Cathay General Bancorp — Q1 2018 Form 10-Q
Business and period: Cathay General Bancorp is the bank holding company for Cathay Bank, serving customers through U.S. and Asia operations. This unaudited quarterly report covers the three months ended March 31, 2018. Income-statement and cash-flow comparisons are against Q1 2017; balance-sheet comparisons are against December 31, 2017. The 2017 comparison includes Far East National Bank (FENB), acquired in July 2017, so year-over-year changes are not wholly organic.
Financial performance and position
| Metric | Q1 2018 / March 31, 2018 | Comparison |
|---|---|---|
| Net income | $63.8 million | $48.9 million in Q1 2017; up 30.4% |
| Diluted EPS | $0.78 | $0.61 in Q1 2017 |
| Net interest income before credit-loss reversal | $135.3 million | $112.1 million in Q1 2017; up 20.7% |
| Net interest margin | 3.75% | 3.49% in Q1 2017; 3.65% in Q4 2017 |
| Non-interest income / expense | $5.3 million / $61.0 million | Income down 21.0%; expense up 17.5% year over year |
| Effective tax rate | 22.8% | 29.5% in Q1 2017 |
| Operating cash flow | $84.9 million | $54.1 million in Q1 2017 |
| Total assets | $15.88 billion | $15.64 billion at December 31, 2017 |
| Gross loans / deposits | $13.01 billion / $13.01 billion | Loans up 1.1%; deposits up 2.5% from year-end |
| Stockholders’ equity | $2.01 billion | $1.97 billion at December 31, 2017 |
Loan growth was concentrated in residential mortgages (+4.5%) and commercial mortgages (+2.0%); construction loans declined 13.4%. Time deposits rose to $5.87 billion, or 45.1% of deposits. Cash and cash equivalents were $723.7 million, up from $539.8 million at year-end. The average monthly liquidity ratio was 12.7%, versus 12.1% at year-end. Management said available sources were expected to provide adequate liquidity for the next 12 months.
Credit-loss reversal was $3.0 million, versus a $2.5 million reversal in Q1 2017; net recoveries were $1.8 million. The allowance for loan losses was $122.1 million, or 0.94% of gross loans. Nonperforming assets were $58.6 million (0.4% of assets); nonaccrual loans were $49.3 million. Accruing troubled debt restructurings rose to $82.8 million from $68.6 million at year-end.
At March 31, total borrowings included $325 million of FHLB advances, $100 million of repurchase agreements, $194.1 million of long-term debt, and $35.7 million payable for the FENB acquisition. The Bank’s regulatory capital ratios exceeded minimums; its common equity Tier 1 ratio was 13.68% and total risk-based capital ratio was 14.66%. CRE loans were 293% of risk-based capital, below the Bank’s stated 400% internal limit.
Material changes and unusual items
- Net interest income benefited from higher loan and securities income and the larger post-acquisition balance sheet; deposit and borrowing interest costs also increased.
- Q1 net income included a $3.8 million fair-value loss on equity securities, reducing EPS by about $0.03. Adoption of ASU 2016-01 moved equity-security fair-value changes into earnings and reclassified approximately $8.6 million from accumulated other comprehensive income to retained earnings.
- Available-for-sale securities had $31.7 million of gross unrealized losses, attributed mainly to interest-rate and spread movements. Management considered the losses temporary, reported no intent or requirement to sell before recovery, and recorded no impairment loss on those securities.
- Non-interest expense increased, particularly salaries and benefits (+$4.5 million, partly related to FENB) and professional services (+$1.8 million). The efficiency ratio improved slightly to 43.35% from 43.66%.
- The lower tax rate primarily reflected the federal corporate tax-rate reduction under the Tax Cuts and Jobs Act. The company adopted revenue-recognition guidance without a material financial-statement impact.
- Accumulated other comprehensive loss increased to $20.9 million, including securities-related losses. The filing also states that the 2017 cash-flow comparative amounts were corrected from those previously reported.
Outlook, risks, and contingencies
The filing provides no numerical earnings or growth guidance. Management highlighted deposit competition and expected some time-deposit runoff at maturity, while anticipating it would not be significant based on historical experience. Key exposures include credit quality and loan-loss estimates, real estate collateral values, interest-rate movements, liquidity, regulatory requirements, economic conditions in the U.S. and Asia, and technology and cybersecurity risks. A modeled +200-basis-point rate shock increased projected 12-month net interest income 8.7%; a −200-basis-point shock reduced it 15.0%. These are simulations dependent on assumptions, not forecasts.
The company reported routine litigation and said management did not expect it to materially affect consolidated financial condition or results. No material change to the previously disclosed risk factors was reported. The Bank was described as well capitalized; the filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much reported loan, deposit, and earnings growth reflects FENB acquisition effects versus organic performance.
- Whether the $3.0 million credit-loss reversal and current allowance remain appropriate as impaired loans and accruing TDRs change.
- Trends in commercial real estate exposure, construction lending, nonaccrual loans, and collateral valuations.
- Deposit pricing, time-deposit renewals and runoff, and the effect of rising funding costs on net interest margin and liquidity.
- Potential earnings volatility from equity-security fair-value changes and unrealized securities losses.
- Regulatory capital and liquidity capacity, including the scheduled maturities of borrowings and the terms of acquisition-related deferred payments.