UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 25, 2017
CATHAY
GENERAL BANCORP
(Exact name of registrant as specified in its charter)
Delaware | 001-31830 | 95-4274680 | ||
(State or other jurisdiction of incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
777 North Broadway, Los Angeles, California | 90012 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (213) 625-4700
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 or Rule 12b-2 of the Securities Exchange Act of 1934.
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Item 2.02 | Results of Operations and Financial Condition. |
On October 25, 2017, Cathay General Bancorp announced, in a press release, its financial results for the quarter ended September 30, 2017. That press release is attached hereto as Exhibit 99.1.
The foregoing information and the attached exhibit are intended to be furnished only and shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933.
Item 7.01 | Regulation FD Disclosure. |
On October 25, 2017, Cathay General Bancorp (the “Company”) posted on its website www.cathaygeneralbancorp.com a summary of the results of the annual stress test that it conducted for the Company and its subsidiary, Cathay Bank, as required by the Dodd Frank Wall Street Reform and Consumer Protection Act. That summary is attached hereto as Exhibit 99.2.
The foregoing information and the attached exhibit are intended to be furnished only and shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933.
The information on, or that can be accessed through, the Company’s website is not part of this report. This report will not be deemed an admission as to the materiality of any information in the report that is required to be disclosed solely by Regulation FD.
Item 9.01 | Financial Statements and Exhibits. |
(d) | Exhibits |
99.1 | Press Release of Cathay General Bancorp dated October 25, 2017 | |
99.2 | Dodd-Frank Act Stress Test Results Disclosure dated October 25, 2017 |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: October 25, 2017
CATHAY GENERAL BANCORP | ||
By: | /s/ Heng W. Chen | |
Heng W. Chen | ||
Executive Vice President and | ||
Chief Financial Officer |
EXHIBIT INDEX
Number | Exhibit |
99.1 | Press Release of Cathay General Bancorp dated October 25, 2017 |
99.2 | Dodd-Frank Act Stress Test Results Disclosure dated October 25, 2017 |
Cathay General Bancorp Announces Third Quarter 2017 Results
LOS ANGELES, Oct. 25, 2017 /PRNewswire/ -- Cathay General Bancorp (the "Company", NASDAQ: CATY), the holding company for Cathay Bank, today announced net income of $49.7 million, or $0.61 per share, for the third quarter of 2017.
FINANCIAL PERFORMANCE
| Three months ended | ||||
| September 30, 2017 |
| June 30, 2017 |
| September 30, 2016 |
Net income | $49.7 million |
| $51.4 million |
| $46.1 million |
Basic earnings per common share | $0.62 |
| $0.64 |
| $0.58 |
Diluted earnings per common share | $0.61 |
| $0.64 |
| $0.58 |
Return on average assets | 1.29% |
| 1.48% |
| 1.38% |
Return on average total stockholders' equity | 9.77% |
| 10.96% |
| 10.30% |
Efficiency ratio | 41.91% |
| 45.88% |
| 45.05% |
THIRD QUARTER HIGHLIGHTS
"We enjoyed strong growth during the third quarter of 2017. Excluding the loans and deposits from Far East National Bank, our loan growth was $331.5 million, or 11.8% annualized, and our deposit growth was $380.8 million, or 13.0% annualized, for the third quarter of 2017," commented Pin Tai, Chief Executive Officer and President of the Company.
"We recently received final regulatory approval to merge Far East National Bank into Cathay Bank, which will permit additional integration of our operations," added Dunson Cheng, Executive Chairman of the Board of the Company.
THIRD QUARTER INCOME STATEMENT REVIEW
Net income for the quarter ended September 30, 2017, was $49.7 million, an increase of $3.6 million, or 7.8%, compared to net income of $46.1 million for the same quarter a year ago. Diluted earnings per share for the quarter ended September 30, 2017, was $0.61 compared to $0.58 for the same quarter a year ago.
Return on average stockholders' equity was 9.77% and return on average assets was 1.29% for the quarter ended September 30, 2017, compared to a return on average stockholders' equity of 10.30% and a return on average assets of 1.38% for the same quarter a year ago.
Net interest income before provision for credit losses
Net interest income before provision for credit losses increased $29.4 million, or 28.3%, to $133.2 million during the third quarter of 2017 compared to $103.8 million during the same quarter a year ago. The increase was due primarily to an increase in interest income from loans from organic growth and from the acquisition of FENB and a decrease in interest expense from securities sold under agreements to repurchase.
The net interest margin was 3.75% for the third quarter of 2017 compared to 3.36% for the third quarter of 2016 and 3.63% for the second quarter of 2017. The increase from the second quarter of 2017 was primarily the result of interest recoveries and prepayment penalties of $5.6 million, including $4.5 million from the payoff of a loan that had been on nonaccrual status in prior years.
For the third quarter of 2017, the yield on average interest-earning assets was 4.34%, the cost of funds on average interest-bearing liabilities was 0.81%, and the cost of interest-bearing deposits was 0.68%. In comparison, for the third quarter of 2016, the yield on average interest-earning assets was 4.02%, the cost of funds on average interest-bearing liabilities was 0.89%, and the cost of average interest-bearing deposits was 0.70%. The increase in the yield on average interest earning assets was a result of higher interest rates and increases in interest income collected from nonaccrual loans and loan prepayment penalties. The net interest spread, defined as the difference between the yield on average interest-earning assets and the cost of funds on average interest-bearing liabilities, was 3.53% for the quarter ended September 30, 2017, compared to 3.13% for the same quarter a year ago.
Provision/(reversal) for credit losses
There was no provision for credit losses recorded for the third quarter of 2017 or 2016. The provision/(reversal) for credit losses was based on a review of the appropriateness of the allowance for loan losses at September 30, 2017. The following table summarizes the charge-offs and recoveries for the periods indicated:
| Three months ended |
| Nine months ended September 30, | ||||||
| September 30, 2017 |
| June 30, 2017 |
| September 30, 2016 |
| 2017 |
| 2016 |
| (In thousands) | ||||||||
Charge-offs: |
|
|
|
|
|
|
|
|
|
Commercial loans | $ 80 |
| $ 526 |
| $ 3,278 |
| $ 1,810 |
| $ 12,035 |
Real estate loans (1) | 305 |
| - |
| 4,626 |
| 860 |
| 5,830 |
Total charge-offs | 385 |
| 526 |
| 7,904 |
| 2,670 |
| 17,865 |
Recoveries: |
|
|
|
|
|
|
|
|
|
Commercial loans | 575 |
| 335 |
| 2,006 |
| 1,401 |
| 3,720 |
Construction loans | 47 |
| 47 |
| 548 |
| 143 |
| 7,871 |
Real estate loans(1) | 5,489 |
| 410 |
| 343 |
| 6,195 |
| 903 |
Total recoveries | 6,111 |
| 792 |
| 2,897 |
| 7,739 |
| 12,494 |
Net (recoveries)/charge-offs | $ (5,726) |
| $ (266) |
| $ 5,007 |
| $ (5,069) |
| $ 5,371 |
|
|
(1) | Real estate loans include commercial mortgage loans, residential mortgage loans, and equity lines. |
Non-interest income
Non-interest income, which includes revenues from depository service fees, letters of credit commissions, securities gains (losses), wire transfer fees, and other sources of fee income, was $13.0 million for the third quarter of 2017, an increase of $4.2 million, or 47.7%, compared to $8.8 million for the third quarter of 2016, primarily due to the gain of $5.4 million on the acquisition of SinoPac Bancorp that was offset by a decrease in securities gains of $1.7 million from the quarter a year ago.
