Cathay General Bancorp — Third-Quarter 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; unaudited. Cathay General Bancorp is the holding company for Cathay Bank, a commercial bank operating across several U.S. states and in Hong Kong, with representative offices in Asia.
Financial performance
- Third quarter: Net income was $69.8 million, up 40.2% from $49.7 million; diluted EPS was $0.85 versus $0.61. Interest and dividend income was $176.9 million, and net interest income before credit-loss reversal was $145.1 million, up 8.9%. Noninterest income was $7.8 million, down 39.5%, while noninterest expense rose 7.7% to $66.0 million.
- First nine months: Net income was $207.2 million, up 38.1%; diluted EPS was $2.53 versus $1.86. Net interest income was $420.5 million, up from $362.7 million. Total noninterest income was $20.9 million versus $25.8 million; noninterest expense was $190.0 million versus $169.8 million.
- Margins and returns: Third-quarter net interest margin was 3.83% versus 3.75% a year earlier; nine-month margin was 3.80% versus 3.63%. Third-quarter return on average assets/equity was 1.72%/13.19%, compared with 1.29%/9.77%. The quarterly efficiency ratio increased to 43.14% from 41.91%; the nine-month ratio improved to 43.05% from 43.71%.
- Taxes and unusual earnings items: The effective tax rate was 21.1% for the quarter and 19.0% year to date, down from 41.4% and 32.1%, respectively, primarily reflecting the lower federal corporate tax rate and tax credits. The prior-year quarter included a $5.4 million acquisition gain; 2018 results included a $1.5 million credit-loss reversal in Q3 and a $4.6 million year-to-date loss on equity securities.
Financial position, funding and asset quality
- At September 30, total assets were $16.46 billion, up 5.3% from year-end 2017. Gross loans were $13.65 billion, up 6.0%; growth was led by residential mortgages (+16.6%) and commercial loans (+8.6%). Total deposits were $13.58 billion, up 7.0%, with time deposits increasing to $6.33 billion.
- Cash and cash equivalents were $582.0 million. Nine-month operating cash flow was $239.3 million versus $123.6 million; investing activities used $806.1 million, principally reflecting loan growth, and financing activities provided $609.0 million. The average monthly liquidity ratio was 12.8%, compared with 12.1% at year-end. The Bank had a $4.0 billion FHLB credit line and $17.7 million of Federal Reserve Discount Window borrowing capacity.
- Borrowings included $315.0 million of FHLB advances, $194.1 million of long-term debt, and $18.3 million of deferred acquisition payments. The Bank’s U.S. Bank term loan had a 3.875% rate and quarterly principal installments beginning December 2018. Long-term debt includes $119.1 million of junior subordinated notes.
- The allowance for loan losses was $123.5 million, or 0.90% of gross loans; the company recorded net recoveries of $4.7 million for the nine months. Nonperforming assets were $57.8 million, 0.4% of assets, versus $58.2 million at year-end; nonaccrual loans declined to $42.4 million. Accruing troubled debt restructurings rose to $74.6 million from $68.6 million.
- Regulatory capital ratios remained above minimums: Bancorp common equity Tier 1 was 12.81% and total capital was 14.60%; Cathay Bank’s corresponding ratios were 13.81% and 14.74%. The Bank remained classified as well capitalized.
Material changes, outlook and risks
- Higher loan and securities yields supported interest income, while deposit funding costs rose: third-quarter interest expense increased to $31.8 million from $20.9 million, with time-deposit expense nearly doubling. Management attributed increased asset yields principally to higher loan rates.
- Noninterest income fell chiefly because the 2017 comparison included the $5.4 million FENB acquisition gain. Expense growth reflected higher salaries and increased amortization of affordable-housing and alternative-energy investments, partly offset by lower acquisition and integration costs.
- Available-for-sale securities had $38.9 million of gross unrealized losses at quarter-end, which management attributed mainly to interest-rate movements and wider liquidity and credit spreads. Management considered the losses temporary and stated it did not intend, and would not be required, to sell the securities before anticipated recovery. Accumulated other comprehensive loss was $23.8 million.
- Interest-rate simulation estimated net interest income changes of +10.4% under a +200-basis-point scenario and -19.8% under a -200-basis-point scenario. The filing describes a policy tolerance of plus or minus 5% at those rate shocks; the modeled outcomes therefore warrant investor attention. Results depend on assumptions and are not forecasts.
- Commercial real estate loans were 271% of the Bank’s risk-based capital, down from 293% at year-end and below its internal 400% limit. Management cited U.S.–China trade instability and tariffs as factors in the commercial-loan allowance assessment. Other stated risks include credit deterioration, real-estate values, liquidity, changing rates, regulatory requirements, and economic conditions in the U.S. and Asia.
- No formal earnings or growth guidance was provided. Management expected liquidity sources to be adequate for the next 12 months, while noting potential time-deposit outflows at maturity amid competition; about 84% of time deposits matured within one year.
- After quarter-end, the company completed its prior $45 million repurchase program and announced a new $45 million program. It repurchased $9.7 million of shares under the new program through November 7, 2018. The filing reported no material change in previously disclosed risk factors and no material expected impact from routine litigation.
Most important facts for investors to verify
- Whether continued deposit repricing, particularly on time deposits, pressures net interest margin and earnings.
- Whether the modeled sensitivity to rate decreases—and the stated policy tolerance—results in management actions or changed exposure.
- Credit trends in commercial lending, TDRs, past-due loans, and collateral-dependent exposures, including the adequacy of the allowance.
- Time-deposit retention, liquidity usage, and the funding and capital effects of ongoing share repurchases and dividends.
- The effects of the new credit-loss accounting standard, scheduled for adoption in 2020; the company had not yet determined its financial impact.