Cathay General Bancorp — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Cathay General Bancorp is the holding company for Cathay Bank, a regional bank with branches across several U.S. states and Hong Kong, plus representative offices in Shanghai and Taipei. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net income attributable to common stockholders | $35.9 | $30.0 | $102.3 | $81.6 |
| Diluted earnings per share | $0.45 | $0.38 | $1.28 | $1.03 |
| Net interest income before credit provision | $86.8 | $82.6 | $255.0 | $242.7 |
| Credit provision/(credit) | ($5.1) | ($3.0) | ($8.8) | ($3.0) |
| Non-interest income | $9.0 | $16.7 | $32.6 | $52.0 |
| Non-interest expense | $42.6 | $50.7 | $133.2 | $153.5 |
- Q3 common earnings rose 19.5%; nine-month common earnings rose 25.4%. Management attributed improvement to higher net interest income, credit-loss reversals, lower debt-redemption costs and, year to date, the absence of preferred dividends.
- Q3 fully taxable-equivalent net interest margin was 3.31%, down from 3.35% a year earlier and 3.37% in Q2 2014. Nine-month margin was 3.35%, compared with 3.33% in 2013. Q3 return on average assets was 1.27%, return on average equity 9.14%, and efficiency ratio 44.51%.
- Lower securities gains partly offset earnings improvement: Q3 gains were $0.4 million versus $8.7 million; nine-month gains were $6.8 million versus $27.2 million. Debt-redemption costs were $0.5 million in Q3 versus $6.9 million, and $3.3 million year to date versus $22.6 million.
Balance sheet, cash flow and credit quality
- Total assets were $11.60 billion at September 30, up 5.6% from year-end 2013. Gross loans grew 9.6% to $8.86 billion, including commercial real estate loans of $4.41 billion; deposits rose 8.9% to $8.69 billion. Available-for-sale securities declined to $1.34 billion from $1.59 billion.
- Cash and due from banks was $200.3 million; short-term investments and interest-bearing bank deposits were $597.7 million. Nine-month operating cash flow was $104.1 million, investing cash outflow $538.2 million and financing cash inflow $480.7 million. Ending cash and cash equivalents were $200.3 million.
- At period end, repurchase-agreement borrowings were $550.0 million, FHLB advances $555.0 million and long-term debt $119.1 million. Total liabilities were $10.03 billion and stockholders’ equity $1.57 billion. Repurchase borrowings fell from $800.0 million at year-end; deposits increased from $7.98 billion.
- Non-performing assets declined to $94.9 million from $137.2 million at year-end; non-performing assets were 0.8% of total assets. Non-accrual loans were $65.3 million, versus $83.2 million at year-end. Other real estate owned fell to $29.0 million from $53.0 million.
- The allowance for loan losses was $169.2 million, or 1.91% of gross loans; allowance for credit losses including off-balance-sheet commitments was $171.2 million, or 1.93% of gross loans and 259.7% of non-performing loans. Nine-month net recoveries were $4.5 million, despite charge-offs increasing to $12.7 million from $8.8 million in 2013.
- Accruing troubled debt restructurings were $123.1 million, up from $117.6 million at year-end; non-accrual TDRs were $34.2 million, down from $38.8 million.
Liquidity, capital and outlook
- The reported liquidity ratio was 15.3%, unchanged from year-end. The Bank had a $3.6 billion approved FHLB credit line, with $555 million drawn, and $636.5 million of investment securities available after pledged securities. Management expected adequate liquidity but noted that deposit maturities could experience competitive runoff; approximately 78.6% of time deposits mature within one year.
- The Bank was classified as well capitalized. At September 30, its Tier 1 risk-based capital ratio was 14.44%, total risk-based capital ratio 15.69%, and Tier 1 leverage ratio 12.37%. Management stated it believed the company and Bank would meet Basel III requirements on a fully phased-in basis.
- No earnings or financial guidance was provided. Management cited loan growth and expected adequate liquidity, while cautioning that results depend on credit conditions, interest rates, deposit retention and other risks.
Material developments, risks and unusual items
- The allowance methodology was revised in Q3: management restored a five-year loss look-back period and adjusted loss weighting and environmental factors. The allowance remained consistent with the prior quarter, but the reserve allocated to construction loans rose to $34.7 million from $12.0 million at year-end, reflecting loan growth and methodology changes.
- Commercial real estate loans were 253% of Bank risk-based capital, below the Bank’s internal 300% limit. Construction, land-development and other land loans were 30% of risk-based capital. The portfolio is concentrated in real-estate lending, although the company reported no borrower or industry concentration exceeding 10% of total loans.
- Investment securities had $22.7 million of gross unrealized losses, primarily attributed to interest-rate and spread changes. Management considered the losses temporary and said it did not intend, nor expect to be required, to sell affected debt securities before recovery. The company recorded an $820,000 write-down of agency preferred stock during Q3.
- The company entered into interest-rate swaps in 2014 to hedge junior subordinated debt interest payments and certain fixed-rate commercial real estate loans. Management noted counterparty and interest-rate risks. Its simulation estimated that a 200-basis-point rate increase would raise 12-month net interest income 10.3%, while a 200-basis-point decrease would reduce it 1.9%; estimated market value of equity would change +1.9% and -11.5%, respectively.
- Foreign-country net exposures totaled $805.6 million, principally Hong Kong ($364.0 million) and China ($179.3 million). Routine litigation was not expected by management to materially affect the company. Risk factors were reported as unchanged from the 2013 Form 10-K; disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Whether loan growth—particularly commercial real estate and construction lending—continues without weakening underwriting or asset quality.
- Whether credit-loss reversals and net recoveries persist, and whether the revised allowance methodology adequately captures emerging loan losses.
- How margins respond to funding costs, deposit competition, interest-rate movements and the new hedging positions.
- Whether securities unrealized losses remain temporary and whether deposit maturities and collateralized borrowing capacity support liquidity.
- How Basel III implementation, foreign-country exposures and the company’s capital and dividend capacity develop.