Non-interest expense
Non-interest expense increased $10.5 million, or 20.7%, to $61.2 million in the third quarter of 2017 compared to $50.7 million in the same quarter a year ago. The increase in non-interest expense in the third quarter of 2017 was primarily due to a $5.0 million increase in salary and employee benefit expenses and a $3.3 million increase in acquisition related expense when compared to the same quarter a year ago. Acquisition related expenses during the third quarter totaled approximately, $3.3 million, including $2.8 million in legal and investment banking fees and $0.5 million in severance and retention expenses. The efficiency ratio was 41.9% in the third quarter of 2017 compared to 45.1% for the same quarter a year ago.
Income taxes
The effective tax rate for the third quarter of 2017 was 41.4% compared to 25.5% for the third quarter of 2016. The third quarter 2017 effective tax rate of 41.4% reflected additional tax expense to increase the full year effective tax rate to 34% compared to the 29% effective tax rate forecasted at June 30, 2017. This adjustment in the third quarter was the result of lower tax credits from the slow deployment of alternative energy investments. Income tax expense for the first quarter of 2017 was also reduced by $2.6 million in benefits from the distribution of restricted stock units and exercises of stock options.
ACQUISITION OF SINOPAC BANCORP
Under the terms of the Stock Purchase Agreement with Bank SinoPac Co. Ltd, the Company purchased all of the issued and outstanding share capital of SinoPac Bancorp for an aggregate purchase price of $351.6 million plus additional post closing payments based on the realization of certain assets of FENB. We issued 926,192 shares of common stock as consideration and the remainder of the consideration is payable in cash. Pursuant to the Stock Purchase Agreement, $100 million of the purchase price will be released 30 days after receipt of regulatory approval for the merger of FENB into Cathay Bank and $35.1 million will be released over a period of three years. SinoPac Bancorp was merged into Cathay General Bancorp on July 17, 2017 with FENB scheduled to merge into Cathay Bank with the surviving bank being Cathay Bank. At the date of acquisition, the total value of assets purchased was $1.2 billion including total gross loans of $703.8 million, investments of $114.3 million, and core deposit intangibles of $7.1 million. The total value of deposits purchased was $813.9 million. The acquisition resulted in a gain of $5.4 million. The purchase accounting adjustments are preliminary and subject to finalization during the one-year measurement period from the date of the acquisition.
BALANCE SHEET REVIEW
Gross loans, excluding loans held for sale, were $12.6 billion at September 30, 2017, an increase of $1.4 billion, or 12.5%, from $11.2 billion at December 31, 2016. The increase was primarily due to increases of $591.8 million, or 10.2%, in commercial mortgage loans, $478.5 million, or 19.6%, in residential mortgage loans, $171.7 million, or 7.6%, in commercial loans, and $143.4 million, or 26.2%, in real estate construction loans. The total loan growth during the third quarter compared to the second quarter 2017 was $1.03 billion, of which $331.5 million was organic loan growth and $694.7 million from loans acquired from FENB. The loan balances and composition at September 30, 2017, compared to December 31, 2016, and to September 30, 2016, are presented below:
| September 30, 2017 |
| December 31, 2016 |
| September 30, 2016 |
| (In thousands) | ||||
Commercial loans | $ 2,419,891 |
| $ 2,248,187 |
| $ 2,248,996 |
Residential mortgage loans | 2,922,537 |
| 2,444,048 |
| 2,329,402 |
Commercial mortgage loans | 6,377,047 |
| 5,785,248 |
| 5,743,991 |
Equity lines | 181,751 |
| 171,711 |
| 170,022 |
Real estate construction loans | 691,486 |
| 548,088 |
| 515,236 |
Installment & other loans | 4,722 |
| 3,993 |
| 2,810 |
|
|
|
|
|
|
Gross loans | $ 12,597,434 |
| $ 11,201,275 |
| $ 11,010,457 |
|
|
|
|
|
|
Allowance for loan losses | (121,535) |
| (118,966) |
| (117,942) |
Unamortized deferred loan fees | (3,424) |
| (4,994) |
| (5,519) |
|
|
|
|
|
|
Total loans, net | $ 12,472,475 |
| $ 11,077,315 |
| $ 10,886,996 |
Loans held for sale | $ - |
| $ 7,500 |
| $ 4,750 |
Total deposits were $12.6 billion at September 30, 2017, an increase of $887 million, or 7.6%, from $11.7 billion at December 31, 2016. The total deposit growth in the third quarter compared to the second quarter 2017 was $1.1 billion, of which $380.8 million was organic deposit growth and $717.5 million from deposits acquired from FENB. The deposit balances and composition at September 30, 2017, compared to December 31, 2016, and to September 30, 2016, are presented below:
| September 30, 2017 |
| December 31, 2016 |
| September 30, 2016 |
| (In thousands) | ||||
Non-interest-bearing demand deposits | $ 2,730,006 |
| $ 2,478,107 |
| $ 2,246,661 |
NOW deposits | 1,379,100 |
| 1,230,445 |
| 1,073,436 |
Money market deposits | 2,370,724 |
| 2,198,938 |
| 2,131,190 |
Savings deposits | 925,312 |
| 719,949 |
| 633,345 |
Time deposits | 5,156,553 |
| 5,047,287 |
| 4,854,064 |
Total deposits | $ 12,561,695 |
| $ 11,674,726 |
| $ 10,938,696 |
ASSET QUALITY REVIEW
At September 30, 2017, total non-accrual loans were $65.4 million, an increase of $15.7 million, or 31.6%, from $49.7 million at December 31, 2016, and an increase of $21.0 million, or 47.3%, from $44.4 million at September 30, 2016. The increase in total non-accrual loans resulted primarily from several construction and commercial real estate loans placed on nonaccrual status.
