Cathay General Bancorp — Q3 2016 Form 10-Q
Business context and reporting period. The filing covers the three and nine months ended September 30, 2016; balance-sheet comparisons are to December 31, 2015. Cathay General Bancorp is the holding company for Cathay Bank, a U.S. and international commercial bank. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial results and position
| Metric | Q3 2016 / September 30, 2016 | Comparable period / prior date |
|---|---|---|
| Net income | $46.1 million; diluted EPS $0.58 | Q3 2015: $38.5 million; diluted EPS $0.47 |
| Net interest income before credit-loss provision or reversal | $103.8 million | Q3 2015: $97.6 million |
| Net interest margin | 3.36% | 3.37% in Q3 2015; 3.38% in Q2 2016 |
| Non-interest income / expense | $8.8 million / $50.7 million | Q3 2015: $9.2 million / $57.5 million |
| Return on average assets / equity | 1.38% / 10.30% | Q3 2015: 1.23% / 8.80% |
| Total assets | $14.10 billion | $13.25 billion at December 31, 2015 |
| Gross loans / deposits | $11.01 billion / $10.94 billion | $10.16 billion / $10.51 billion at December 31, 2015 |
| Allowance for loan losses | $117.9 million; 1.07% of gross loans | $139.0 million; 1.37% at December 31, 2015 |
| Cash and due from banks | $203.9 million | $180.1 million at December 31, 2015 |
| Total equity | $1.79 billion | $1.75 billion at December 31, 2015 |
- For the nine months ended September 30, net income was $127.1 million, versus $119.7 million in 2015; diluted EPS was $1.59 versus $1.48. Net interest income was $308.0 million versus $280.3 million, while net interest margin was 3.39% versus 3.43%.
- Year-to-date cash flow: operating activities provided $170.6 million, investing activities used $856.4 million, and financing activities provided $709.6 million. Cash and cash equivalents rose $23.7 million to $203.9 million.
- At quarter-end, borrowings included $350 million in repurchase agreements, $700 million in FHLB advances, and $119.1 million in long-term debt. FHLB advances included $375 million maturing in October 2016.
- Bank capital ratios exceeded minimum requirements; Cathay Bank’s common equity Tier 1 ratio was 13.22%, total risk-based capital ratio 14.29%, and leverage ratio 11.52%. The filing describes the Bank as well capitalized.
Material changes versus comparable periods
- Q3 net income increased 19.8% year over year. Management attributed the improvement primarily to an $11.7 million reduction in quarterly amortization of alternative-energy partnership investments. Year-to-date, however, that amortization was $35.6 million versus $23.3 million in 2015.
- Q3 net interest income increased 6.3%, principally from higher loan interest income. Net interest margin was nearly flat year over year but declined from Q2, which management attributed mainly to lower interest recoveries and prepayment penalties.
- Loans grew 8.3% from year-end, led by commercial mortgage loans (+$442.8 million) and residential mortgages (+$397.0 million). Deposits grew 4.1%; time deposits fell while non-interest-bearing demand, interest-bearing demand, and money-market balances rose.
- Available-for-sale securities declined $287.9 million from year-end to $1.30 billion. Net unrealized gains, net of tax, improved from a $5.4 million loss at year-end to an $8.5 million gain.
- Non-performing assets declined 15.0% from year-end to $65.3 million; non-accrual loans were $44.4 million, down 14.9%. The allowance for loan losses fell 15.1%, and year-to-date net charge-offs rose to $5.4 million from $2.9 million.
- Q3 efficiency ratio improved to 45.05% from 53.81%; the nine-month ratio worsened to 51.35% from 49.13%.
Outlook, risks, contingencies, and unusual items
- The filing gives no specific earnings, growth, or margin guidance. Management says it expects liquidity to be adequate and anticipates any time-deposit runoff at maturity to be minimal, based on historical experience; it also notes keen deposit-market competition.
- Liquidity ratio averaged 12.0% in September 2016, versus 15.8% at December 31, 2015. The Bank reported a $5.2 billion FHLB credit line and $792.5 million of investment securities available for additional liquidity or collateral. Approximately 86.4% of time deposits mature within one year.
- Credit risks include loan growth and real-estate exposure: commercial real estate loans were 304% of Bank risk-based capital, up from 286%, though below the Bank’s 400% internal limit. Management cautions that economic weakness, collateral values, interest rates, and borrower performance could increase future credit losses.
- Interest-rate simulation showed estimated net interest income volatility of +9.0% under a +200-basis-point shock, above the company’s stated plus-or-minus 5% tolerance; estimated market-value-of-equity volatility was +1.4%. Under a -200-basis-point shock, the estimates were -2.8% and +6.5%, respectively. Management notes these are model-based estimates subject to assumptions and uncertainty.
- Temporary unrealized losses on securities were $1.3 million; management attributed them mainly to yield-curve and spread movements and said it did not intend, nor expect to be required, to sell affected securities before recovery. A $206,000 permanent impairment write-down was recorded during the first nine months.
- Ordinary-course litigation is not expected by management to materially affect the Company, although ultimate legal losses could differ from accruals. The filing reports no material change in previously disclosed risk factors and no material change in internal control over financial reporting.
- Other notable items: the Company repurchased $54.4 million of stock and paid $42.6 million in dividends in the first nine months. $7.5 million remained under the February 2016 repurchase authorization at quarter-end. The effective tax rate was 28.5% for the first nine months, versus 26.5% in 2015, including tax-credit effects and a write-off of deferred tax assets related to expired stock options.
Important facts for investors to verify
- Whether loan growth, particularly commercial and residential real estate lending, is maintaining underwriting quality as criticized and substandard exposures change.
- Whether the lower allowance and reserve ratios remain appropriate given higher year-to-date net charge-offs and loan growth.
- How the $375 million FHLB maturity in October 2016 and the large near-term time-deposit maturities were funded or renewed after quarter-end.
- Whether the Q3 reduction in alternative-energy investment amortization is timing-related or likely to persist; year-to-date amortization increased versus 2015.
- How interest-rate changes affect net interest margin, deposit costs, and the reported simulation outcomes, particularly the +200-basis-point scenario.
- Whether the Company used the remaining stock-repurchase authorization and how capital, dividends, and repurchases evolve under Basel III capital-buffer requirements.