoveries accounted for $7.3 million.
- The allowance for loan losses fell to $134.6 million from $139.0 million at year-end, equal to 1.30% of gross loans. Non-performing assets declined to $71.9 million from $76.8 million; non-accrual loans fell to $44.6 million from $52.1 million. OREO increased to $27.3 million from $24.7 million.
- Impaired loans totaled $134.8 million. Accruing troubled debt restructurings increased to $90.2 million from $81.7 million, while non-accrual TDRs declined to $23.2 million from $39.9 million. No TDRs were modified in Q1 2016.
- Available-for-sale securities were $1.49 billion, down from $1.59 billion at year-end. Their net unrealized position moved to a $5.0 million gain, net of tax, from a $5.4 million loss. Management considered remaining unrealized losses temporary and stated it did not intend, and would not be required, to sell affected debt securities before anticipated recovery. A $206,000 permanent impairment write-down was recorded.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management’s liquidity outlook was that available funding sources would meet operating needs, subject to deposit-maturity and competitive pressures.
- Non-interest expense rose mainly from salary and bonus costs, professional services and other operating expenses. Income tax expense included a $3.3 million write-off of deferred tax assets related to stock options that expired unexercised; the effective tax rate was 32.9%, versus 37.3% in Q1 2015, with low-income-housing and alternative-energy tax credits affecting the rate.
- Commercial real estate loans were 296% of Bank risk-based capital, up from 286% at year-end and below the company’s stated 400% internal limit. Management identified credit deterioration, collateral values, economic conditions, interest-rate movements, liquidity, regulatory requirements, goodwill impairment and operational/security risks among factors that could affect future results.
- Interest-rate sensitivity modeling estimated that a 200-basis-point rise would increase 12-month net interest income by 7.4%; a 200-basis-point decline would reduce it by 2.8%. Management cautioned that model assumptions may not predict actual outcomes.
- Routine litigation was not expected by management to materially affect the company. The filing reported no material change to previously disclosed risk factors, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether strong earnings growth is sustainable without unusually high loan recoveries and credit-loss reversals.
- Loan growth and underwriting trends, especially commercial real estate exposure, construction lending, TDRs and the rise in OREO.
- Deposit retention and funding costs, including the April 2016 FHLB maturity and the company’s ability to replace maturing time deposits.
- Expense growth relative to revenue, including compensation, professional services and the efficiency ratio.
- Capital and liquidity after dividends and share repurchases, and the effects of market or interest-rate changes on securities and funding.