The allowance for loan losses was $121.5 million and the allowance for off-balance sheet unfunded credit commitments was $4.3 million at September 30, 2017, which represented the amount believed by management to be appropriate to absorb credit losses inherent in the loan portfolio, including unfunded commitments. The $121.5 million allowance for loan losses at September 30, 2017, increased $2.5 million, or 2.1%, from $119.0 million at December 31, 2016. The allowance for loan losses represented 0.96% of period-end gross loans, excluding loans held for sale, and 175.5% of non-performing loans at September 30, 2017. The comparable ratios were 1.06% of period-end gross loans, excluding loans held for sale, and 239.5% of non-performing loans at December 31, 2016. The changes in non-performing assets and troubled debt restructurings at September 30, 2017, compared to December 31, 2016, and to September 30, 2016, are highlighted below:
(Dollars in thousands) | September 30, 2017 |
| December 31, 2016 |
| % Change |
| September 30, 2016 |
| % Change |
Non-performing assets |
|
|
|
|
|
|
|
|
|
Accruing loans past due 90 days or more | $ 3,900 |
| $ - |
| 100 |
| $ - |
| 100 |
Non-accrual loans: |
|
|
|
|
|
|
|
|
|
Construction loans | 14,267 |
| 5,458 |
| 161 |
| 5,507 |
| 159 |
Commercial mortgage loans | 28,379 |
| 20,078 |
| 41 |
| 21,077 |
| 35 |
Commercial loans | 15,942 |
| 15,710 |
| 1 |
| 9,251 |
| 72 |
Residential mortgage loans | 6,763 |
| 8,436 |
| (20) |
| 8,524 |
| (21) |
Total non-accrual loans: | $ 65,351 |
| $ 49,682 |
| 32 |
| $ 44,359 |
| 47 |
Total non-performing loans | 69,251 |
| 49,682 |
| 39 |
| 44,359 |
| 56 |
Other real estate owned | 18,115 |
| 20,070 |
| (10) |
| 20,986 |
| (14) |
Total non-performing assets | $ 87,366 |
| $ 69,752 |
| 25 |
| $ 65,345 |
| 34 |
Accruing troubled debt restructurings (TDRs) | $ 62,358 |
| $ 65,393 |
| (5) |
| $ 86,555 |
| (28) |
Non-accrual loans held for sale | $ - |
| $ 7,500 |
| (100) |
| $ 4,750 |
| (100) |
|
|
|
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|
|
|
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|
Allowance for loan losses | $ 121,535 |
| $ 118,966 |
| 2 |
| $ 117,942 |
| 3 |
|
|
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|
|
|
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|
|
|
Total gross loans outstanding, at period-end (1) | $ 12,597,434 |
| $ 11,201,275 |
| 12 |
| $ 11,010,457 |
| 14 |
|
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Allowance for loan losses to non-performing loans, at period-end (2) | 175.50% |
| 239.45% |
|
|
| 265.88% |
|
|
Allowance for loan losses to gross loans, at period-end (1) | 0.96% |
| 1.06% |
|
|
| 1.07% |
|
|
|
|
(1) | Excludes loans held for sale at period-end. |
(2) | Excludes non-accrual loans held for sale at period-end. |
The ratio of non-performing assets, excluding non-accrual loans held for sale, to total assets was 0.6% at September 30, 2017, compared to 0.5% at December 31, 2016. Total non-performing assets increased $17.6 million, or 25.2%, to $87.4 million at September 30, 2017, compared to $69.8 million at December 31, 2016, primarily due to an increase of $15.7 million, or 31.5%, in non-accrual loans offset by a decrease of $2.0 million, or 9.7%, in other real estate owned.
CAPITAL ADEQUACY REVIEW
At September 30, 2017, the Company's common equity Tier 1 capital ratio of 12.18%, Tier 1 risk-based capital ratio of 12.18%, total risk-based capital ratio of 14.11%, and Tier 1 leverage capital ratio of 10.41%, calculated under the Basel III capital rules, continue to place the Company in the "well capitalized" category for regulatory purposes, which is defined as institutions with a common equity tier 1 capital ratio equal to or greater than 6.5%, a Tier 1 risk-based capital ratio equal to or greater than 8%, a total risk-based capital ratio equal to or greater than 10%, and a Tier 1 leverage capital ratio equal to or greater than 5%. At December 31, 2016, the Company's common equity Tier 1 capital ratio was 12.84%, Tier 1 risk-based capital ratio was 13.85%, total risk-based capital ratio was 14.97%, and Tier 1 leverage capital ratio was 11.57%.
YEAR-TO-DATE REVIEW
Net income for the nine months ended September 30, 2017, was $150.1 million, an increase of $23.0 million, or 18.1%, compared to net income of $127.1 million for the same period a year ago. Diluted earnings per share was $1.86 compared to $1.59 per share for the same period a year ago. The net interest margin for the nine months ended September 30, 2017, was 3.63% compared to 3.39% for the same period a year ago.
Return on average stockholders' equity was 10.46% and return on average assets was 1.39% for the nine months ended September 30, 2017, compared to a return on average stockholders' equity of 9.66% and a return on average assets of 1.29% for the same period of 2016. The efficiency ratio for the nine months ended September 30, 2017, was 43.71% compared to 51.35% for the same period a year ago.
CONFERENCE CALL
Cathay General Bancorp will host a conference call this afternoon to discuss its third quarter 2017 financial results. The call will begin at 3:00 p.m., Pacific Time. Analysts and investors may dial in and participate in the question-and-answer session. To access the call, please dial 1-855-761-3186 and enter Conference ID 88339508. A listen-only live Webcast of the call will be available at www.cathaygeneralbancorp.com and a recorded version is scheduled to be available for replay for 12 months after the call.
ABOUT CATHAY GENERAL BANCORP
Cathay General Bancorp is the holding company for Cathay Bank, a California state-chartered bank and Far East National Bank, a U.S. federally chartered bank. Founded in 1962, Cathay Bank offers a wide range of financial services. Cathay Bank currently operates 34 branches in California, 12 branches in New York State, three in the Chicago, Illinois area, three in Washington State, two in Texas, one in Maryland, one in Massachusetts, one in Nevada, one in New Jersey, one in Hong Kong, and a representative office in Taipei and in Shanghai. Cathay Bank's website is found at www.cathaybank.com. Founded in 1974, Far East National Bank offers a wide range of financial services. Far East National Bank operates nine branches in California, and a representative office in Beijing. Far East National Bank's website is found at www.fareastnationalbank.com. Information set forth on such websites are not incorporated into this press release.
FORWARD-LOOKING STATEMENTS
Statements made in this press release, other than statements of historical fact, are forward-looking statements within the meaning of the applicable provisions of the Private Securities Litigation Reform Act of 1995 regarding management's beliefs, projections, and assumptions concerning future results and events. These forward-looking statements may include, but are not limited to, such words as "aims," "anticipates," "believes," "can," "continue," "could," "estimates," "expects," "hopes," "intends," "may," "plans," "projects," "predicts," "potential," "possible," "optimistic," "seeks," "shall," "should," "will," and variations of these words and similar expressions. Forward-looking statements are based on estimates, beliefs, projections, and assumptions of management and are not guarantees of future performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. Such risks and uncertainties and other factors include, but are not limited to, adverse developments or conditions related to or arising from U.S. and international business and economic conditions; possible additional provisions for loan losses and charge-offs; credit risks of lending activities and deterioration in asset or credit quality; extensive laws and regulations and supervision that we are subject to including potential future supervisory action by bank supervisory authorities; increased costs of compliance and other risks associated with changes in regulation including the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act; higher capital requirements from the implementation of the Basel III capital standards; compliance with the Bank Secrecy Act and other money laundering statutes and regulations; potential goodwill impairment; liquidity risk; fluctuations in interest rates; risks associated with acquisitions and the expansion of our business into new markets; inflation and deflation; real estate market conditions and the value of real estate collateral; environmental liabilities; our ability to compete with larger competitors; our ability to retain key personnel; successful management of reputational risk; natural disasters and geopolitical events; general economic or business conditions in Asia, and other regions where Cathay Bank has operations; failures, interruptions, or security breaches of our information systems; our ability to adapt our systems to technological changes; risk management processes and strategies; adverse results in legal proceedings; certain provisions in our charter and bylaws that may affect acquisition of the Company; changes in accounting standards or tax laws and regulations; market disruption and volatility; restrictions on dividends and other distributions by laws and regulations and by our regulators and our capital structure; issuance of preferred stock; successfully raising additional capital, if needed, and the resulting dilution of interests of holders of our common stock; the soundness of other financial institutions; our ability to consummate and realize the anticipated benefits of our acquisitions, including the recent acquisition of SinoPac Bancorp and Far East National Bank; the risk that integration of SinoPac Bancorp's and Far East National Bank's operations with those of the Company and Cathay Bank will be materially delayed or will be more costly or difficult than expected; the diversion of management's attention from ongoing business operations and opportunities; the challenges of integrating and retaining key employees; and general competitive, economic political, and market conditions and fluctuations.
