Cathay General Bancorp — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts are U.S. dollars; financial statement amounts below are in millions unless otherwise noted. The company is a bank holding company operating Cathay Bank, with branches across the U.S. and in Hong Kong and representative offices in Shanghai and Taipei.
Financial performance and condition
| Metric | Q2 2015 | Comparable period / change |
|---|---|---|
| Net income | $45.2 million | Up 28.8% from $35.1 million in Q2 2014 |
| Diluted EPS | $0.56 | Up from $0.44 |
| Net interest income before credit-loss reversal | $94.8 million | Up 10.7% from $85.6 million |
| Net interest margin | 3.51% | 3.37% in Q2 2014; 3.41% in Q1 2015 |
| Non-interest income | $5.6 million | Down 37.7% from $9.0 million |
| Non-interest expense | $47.6 million | Up 11.9% from $42.5 million |
| Efficiency ratio | 47.41% | 44.92% in Q2 2014 |
| Return on average assets / equity | 1.56% / 10.93% | 1.29% / 9.25% in Q2 2014 |
For the six months ended June 30, net income was $81.2 million, up 22.4% year over year; diluted EPS was $1.01 versus $0.83. Net interest income was $182.7 million, up 8.6%, and net interest margin was 3.46% versus 3.37%. The six-month effective tax rate was 27.7%, versus 36.8% in 2014.
- Balance sheet at June 30: Total assets were $11.92 billion, up 3.5% from year-end 2014. Gross loans were $9.50 billion, up 6.6%; deposits were $9.34 billion, up 6.3%. Equity was $1.67 billion, up 4.1%.
- Cash flows, six months: Operating activities provided $86.4 million; investing activities used $366.1 million; financing activities provided $269.8 million. Cash and due from banks ended at $166.9 million, down from $176.8 million at year-end.
- Debt and funding: Long-term debt was $119.1 million. Repurchase-agreement borrowings were $400 million and FHLB advances were $210 million, compared with $450 million and $425 million, respectively, at year-end. Time deposits totaled $4.55 billion.
- Capital: At June 30, Bancorp’s common equity Tier 1, Tier 1 risk-based, total risk-based, and leverage ratios were 13.38%, 14.52%, 15.80%, and 12.99%. Cathay Bank’s respective ratios were 14.02%, 14.02%, 15.28%, and 12.56%; the filing states the Bank remained well capitalized.
Material changes and notable items
- Loan growth was led by commercial mortgages, up 8.1% from year-end; residential mortgages rose 9.1% and construction loans rose 24.2%. Commercial mortgages represented 51.0% of gross loans.
- Q2 included $3.3 million of net securities losses, including $3.9 million of other-than-temporary impairment write-downs on agency preferred stock. This was a principal reason non-interest income fell year over year.
- Q2 net interest income benefited from loan growth, lower repurchase-agreement interest expense, and a special FHLB stock dividend; lower investment-securities income partially offset those benefits. Q2 included a $2.2 million reversal of credit-loss provision, versus a $3.7 million reversal in Q2 2014.
- Non-interest expense rose mainly due to a $4.5 million increase in amortization of affordable-housing and alternative-energy investments, plus higher salary and professional-services costs. The reported Q2 effective tax rate was 17.7%; management forecast a 27.7% full-year 2015 rate, reflecting tax credits, including alternative-energy credits from an April investment.
- Asset quality improved in several measures: non-performing assets fell to $89.9 million from $101.6 million at year-end, and non-accrual loans declined to $66.1 million from $70.2 million. OREO decreased to $23.8 million. The allowance for loan losses was $153.4 million, or 1.61% of gross loans; net charge-offs for the first six months were $0.8 million.
- Impaired loans totaled $166.1 million, including $100.0 million of accruing TDRs and $66.1 million of non-accrual loans. One $9.6 million commercial mortgage loan modified as a TDR in the prior 12 months subsequently defaulted.
- On July 31, 2015, after quarter-end, the company completed its acquisition of Asia Bancshares for 2.58 million Bancorp shares and $57 million cash. Asia Bancshares had June 30 assets of $520.5 million, loans of $413.7 million, deposits of $437.1 million, and equity of $79.3 million.
Outlook, liquidity, risks, and contingencies
- No earnings or loan-growth guidance is provided. Management said it expected deposit maturities to cause some outflow, but anticipated it would be minimal and replaceable through normal deposit growth. It considered available funding sources adequate for daily needs.
- The average monthly liquidity ratio was 12.9% in June 2015, compared with 14.9% at year-end 2014. Of $1.55 billion in investment securities, $519.2 million was pledged and approximately $1.03 billion remained available. The Bank had a $4.1 billion FHLB credit line and $89 million of Federal Reserve discount-window borrowing capacity.
- Approximately 80.8% of time deposits matured within one year. The company also disclosed a $125 million FHLB advance due in July 2015 and potential collateral requirements on repurchase agreements.
- Commercial real estate loans were 269% of Bank total risk-based capital, below the company’s 300% internal limit but above the cited supervisory concentration criterion of 300% only when combined with 50% portfolio growth over 39 months. Construction, land-development, and other land loans were 34% of capital. Foreign-country net exposure totaled $751.6 million, primarily Hong Kong and China.
- The interest-rate model projected a 9.6% increase in 12-month net interest income under a +200-basis-point shock and a 2.3% decrease under a −200-basis-point shock. The filing states a policy tolerance of plus or minus 5% under those scenarios; the disclosed positive-shock result is above that stated range. The model is assumption-dependent and actual results may differ.
- Routine litigation was not expected by management to have a material effect, though ultimate losses could differ from recorded accruals. The filing also identifies credit deterioration, interest-rate movements, liquidity, real-estate collateral values, regulatory requirements, goodwill impairment, and economic conditions in the U.S. and Asia as risks. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the 3.9 million-dollar securities impairment, investment-partnership amortization, FHLB special dividend, and tax-credit benefits are recurring or materially affect comparisons.
- Credit quality beneath aggregate improvement: performance of the defaulted TDR, construction and commercial-real-estate exposure, and adequacy of the allowance as loans grow.
- Deposit retention and refinancing needs, especially the near-term time-deposit maturities and July 2015 FHLB maturity; confirm post-quarter funding developments.
- How management addresses the modeled +200-basis-point net-interest-income sensitivity relative to its stated tolerance, and the effect of actual rate changes on margins.
- Integration, financing, share dilution, and realized contribution from the completed Asia Bancshares acquisition; the quarter-end financial statements do not include the completed merger.