Cathay General Bancorp — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Figures are unaudited; dollar amounts are in millions unless noted. Cathay Bank operates across multiple U.S. states and in Hong Kong, with representative offices in Shanghai and Taipei.
Financial results and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Interest income | $121.9 | $112.4 | $244.2 | $217.3 |
| Net interest income before credit-loss reversal | $101.8 | $94.8 | $204.1 | $182.7 |
| Reversal for credit losses | $5.2 | $2.2 | $15.7 | $7.2 |
| Non-interest income | $9.1 | $5.6 | $16.6 | $14.2 |
| Non-interest expense | $68.9 | $47.6 | $120.5 | $91.7 |
| Net income | $34.8 | $45.2 | $81.0 | $81.2 |
| Diluted EPS | $0.44 | $0.56 | $1.01 | $1.01 |
Q2 net interest margin was 3.38%, down from 3.51%; the six-month margin was 3.40%, down from 3.46%. Q2 return on average assets was 1.07% and return on equity 8.00%, versus 1.56% and 10.93%. The efficiency ratio rose to 62.15% from 47.41% in Q2, and to 54.57% from 46.59% for the first half.
- At June 30, total assets were $13.49 billion, loans $10.52 billion, deposits $10.47 billion, and stockholders’ equity $1.76 billion. Since year-end 2015, assets increased 1.8%, gross loans 3.5%, and deposits decreased about $38 million.
- Cash and due from banks were $229.4 million; short-term investments and interest-bearing bank deposits were $706.9 million. Six-month operating cash flow was $91.5 million, compared with $86.4 million a year earlier.
- Borrowings included $400 million of repurchase agreements, $555 million of FHLB advances, and $119.1 million of long-term debt. The average monthly liquidity ratio was 12.4%, versus 15.8% at December 31, 2015. The Bank reported a $4.4 billion FHLB credit line and $770.3 million of securities available for additional liquidity or collateral.
- Bank regulatory capital ratios were 13.30% common equity Tier 1, 13.30% Tier 1 risk-based, 14.45% total risk-based, and 11.39% leverage; the Bank was categorized as well capitalized.
Changes, asset quality, and unusual items
- Q2 net income fell 22.9% year over year, primarily as non-interest expense rose. The filing attributes the increase chiefly to a $20.8 million rise in amortization of alternative-energy investments following rapid solar-system installation. Q2 amortization expense for affordable-housing and alternative-energy investments was $27.4 million, versus $5.5 million a year earlier.
- Q2 non-interest income increased mainly because the prior-year quarter included $3.3 million of net securities losses; Q2 2016 recorded $1.7 million of securities gains. For the first half, net income was nearly flat despite higher net interest income and a larger credit-loss reversal.
- Gross loans grew $359.6 million from year-end, led by commercial mortgage and residential mortgage growth; commercial loans declined $128.8 million. Commercial real estate loans were 52.6% of gross loans.
- Non-performing assets were $79.6 million, or 0.6% of assets, up from $76.8 million at year-end. Non-accrual loans were $53.1 million; accruing troubled debt restructurings were $74.7 million. The allowance for loan losses was $122.9 million, or 1.17% of gross loans, down from $139.0 million and 1.37% at year-end. Q2 net charge-offs were $6.5 million, versus $0.5 million a year earlier.
- Total commercial real estate loans were 301% of the Bank’s risk-based capital, compared with 286% at year-end; management said this remained below its 400% internal limit. Construction, land-development, and other land loans were 35.9% of risk-based capital.
- Six-month cash dividends paid were $28.4 million, or $0.36 per share. The Company repurchased $54.4 million of stock in the first half; $7.5 million remained under the February 2016 repurchase authorization at June 30.
Outlook, risks, and contingencies
- Acquisition: On July 8, 2016, after quarter-end, the Company signed an agreement to acquire SinoPac Bancorp, the U.S. holding company for Far East National Bank, for $340 million, subject to adjustments. The supplied filing text gives no projected closing date, financing plan, or earnings impact. This remains subject to transaction conditions and execution risks.
- Guidance: The filing does not provide specific earnings or revenue guidance. Management said it expected time-deposit runoff at maturity to be minimal and replaceable through normal deposit growth, and considered available funding sources adequate for daily needs.
- Interest-rate sensitivity: The Company’s model estimated that a 200-basis-point rate increase would raise 12-month net interest income 10.3%; a 200-basis-point decrease would lower it 2.9%. The stated policy tolerance was plus or minus 5% for a 200-basis-point shock. The model estimated market-value-of-equity changes of +1.4% and +3.7%, respectively. Management cautioned that model assumptions are uncertain.
- Other risks: Management identified credit quality, real-estate collateral values, interest rates, liquidity, regulatory and capital requirements, foreign and domestic economic conditions, and operational and technology risks. Foreign country-risk net exposure was $566.5 million, primarily Hong Kong ($322.7 million) and China ($74.9 million).
- Contingencies: The Company is involved in ordinary-course litigation; management did not expect a material effect but noted ultimate legal losses could differ from accruals. Off-balance-sheet commitments included $2.04 billion to extend credit and $76.6 million of standby letters of credit. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Acquisition terms, closing conditions, funding, integration costs, and expected impact of the SinoPac Bancorp transaction.
- Whether the unusually high alternative-energy investment amortization recurs, and its effect on earnings, taxes, and reported efficiency.
- Trends in net charge-offs, non-accrual loans, troubled restructurings, allowance coverage, and commercial real estate concentrations.
- How management addresses the modeled +200-basis-point net interest income sensitivity that exceeds the stated 5% tolerance, and how deposit competition affects funding costs and liquidity.
- Capital and dividend capacity after the acquisition and under the phased-in Basel III capital conservation buffer.