These and other factors are further described in Cathay General Bancorp's Annual Report on Form 10-K for the year ended December 31, 2016 (Item 1A in particular), other reports filed with the Securities and Exchange Commission ("SEC"), and other filings Cathay General Bancorp makes with the SEC from time to time. Actual results in any future period may also vary from the past results discussed in this press release. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements, which speak to the date of this press release. Cathay General Bancorp has no intention and undertakes no obligation to update any forward-looking statement or to publicly announce any revision of any forward-looking statement to reflect future developments or events, except as required by law.
CATHAY GENERAL BANCORP | ||||||||||
CONSOLIDATED FINANCIAL HIGHLIGHTS | ||||||||||
(Unaudited) | ||||||||||
| ||||||||||
|
| Three months ended |
| Nine months ended September 30, | ||||||
(Dollars in thousands, except per share data) |
| September 30, 2017 |
| June 30, 2017 |
| September 30, 2016 |
| 2017 |
| 2016 |
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FINANCIAL PERFORMANCE |
|
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Net interest income before provision for credit losses |
| $ 133,196 |
| $ 117,352 |
| $ 103,824 |
| $362,662 |
| $307,968 |
Reversal for credit losses |
| - |
| - |
| - |
| (2,500) |
| (15,650) |
Net interest income after reversal for credit losses |
| 133,196 |
| 117,352 |
| 103,824 |
| 365,162 |
| 323,618 |
Non-interest income |
| 12,961 |
| 6,152 |
| 8,811 |
| 25,831 |
| 25,409 |
Non-interest expense |
| 61,248 |
| 56,658 |
| 50,737 |
| 169,792 |
| 171,187 |
Income before income tax expense |
| 84,909 |
| 66,846 |
| 61,898 |
| 221,201 |
| 177,840 |
Income tax expense |
| 35,163 |
| 15,431 |
| 15,808 |
| 71,099 |
| 50,756 |
Net income |
| $ 49,746 |
| $ 51,415 |
| $ 46,090 |
| 150,102 |
| 127,084 |
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Net income per common share |
|
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|
Basic |
| $ 0.62 |
| $ 0.64 |
| $ 0.58 |
| $ 1.87 |
| $ 1.61 |
Diluted |
| $ 0.61 |
| $ 0.64 |
| $ 0.58 |
| $ 1.86 |
| $ 1.59 |
|
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Cash dividends paid per common share |
| $ 0.21 |
| $ 0.21 |
| $ 0.18 |
| $ 0.63 |
| $ 0.54 |
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SELECTED RATIOS |
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|
|
Return on average assets |
| 1.29% |
| 1.48% |
| 1.38% |
| 1.39% |
| 1.29% |
Return on average total stockholders' equity |
| 9.77% |
| 10.96% |
| 10.30% |
| 10.46% |
| 9.66% |
Efficiency ratio |
| 41.91% |
| 45.88% |
| 45.05% |
| 43.71% |
| 51.35% |
Dividend payout ratio |
| 34.11% |
| 32.61% |
| 30.80% |
| 33.64% |
| 33.50% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YIELD ANALYSIS (Fully taxable equivalent) |
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
| 4.34% |
| 4.19% |
| 4.02% |
| 4.21% |
| 4.05% |
Total interest-bearing liabilities |
| 0.81% |
| 0.78% |
| 0.89% |
| 0.79% |
| 0.89% |
Net interest spread |
| 3.53% |
| 3.41% |
| 3.13% |
| 3.42% |
| 3.16% |
Net interest margin |
| 3.75% |
| 3.63% |
| 3.36% |
| 3.63% |
| 3.39% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL RATIOS |
| September 30, 2017 |
| December 31, 2016 |
| September 30, 2016 |
|
|
|
|
Common Equity Tier 1 capital ratio |
| 12.18% |
| 12.84% |
| 12.64% |
|
|
|
|
Tier 1 risk-based capital ratio |
| 12.18% |
| 13.85% |
| 13.67% |
|
|
|
|
Total risk-based capital ratio |
| 14.11% |
| 14.97% |
| 14.78% |
|
|
|
|
Tier 1 leverage capital ratio |
| 10.41% |
| 11.57% |
| 11.91% |
|
|
|
|
|
| . |
|
|
|
|
|
|
|
|
CATHAY GENERAL BANCORP | ||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||
(Unaudited) | ||||||
| ||||||
(In thousands, except share and per share data) |
| September 30, 2017 |
| December 31, 2016 |
| September 30, 2016 |
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
Cash and due from banks |
| $ 167,886 |
| $ 218,017 |
| $ 203,877 |
Federal funds sold |
| 7,000 |
| - |
| - |
Cash and cash equivalents |
| 174,886 |
| 218,017 |
| 203,877 |
Short-term investments and interest bearing deposits |
| 566,059 |
| 967,067 |
| 791,757 |
Securities available-for-sale (amortized cost of $1,364,955 at September 30, 2017,$1,317,012 at December 31, 2016, and $1,283,808 at September 30, 2016) |
|
1,368,487 |
|
1,314,345 |
|
1,298,469 |
Loans held for sale |
| - |
| 7,500 |
| 4,750 |
Loans |
| 12,597,434 |
| 11,201,275 |
| 11,010,457 |
Less: Allowance for loan losses |
| (121,535) |
| (118,966) |
| (117,942) |
Unamortized deferred loan fees, net |
| (3,424) |
| (4,994) |
| (5,519) |
Loans, net |
| 12,472,475 |
| 11,077,315 |
| 10,886,996 |
Federal Home Loan Bank and Federal Reserve Bank stock |
| 30,681 |
| 17,250 |
| 18,900 |
Other real estate owned, net |
| 18,115 |
| 20,070 |
| 20,986 |
Affordable housing investments and alternative energy partnerships, net |
| 298,426 |
| 251,077 |
| 225,535 |
Premises and equipment, net |
| 107,954 |
| 105,607 |
| 106,885 |
Customers' liability on acceptances |
| 12,009 |
| 12,182 |
| 13,339 |
Accrued interest receivable |
| 42,190 |
| 37,299 |
| 31,868 |
Goodwill |
| 372,189 |
| 372,189 |
| 372,189 |
Other intangible assets, net |
| 9,408 |
| 2,949 |
| 3,158 |
Other assets |
| 255,538 |
| 117,902 |
| 120,080 |
|
|
|
|
|
|
|
Total assets |
| $ 15,728,417 |
| $ 14,520,769 |
| $ 14,098,789 |
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
Non-interest-bearing demand deposits |
| $ 2,730,006 |
| $ 2,478,107 |
| $ 2,246,661 |
Interest-bearing deposits: |
|
|
|
|
|
|
NOW deposits |
