Cathay General Bancorp — 2013 Form 10-K
Business context and reporting period. Cathay General Bancorp is a bank holding company whose principal business is Cathay Bank, a commercial bank serving individuals and businesses, with a concentration in California and operations across other U.S. markets and Hong Kong. The filing covers the fiscal year ended December 31, 2013; unaudited quarterly data are also reported, including fourth-quarter results.
Financial performance and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Net interest income before credit-loss provision | $324.7 million | $321.3 million |
| Provision / (reversal) for credit losses | $(3.0) million | $(9.0) million |
| Non-interest income | $60.3 million | $46.5 million |
| Non-interest expense | $193.8 million | $192.6 million |
| Net income attributable to common stockholders | $113.5 million; diluted EPS $1.43 | $101.0 million; diluted EPS $1.28 |
| Net interest margin, taxable-equivalent | 3.33% | 3.28% |
| Return on average assets / equity | 1.17% / 8.00% | 1.11% / 7.48% |
| Net cash provided by operating activities | $115.1 million | $164.6 million |
For fourth-quarter 2013, net income available to common stockholders was $31.9 million, or $0.40 per diluted share, compared with $24.2 million, or $0.31 per diluted share, in fourth-quarter 2012.
At December 31, 2013, total assets were $11.0 billion, gross loans $8.08 billion, net loans $7.90 billion, deposits $7.98 billion, and total equity $1.46 billion. Gross loans grew 8.8% and deposits 8.1% year over year. Investment securities were $1.59 billion, down from $2.07 billion. Cash and due from banks were $153.7 million, with an additional $516.9 million in short-term investments and interest-bearing deposits.
The allowance for loan losses was $173.9 million (2.17% of gross loans); net charge-offs were $6.4 million, or 0.08% of average loans. Non-performing assets were $137.2 million, or 1.69% of gross loans plus OREO, versus $150.9 million and 2.02% in 2012. OREO increased to $53.0 million. Bank capital ratios remained above “well-capitalized” thresholds: total risk-based capital 15.79%, Tier 1 risk-based capital 14.53%, and leverage 12.06%.
Liquidity ratio was 15.3%. The Bank had $521.2 million in FHLB advances, an approved FHLB credit line of $1.36 billion, and $110.2 million of Federal Reserve Discount Window borrowing capacity. Management said available sources were adequate for operating needs over the next 12 months. The filing does not provide a specific standalone free-cash-flow measure.
Material changes versus prior comparable period
- Common-stockholder net income rose 12.4% and diluted EPS rose from $1.28 to $1.43. Management attributed the increase principally to lower OREO expenses, higher securities gains, lower preferred dividends, reduced litigation expense, and greater wealth-management commissions.
- Net interest income increased modestly as lower funding costs offset lower interest income and loan yields. The average yield on interest-earning assets fell to 4.17% from 4.38%, while the average cost of interest-bearing liabilities fell to 1.09% from 1.39%.
- Loan growth was broad, including commercial, residential mortgage, and commercial mortgage lending. The allowance declined from $183.3 million to $173.9 million, while credit quality improved on several measures, including lower non-accrual loans and net charge-offs.
- Total equity decreased 10.5%, primarily reflecting redemption of $258 million of TARP preferred stock and a $30.2 million after-tax decline in accumulated other comprehensive income, partly offset by earnings.
Outlook, commentary, risks, contingencies, and unusual items
- No numerical earnings or revenue guidance is provided. Management expects liquidity to be adequate for the next twelve months, while noting potential deposit outflows as time deposits mature and expecting these to be manageable based on historical experience.
- Interest-rate sensitivity modeling estimated next-12-month net interest income would rise 0.4% for an immediate 100-basis-point rate increase and 4.1% for a 200-basis-point increase; a 200-basis-point decrease was estimated to reduce it 0.6%. These are model estimates subject to assumptions and not guidance.
- Credit and collateral risks remain significant given the real-estate-heavy loan portfolio and geographic concentration. Commercial real estate loans were $4.02 billion; commercial real estate and construction loans together were approximately $4.2 billion. Management cautioned that uneven economic recovery, rising rates, and weaker real-estate conditions could increase losses.
- Accruing troubled debt restructurings totaled $117.6 million and non-accrual TDRs $38.8 million. Management said accruing TDRs were performing under modified terms; their continued performance is not assured.
- The Company reclassified $722.5 million of held-to-maturity securities to available-for-sale in 2013 and recorded a $40.5 million unrealized gain in other comprehensive income at transfer. Year-end available-for-sale securities had $69.8 million of gross unrealized losses; management considered them temporary and recorded no impairment loss. Securities gains of $27.4 million were recognized during 2013.
- The Company prepaid $450 million of repurchase-agreement borrowings and incurred $22.6 million in penalties. It redeemed all $258 million of TARP preferred stock and repaid $50 million of Bank subordinated debt. These actions contributed to reported costs and reduced equity.
- New Basel III capital requirements were scheduled to phase in beginning in 2015, with a capital conservation buffer phased in over 2016–2019. The Volcker Rule was to take effect in 2014; the Company reported approximately $6.0 million of limited-partnership interests potentially requiring sale, restructuring, or regulatory extension.
- Other risks include regulatory and compliance costs, interest-rate and liquidity risk, competition, cyber and information-system risks, Asian economic conditions, goodwill impairment, and the possibility of additional credit provisions. The Company reported no material pending legal proceeding; management stated ordinary-course litigation was not expected to materially affect the Company as a whole.
- The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal control over financial reporting.
Most important facts an investor should verify
- Whether loan growth is translating into sustainable earnings as loan yields decline, and whether credit costs remain low.
- The composition, collateral quality, geography, and subsequent performance of commercial real estate, construction, non-accrual, and restructured loans; also test the adequacy of the allowance.
- Deposit stability and repricing, especially the large time-deposit balance: about 90.8% of jumbo CDs matured within one year at year-end.
- The realizability of securities’ carrying values and the duration of unrealized losses, including assumptions underlying management’s conclusion that impairments were temporary.
- The effects of repurchase-agreement terms, funding costs, interest-rate changes, and Basel III implementation on margins, capital, dividends, and liquidity.
- How much of 2013 earnings depended on securities gains and other non-recurring or timing-sensitive items, including debt-prepayment penalties and lower OREO and litigation costs.