| 1,379,100 |
| 1,230,445 |
| 1,073,436 |
Money market deposits |
| 2,370,724 |
| 2,198,938 |
| 2,131,190 |
Savings deposits |
| 925,312 |
| 719,949 |
| 633,345 |
Time deposits |
| 5,156,553 |
| 5,047,287 |
| 4,854,064 |
Total deposits |
| 12,561,695 |
| 11,674,726 |
| 10,938,696 |
|
|
|
|
|
|
|
Securities sold under agreements to repurchase |
| 100,000 |
| 350,000 |
| 350,000 |
Advances from the Federal Home Loan Bank |
| 595,000 |
| 350,000 |
| 700,000 |
Other borrowings for affordable housing investments |
| 17,518 |
| 17,662 |
| 17,705 |
Long-term debt |
| 119,136 |
| 119,136 |
| 119,136 |
Acceptances outstanding |
| 12,009 |
| 12,182 |
| 13,339 |
Deferred payments from acquisition |
| 136,056 |
| - |
| - |
Other liabilities |
| 218,304 |
| 168,524 |
| 166,474 |
Total liabilities |
| 13,759,718 |
| 12,692,230 |
| 12,305,350 |
Commitments and contingencies |
| - |
| - |
| - |
Stockholders' Equity |
|
|
|
|
|
|
Common stock, $0.01 par value, 100,000,000 shares authorized,89,027,259 issued and 80,816,616 outstanding at September 30, 2017,87,820,920 issued and 79,610,277 outstanding at December 31, 2016, and87,090,319 issued and 78,879,676 outstanding at September 30, 2016 |
|
890 |
|
878 |
|
871 |
Additional paid-in-capital |
| 932,521 |
| 895,480 |
| 886,081 |
Accumulated other comprehensive income/(loss), net |
| (217) |
| (3,715) |
| 1,903 |
Retained earnings |
| 1,275,094 |
| 1,175,485 |
| 1,144,173 |
Treasury stock, at cost (8,210,643 shares at September 30, 2017, at December 31, 2016, and at September 30, 2016) |
|
(239,589) |
|
(239,589) |
|
(239,589) |
|
|
|
|
|
|
|
Total equity |
| 1,968,699 |
| 1,828,539 |
| 1,793,439 |
Total liabilities and equity |
| $ 15,728,417 |
| $ 14,520,769 |
| $ 14,098,789 |
|
|
|
|
|
|
|
Book value per common share |
| $ 24.24 |
| $ 22.80 |
| $ 22.57 |
Number of common shares outstanding |
| 80,816,616 |
| 79,610,277 |
| 78,879,676 |
CATHAY GENERAL BANCORP | |||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||
(Unaudited) | |||||||
| |||||||
|
| Three months ended |
| Nine months ended September 30, | |||
|
| September 30, 2017 | June 30, 2017 | September 30, 2016 |
| 2017 | 2016 |
|
| (In thousands, except share and per share data) | |||||
INTEREST AND DIVIDEND INCOME |
|
|
|
|
|
|
|
Loan receivable, including loan fees |
| $ 146,383 | $ 129,836 | $ 118,500 |
| $ 401,129 | $ 349,212 |
Investment securities |
| 5,692 | 4,719 | 4,850 |
| 14,817 | 16,974 |
Federal Home Loan Bank and Federal Reserve Bank stock |
| 607 | 298 | 393 |
| 1,317 | 1,122 |
Federal funds sold and securities purchased under agreements to resell |
|
108 |
- |
- |
|
108 |
- |
Deposits with banks |
| 1,288 | 776 | 412 |
| 3,140 | 1,094 |
|
|
|
|
|
|
|
|
Total interest and dividend income |
| 154,078 | 135,629 | 124,155 |
| 420,511 | 368,402 |
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
Time deposits |
| 11,678 | 10,769 | 10,701 |
| 33,429 | 32,177 |
Other deposits |
| 5,101 | 4,698 | 4,212 |
| 14,245 | 11,783 |
Securities sold under agreements to repurchase |
| 874 | 1,065 | 3,828 |
| 3,489 | 11,696 |
Advances from Federal Home Loan Bank |
| 872 | 305 | 134 |
| 1,465 | 442 |
Long-term debt |
| 1,456 | 1,440 | 1,456 |
| 4,320 | 4,336 |
Deferred payments from acquisition |
| 901 | - | - |
| 901 | - |
|
|
|
|
|
|
|
|
Total interest expense |
| 20,882 | 18,277 | 20,331 |
| 57,849 | 60,434 |
|
|
|
|
|
|
|
|
Net interest income before reversal for credit losses |
| 133,196 | 117,352 | 103,824 |
| 362,662 | 307,968 |
Reversal for credit losses |
| - | - | - |
| (2,500) | (15,650) |
|
|
|
|
|
|
|
|
Net interest income after reversal for credit losses |
| 133,196 | 117,352 | 103,824 |
| 365,162 | 323,618 |
|
|
|
|
|
|
|
|
NON-INTEREST INCOME |
|
|
|
|
|
|
|
Securities (losses)/gains, net |
| 24 | 3 | 1,692 |
| (439) | 3,141 |
Letters of credit commissions |
| 1,302 | 1,193 | 1,212 |
| 3,618 | 3,698 |
Depository service fees |
| 1,407 | 1,344 | 1,401 |
| 4,259 | 4,109 |
Gain from acquisition |
| 5,440 | - | - |
| 5,440 | - |
Other operating income |
| 4,788 | 3,612 | 4,506 |
| 12,953 | 14,461 |
|
|
|
|
|
|
|
|
Total non-interest income |
| 12,961 | 6,152 | 8,811 |
| 25,831 | 25,409 |
|
|
|
|
|
|
|
|
NON-INTEREST EXPENSE |
|
|
|
|
|
|
|
Salaries and employee benefits |
| 27,913 | 26,145 | 22,881 |
| 79,929 | 71,313 |
Occupancy expense |
| 5,312 | 4,722 | 4,734 |
| 14,733 | 13,587 |
Computer and equipment expense |
| 2,643 | 2,528 | 2,337 |
| 7,895 | 7,360 |
Professional services expense |
| 4,942 | 5,343 | 4,999 |
| 14,541 | 13,981 |
Data processing service expense |
| 2,918 | 2,396 | 2,279 |
| 7,846 | 6,556 |
FDIC and State assessments |
| 2,552 | 2,189 | 2,288 |
| 7,261 | 7,640 |
Marketing expense |
| 2,103 | 1,859 | 1,516 |
| 4,833 | 3,314 |
Other real estate owned expense |
| 369 | 317 | (176) |
| 747 | 612 |
Amortization of investments in low income housing and alternative energy partnerships |
| 5,723 | 6,224 | 5,432 |
| 16,797 | 35,626 |
Amortization of core deposit intangibles |
| 281 | 173 | 172 |
| 626 | 517 |
Acquisition and integration costs |
| 3,277 | - | - |
| 3,277 | - |
Other operating expense |
| 3,215 | 4,762 | 4,275 |
| 11,307 | 10,681 |
|
|
|
|
|
|
|
|
Total non-interest expense |
| 61,248 | 56,658 | 50,737 |
| 169,792 | 171,187 |
|
|
|
|
|
|
|
|
Income before income tax expense |
| 84,909 | 66,846 | 61,898 |
| 221,201 | 177,840 |
Income tax expense |
| 35,163 | 15,431 | 15,808 |
| 71,099 | 50,756 |
Net income |
| $ 49,746 | $ 51,415 | $ 46,090 |
| 150,102 | 127,084 |
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
Basic |
| $ 0.62 | $ 0.64 | $ 0.58 |
| $ 1.87 | $ 1.61 |
Diluted |
| $ 0.61 | $ 0.64 | $ 0.58 |
| $ 1.86 | $ 1.59 |
|
|
|
|
|
|
|
|
Cash dividends paid per common share |
| $ 0.21 | $ 0.21 | $ 0.18 |
| $ 0.63 | $ 0.54 |
Basic average common shares outstanding |
| 80,665,398 | 79,840,188 | 78,865,860 |
| 80,073,249 | 79,147,839 |
Diluted average common shares outstanding |
| 81,404,854 | 80,562,607 | 79,697,069 |
| 80,797,179 | 79,902,846 |
CATHAY GENERAL BANCORP | ||||||||
AVERAGE BALANCES – SELECTED CONSOLIDATED FINANCIAL INFORMATION | ||||||||
(Unaudited) | ||||||||
| ||||||||
| Three months ended |
| ||||||
(In thousands) | September 30, 2017 |
| June 30, 2017 |
| September 30, 2016 | |||
|
|
|
|
|
|
|
|
|
Interest-earning assets | Average Balance | Average
|
| Average Balance | Average
|
| Average Balance | Average
|
Loans (1) | $12,317,720 | 4.71% |
| $11,388,056 | 4.57% |
| $10,670,253 | 4.42% |
Taxable investment securities | 1,396,859 | 1.61% |
| 1,260,646 | 1.50% |
| 1,303,598 | 1.48% |
FHLB and FRB stock | 32,369 | 7.44% |
| 17,250 | 6.93% |
| 17,268 | 9.05% |
Federal funds sold and securities purchased under agreements to resell |
35,707 |
1.20% |
|
- |
- |
|
- |
- |
Deposits with banks | 292,595 | 1.75% |
| 302,224 | 1.03% |
| 294,292 | 0.56% |
|
|
|
|
|
|
|
|
|
Total interest-earning assets | $14,075,250 | 4.34% |
| $12,968,176 | 4.19% |
| $12,285,411 | 4.02% |
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
Interest-bearing demand deposits | $ 1,349,508 | 0.17% |
| $ 1,260,574 | 0.17% |
| $ 1,060,065 | 0.17% |
Money market deposits | 2,496,548 | 0.63% |
| 2,304,586 | 0.66% |
| 2,117,831 | 0.66% |
Savings deposits | 942,452 | 0.24% |
| 794,450 | 0.20% |
| 627,912 | 0.16% |
Time deposits | 4,939,189 | 0.94% |
| 4,722,920 | 0.91% |
| 4,651,593 | 0.92% |
Total interest-bearing deposits | $ 9,727,697 | 0.68% |
| $ 9,082,530 | 0.68% |
| $ 8,457,401 | 0.70% |
Securities sold under agreements to repurchase | 109,239 | 3.17% |
| 150,000 | 2.85% |
| 378,261 | 4.03% |
Other borrowed funds | 324,581 | 2.17% |
| 103,538 | 1.18% |
| 107,203 | 0.50% |
Long-term debt | 119,136 | 4.85% |
| 119,136 | 4.85% |
| 119,136 | 4.86% |
Total interest-bearing liabilities | 10,280,653 | 0.81% |
| 9,455,204 | 0.78% |
| 9,062,001 | 0.89% |
|
|
|
|
|
|
|
|
|
Non-interest-bearing demand deposits | 2,714,244 |
|
| 2,440,181 |
|
| 2,254,123 |
|
|
|
|
|
|
|
|
|
|
Total deposits and other borrowed funds | $12,994,897 |
|
| $11,895,385 |
|
| $11,316,124 |
|
|
|
|
|
|
|
|
|
|
Total average assets | $15,354,123 |
|
| $13,964,206 |
|
| $13,263,385 |
|
Total average equity | $ 2,020,224 |
|
| $ 1,882,454 |
|
| $ 1,779,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended, |
|
|
| ||||
(In thousands) | September 30, 2017 |
| September 30, 2016 |
|
| |||
|
|
|
|
|
|
|
|
|
Interest-earning assets | Average Balance | Average
|
| Average Balance | Average
|
|
|
|
Loans (1) | $11,668,814 | 4.60% |
| $10,468,328 | 4.46% |
|
|
|
Taxable investment securities | 1,297,789 | 1.52% |
| 1,384,019 | 1.64% |
|
|
|
FHLB and FRB stock | 22,345 | 7.88% |
| 17,256 | 8.69% |
|
|
|
Federal funds sold and securities purchased under agreements to resell |
12,033 |
1.20% |
|
- |
- |
|
|
|
Deposits with banks | 359,579 | 1.17% |
| 272,690 | 0.54% |
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets | $13,360,560 | 4.21% |
| $12,142,293 | 4.05% |
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
Interest-bearing demand deposits | $ 1,282,904 | 0.17% |
| $ 1,013,129 | 0.17% |
|
|
|
Money market deposits | 2,359,871 | 0.64% |
| 2,020,725 | 0.65% |
|
|
|
Savings deposits | 817,540 | 0.20% |
| 626,200 | 0.16% |
|
|
|
Time deposits | 4,840,293 | 0.92% |
| 4,752,938 | 0.90% |
|
|
|
Total interest-bearing deposits | $ 9,300,608 | 0.69% |
| $ 8,412,992 | 0.70% |
|
|
|
Securities sold under agreements to repurchase | 149,267 | 3.13% |
| 392,701 | 3.98% |
|
|
|
Other borrowed funds | 177,372 | 1.78% |
| 119,348 | 0.49% |
|
|
|
Long-term debt | 119,136 | 4.85% |
| 119,136 | 4.86% |
|
|
|
Total interest-bearing liabilities | 9,746,383 | 0.79% |
| 9,044,177 | 0.89% |
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing demand deposits | 2,542,754 |
|
| 2,131,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits and other borrowed funds | $12,289,137 |
|
| $11,175,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets | $14,443,734 |
|
| $13,109,225 |
|
|
|
|
Total average equity | $ 1,918,266 |
|
| $ 1,757,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Yields and interest earned include net loan fees. Non-accrual loans are included in the average balance. |
CONTACT: Heng W. Chen, (626) 279-3652
Exhibit 99.2
Cathay General Bancorp & Cathay Bank
Dodd-Frank Act Stress Test
Results Disclosure
October 25, 2017
Overview
Cathay General Bancorp was incorporated in 1990 under the laws of the State of Delaware (“Bancorp”). We are the holding company of Cathay Bank, a California state-chartered commercial bank, seven limited partnerships investing in affordable housing investments in which the Bank is the sole limited partner, GBC Venture Capital, Inc., and Asia Realty Corp. We also own 100% of the common stock of five statutory business trusts created for the purpose of issuing capital securities. We are regulated as a bank holding company by the Board of Governors of the Federal Reserve System (“Federal Reserve”). Cathay Bank is regulated as a California commercial bank by the California Department of Business Oversight (“DBO”) and the Federal Deposit Insurance Corporation (“FDIC”). In this disclosure, the term “Bancorp” refers to Cathay General Bancorp and the term “Bank” refers to Cathay Bank. The terms “Company,” “we,” “us,” and “our” refer to Bancorp and the Bank collectively.
Bancorp and the Bank are required to conduct annual stress testing pursuant to the requirements of 12 CFR Part 252 and 12 CFR Part 325, respectively (known as the Dodd-Frank Act Stress Test or “DFAST”). The Company conducted the 2017 severely adverse scenario stress test using the severely adverse economic scenario provided by the Federal Reserve in the 2017 Supervisory Scenarios for Annual Stress Tests Required under the Dodd-Frank Act Stress Testing Rules and the Capital Plan Rule.
The Company’s capital ratios are projected to significantly exceed the regulatory minimums for adequately capitalized financial institutions throughout the nine-quarter hypothetical Supervisory Severely Adverse Scenario.
Supervisory Severely Adverse Scenario
The Supervisory Severely Adverse Scenario is characterized by a severe global recession that is accompanied by a period of heightened stress in corporate loan markets and commercial real estate markets.
In this scenario, the level of U.S. real GDP begins to decline in the first quarter of 2017 and reaches a trough in the second quarter of 2018 that is about 6½ percent below the pre-recession peak. The unemployment rate increases by about 5¼ percentage points, to 10 percent, by the third quarter of 2018. Headline consumer price inflation falls to about 1¼ percent at an annual rate by the second quarter of 2017 and then rises to about 1¾ percent at an annual rate by the middle of 2018.
As a result of the severe decline in real activity, short-term Treasury rates fall and remain near zero through the end of the scenario period. The 10-year Treasury yield drops to ¾ percent in the first quarter of 2017, rising gradually thereafter to around 1½ percent by the first quarter of 2019 and to about 1¾ percent by the first quarter of 2020. Financial conditions in corporate and real estate lending markets are stressed severely. The spread between yields on investment-grade corporate bonds and yields on long-term Treasury securities widens to about 5¾ percentage points by the end of 2017, an increase of 3½ percentage points relative to the fourth quarter of 2016. The spread between mortgage rates and 10-year Treasury yields widens to over 3½ percentage points over the same time period.
1
Asset prices drop sharply in this scenario. Equity prices fall by 50 percent through the end of 2017, accompanied by a surge in equity market volatility, which approaches the levels attained in 2008. House prices and commercial real estate prices also experience large declines, with house prices and commercial real estate prices falling by 25 percent and 35 percent, respectively, through the first quarter of 2019.
The international component of this scenario features severe recessions in the euro area, the United Kingdom, and Japan and a marked growth slowdown in developing Asia. As a result of the sharp contraction in economic activity, all foreign economies included in the scenario experience a decline in consumer prices. As in this year’s adverse scenario, the U.S. dollar appreciates against the euro, the pound sterling, and the currencies of developing Asia but depreciates modestly against the yen because of flight-to-safety capital flows.
Risk Types and Summary of Methodologies
Identification of key risks is a core component of our capital planning and stress testing framework. In developing the DFAST methodology, significant risks were assessed including, but not limited to, the following risk types:
· | Interest Rate Risk – Interest rate risk is the risk to earnings or capital that arises from the movement in interest rates. Components of interest rate risk include repricing risk caused by the differences between the timing of rate changes and the timing of cash flows, basis risk caused by the change in relationships between yield curves, yield curve risk caused by changing rate relationships across a spectrum of maturities, and option risk caused by interest rate related options embedded in bank products. |
· | Market Risk – Market risk is the risk to earnings or capital that arises from movements in equity values and other market-based values. Interest rate risk, though a component of market risk, is broken out as a separate category above. |
· | Operational Risk – Operational risk is the risk to earnings or capital that arises from operational problems such as inadequate or failed information systems, breaches in internal control, fraud, legal matters, human error, or unforeseen catastrophes that result in unexpected losses. Operational risk also includes the risk of failure to comply with rules and regulations, or compliance risk, and reputational risk. |
· | Model Risk – Model risk is the risk to earnings or capital that arises from the reliance on model results in decision making. |
· | Credit Risk – Credit risk is the risk to earnings or capital that arises from a borrower’s inability to perform under the terms of its loan agreement, or from the inability of issuers of debt securities to meet debt obligations. |
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We use a variety of modeling techniques that utilize the Supervisory Severely Adverse Scenario macroeconomic variables to forecast pre-provision net revenue (“PPNR”), credit losses and pre-tax net income. The models include a combination of statistical econometric models as well as models based on our historical performance during times of economic stress. The models undergo a set of model risk management procedures, including review and challenge by the Board of Directors, Risk Committee of the Board, and members of executive and senior management. The models are also subject to third party validation and internal audit examination. The results of credit loss models, the most significant driver of severely adverse scenario losses, are also compared to challenger model results as an additional check on the quality of model outputs. A summary of the methodologies used in the 2017 DFAST are described below.
Pre-provision net revenue
Pre-provision net revenue is forecasted by modeling net interest income, non-interest income and non-interest expense. Net interest income is modeled using a dynamic interest income and expense simulation tool. Loan and deposit balances are forecasted using a combination of econometric modeling techniques and forecasted interest rates based on the hypothetical Supervisory Severely Adverse Scenario interest rate variables provided by the Federal Reserve, which serve as the basis for modeling net interest income. Prepayment behavior is modeled using a combination of external and internal models, and is used to forecast cash flows and repricing behavior. Non-accrual loan balances are forecasted using statistical models for purposes of calculating interest income on loans. Non-interest income and non-interest expense are modeled based on a variety of techniques, including econometric models where feasible and appropriate, as well as management forecasts based on historical performance and expectations of performance under the hypothetical Supervisory Severely Adverse Scenario.
Credit models
Credit loss models were developed using both econometric models and models based on historical loan loss experience. In certain cases, where projections were not in-line with expectations, management overlays were applied to the results of the econometric models. Forecasted loan losses under the Supervisory Severely Adverse Scenario are consistent with management expectation and are directionally in-line with the severity of the Supervisory Severely Adverse Scenario and the results of challenger models. The Company models the allowance for loan and lease losses (“ALLL”) using an econometric modeling approach.
The projected results using the methodologies described above are used to forecast risk weighted assets and capital ratios for the nine-quarter forecast horizon. The instructions for the preparation of DFAST stress testing require the use of risk-based capital rules in effect during the forecasted time period. Accordingly, we have used the Basel III capital rules in the calculation of forecasted capital ratios.
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Summary of Results
The results of the Company’s annual DFAST stress testing under the hypothetical Supervisory Severely Adverse Scenario are summarized in the tables below. It is important to note that these results are based on a hypothetical severely adverse economic scenario that is more severe than management’s expectations and does not represent management’s current forecast of actual future events. The results have been prepared using capital action rules prescribed by the DFAST stress testing rule. These rules require the Company to assume the following capital actions:
· | Common stock dividends in the first quarter of 2017 are equal to the actual dividend amount that was paid in the first quarter of 2017. |
· | Common stock dividends in the second quarter of 2017 through the first quarter of 2019 are reasonably assumed consistent with internal capital needs and projections. |
· | Common stock issuances, conversions, or repurchases in the first quarter of 2017 equal to the actual amount in the first quarter of 2017. |
· | No new issuances of common or preferred stock in the second quarter of 2017 through first quarter of 2019. |
These rules require the Company to assume certain capital actions that may not represent the most likely course of action management would take in a severe economic downturn, and there are no other capital actions included in the forecasts. Capital actions referred to in this disclosure are not consistent with the Company’s planned capital actions. Capital positions are forecasted for each quarter of the forecast horizon by adding current quarter income, less forecasted dividends, to prior quarter ending capital under the prescribed approach. The Company has elected to exclude accumulated other comprehensive income for purposes of calculating regulatory capital under the Basel III approach. Under the Supervisory Severely Adverse scenario, the Company expects to reduce the dividend rate to preserve capital under the stress economic conditions and resulting financial impact. The Company assumes the dividend rate will be reduced from $0.21 to $0.01 per quarter starting from the second quarter of 2017, which will be maintained until the end of the stress testing period.
Bancorp’s capital ratios are projected to significantly exceed the regulatory minimums for adequately capitalized financial institutions under the hypothetical Supervisory Severely Adverse Scenario. Under this scenario, our Common Equity Tier 1 capital ratio decreases by 54 basis points from 12.8% at December 31, 2016 to 12.3% at March 31, 2019.
Cathay General Bancorp Actual Q4 2016 Capital Ratios and Projected Stressed Capital Ratios under the Supervisory Severely Adverse Scenario
Required Regulatory | Actual | Stressed capital ratios | ||||||
Minimum | Q4 2016 | Ending | Minimum | |||||
Common equity tier 1 capital ratio (%)1 | 4.5% | 12.8% | 12.3% | 12.3% | ||||
Tier 1 risk-based capital ratio (%) | 6.0% | 13.9% | 12.3% | 12.3% | ||||
Total risk-based capital ratio (%) | 8.0% | 15.0% | 14.7% | 14.7% | ||||
Tier 1 leverage ratio (%) | 4.0% | 11.6% | 10.2% | 10.1% |
1Actual Q4 2016 Common Equity Tier 1 capital ratio is presented under the Basel III rules as adopted by the Federal Reserve.
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Cathay General Bancorp Actual Q4 2016 Risk-Weighted Assets and Projected Stressed Risk-Weighted Assets under the Supervisory Severely Adverse Scenario ($ in Thousands)
Actual | Stress Projected | |||||||
Q4 2016 | Q1 2019 | |||||||
Risk-Weighted Assets | $ | 11,368,663 | $ | 11,288,628 |
The Bank’s capital ratios are similar to Bancorp’s and are generally subject to the same risks. The primary difference between the Bank’s capital ratios and Bancorp’s capital ratios is from $119 million of trust preferred securities issued by Bancorp, and the related interest expense. The Bank’s capital ratios are projected to significantly exceed the regulatory minimums for adequately capitalized institutions under the Supervisory Severely Adverse Scenario.
Cathay Bank Actual Q4 2016 Capital Ratios and Projected Stressed Capital Ratios under the Supervisory Severely Adverse Scenario
Required Regulatory | Actual | Stressed capital ratios | ||||||
Minimum | Q4 2016 | Ending | Minimum | |||||
Common equity tier 1 capital ratio (%)1 | 4.5% | 13.4% | 12.9% | 12.9% | ||||
Tier 1 risk-based capital ratio (%) | 6.0% | 13.4% | 12.9% | 12.9% | ||||
Total risk-based capital ratio (%) | 8.0% | 14.4% | 14.2% | 14.2% | ||||
Tier 1 leverage ratio (%) | 4.0% | 11.2% | 10.6% | 10.4% |
1Actual Q4 2016 Common Equity Tier 1 capital ratio is presented under the Basel III rules as adopted by the Federal Reserve.
Cathay Bank Actual Q4 2016 Risk-Weighted Assets and Projected Stressed Risk-Weighted Assets under the Supervisory Severely Adverse Scenario ($ in Thousands)
Actual | Stress Projected | |||||||
Q4 2016 | Q1 2019 | |||||||
Risk-Weighted Assets | $ | 11,346,260 | $ | 11,268,204 |
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The primary cause for the decrease in capital ratios is the projected nine quarter cumulative loan loss provision of $591 million, exceeding projected pre-provision net revenue of $425 million. Of the $591 million of loan loss provision, $404 million is resulted from projected charge offs and $187 million is resulted from projected additional ALLL needed at the end of each quarter in the nine quarter DFAST horizon. Other significant causes for the decrease in regulatory capital include a decrease to risk weighted assets of $80 million from $11.4 billion at December 31, 2016 to $11.3 billion at March 31, 2019, and $17 million of regulatory disallowed deferred tax assets from net operating loss carry forwards in the Supervisory Severely Adverse Scenario.
Cathay General Bancorp projected net revenue, losses and net income before taxes from Q1 2017 through Q1 2019 under the Supervisory Severely Adverse Scenario
Dollars in | Percentage of | |||
millions | Average Assets %1 | |||
Pre-provision net revenue2 | $425 | 2.9% | ||
Other revenue/(expense) | - | |||
Less: | ||||
Provision | $591 | 4.0% | ||
Realized net losses on securities AFS | - | |||
Other losses/gains | - | |||
Equals: | ||||
Net income/(loss) before taxes | ($166) | -1.1% |
1 | Average assets is the nine quarter average of total assets. |
2 | Pre-provision net revenue includes losses from operational risk events and other real estate owned expenses. |
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A summary of the cumulative loan loss rates by loan segments for the Supervisory Severely Adverse Scenario is provided in the following table:
Dollars | Cumulative Loss | |||||||
Losses by Loan Segments | in Millions | Rates (%)1 | ||||||
Residential Mortgages and HELOCs | $ | 35 | 1.0 | % | ||||
Commercial and Industrial | 143 | 6.5 | % | |||||
Construction (commercial and residential) | 110 | 18.8 | % | |||||
Multifamily | 16 | 2.4 | % | |||||
Commercial Real Estate (excluding construction) | 99 | 2.2 | % | |||||
All Other Loans2 | 1 | 1.0 | % | |||||
Total | $ | 404 | 3.5 | % |
1 | The cumulative loss rate is comptued by divding the nine-quarter cumulative loan losses by segment, by the average loan balances for the nine-quarter period for each loan segment. Ratios are cumulative, not annualized. |
2 | All other loans includes automobile loans, other consumer loans, and loans to depository institutions. |
Important Cautionary Note
These stress test results present certain projected financial measures for Bancorp and the Bank under the hypothetical scenario, models and assumptions that are described above. The economic and financial scenario is more severe than management’s expectations, and the results do not represent management’s current forecast of actual future results. Investors should not rely on the stress test results as being indicative of expected future results.
These disclosures include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. These forward-looking statements include projections under a hypothetical scenario incorporating a set of assumed economic and financial conditions prescribed by our federal banking regulators. Such statements speak as of the date hereof, and we have no intention to update these statements or to publicly announce any revision of any of these forward-looking statements to reflect future developments or events. Our actual financial results will be influenced by future economic and financial conditions and other factors, including those described in our Annual Report on Form 10-K for the year ended December 31, 2016 (Item 1A in particular), and other reports and registration statements filed with the Securities and Exchange Commission from time to time.
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