Cathay General Bancorp — Q1 2020 Form 10-Q
Business context and period. Cathay General Bancorp is the holding company for Cathay Bank, a U.S. commercial bank with operations across several states and in Hong Kong. This unaudited report covers the three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. The quarter and subsequent disclosures are materially shaped by the COVID-19 pandemic.
Financial results and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net income | $46.9 million | $66.7 million in Q1 2019; down 29.7% |
| Diluted EPS | $0.59 | $0.83 in Q1 2019 |
| Net interest income before credit-loss provision | $140.3 million | $143.3 million in Q1 2019; down 2.1% |
| Net interest margin | 3.34% | 3.70% in Q1 2019; unchanged from Q4 2019 |
| Provision for credit losses | $25.0 million | None in Q1 2019 |
| Non-interest income | $5.8 million | $12.9 million in Q1 2019 |
| Non-interest expense | $65.2 million | $71.0 million in Q1 2019 |
| Efficiency ratio | 44.60% | 45.42% in Q1 2019 |
| Total assets | $18.30 billion | $18.09 billion at December 31, 2019 |
| Gross loans / total deposits | $15.53 billion / $15.09 billion | Loans up 3.0%; deposits up 2.7% from year-end |
| Allowance for loan losses | $148.3 million; 0.95% of gross loans | $123.2 million; 0.82% at year-end |
| Non-performing assets | $67.3 million; 0.4% of assets | $57.2 million; 0.3% at year-end |
| Total stockholders’ equity | $2.31 billion | $2.29 billion at year-end |
Cash flow. Operating activities provided $95.0 million; investing activities used $361.5 million, principally reflecting $458.6 million of net loan growth; financing activities provided $172.7 million. Cash, cash equivalents and restricted cash decreased $93.8 million to $500.0 million.
Debt and liquidity. At quarter-end, borrowings included $495.0 million of Federal Home Loan Bank advances, $12.9 million of short-term borrowings, and $119.1 million of long-term junior subordinated notes. The reported average monthly liquidity ratio was 12.1%, versus 12.9% at year-end. The Bank had a $4.5 billion FHLB credit line and reported $1.4 billion of available-for-sale securities largely available for liquidity or collateral, subject to existing pledges. Bancorp and the Bank exceeded the stated “well capitalized” thresholds: total risk-based capital ratios were 14.12% and 13.86%, respectively; leverage ratios were 10.82% and 11.26%.
Material changes and drivers
- Loan growth was broad-based, including commercial loans, commercial mortgages, residential mortgages and equity lines. Deposits also grew, with money market and interest-bearing demand balances rising.
- Net interest income declined as lower loan yields and lower rates on bank deposits outweighed asset growth; funding costs also rose in dollars, particularly on deposits.
- The $25.0 million credit-loss provision reflected pandemic-related economic deterioration, including $22.0 million of additional allowance attributed to worsening conditions late in the quarter. Net charge-offs were low, with net recoveries of $49,000.
- Non-interest income fell largely because equity securities moved from a $4.2 million gain in Q1 2019 to a $6.1 million loss in Q1 2020. Lower operating expenses included a $4.5 million gain on sale of foreclosed property; amortization of affordable-housing and alternative-energy investments increased $3.1 million.
- Non-accrual loans rose to $53.7 million from $40.5 million at year-end. Total impaired loans were $88.1 million, including $34.4 million of accruing troubled debt restructurings. Non-performing assets increased primarily due to a $12.1 million commercial loan being restructured.
Outlook, risks and notable items
- COVID-19 uncertainty. Management warned that worsening or prolonged economic conditions could increase provisions, delinquencies, defaults, foreclosures and losses, weaken collateral values, slow loan demand and growth, and reduce earnings and liquidity. Lower rates could further pressure net interest income and margin. No specific earnings or full-year financial guidance is provided.
- Borrower relief and exposure. As of May 1, 2020, the Company reported 964 approved PPP loans totaling $242.7 million. It also reported 504 commercial real estate loan modifications totaling approximately $978 million, 46 commercial loan modifications totaling $123.2 million, and 1,094 residential mortgage forbearances totaling $477.7 million. These are post-quarter figures. Loans tied to restaurants, hotels/motels and retail businesses or properties totaled $2.23 billion, or 14% of the loan portfolio at March 31.
- Credit-loss accounting. The Company elected to delay CECL adoption under the CARES Act. It estimated a $14–$18 million one-time retained-earnings adjustment and a $20–$25 million increase in the allowance upon adoption; it also preliminarily estimated a further $5–$15 million provision above the reported $25 million, to be recognized after adoption. These were estimates, not final amounts.
- Capital allocation. The Company suspended its share-repurchase program after buying back 400,000 shares for $12.9 million in Q1. It paid a $0.31 per-share dividend; the Board said future dividends would depend on capital, liquidity and other considerations.
- Other risks and contingencies. Management judged that goodwill was not more likely than not impaired at March 31, but cautioned that prolonged pandemic effects or sustained share-price declines could trigger future impairment. Ordinary-course litigation was not expected by management to have a material adverse effect. The filing also identifies operational, cyber-fraud, market, regulatory and counterparty risks.
Important facts for investors to verify
- Track subsequent credit quality, allowance adequacy, borrower payment performance and the conversion or expiration of pandemic-related deferrals and forbearances.
- Confirm the timing and final financial impact of CECL adoption, including the allowance increase and retained-earnings adjustment.
- Monitor the effect of low interest rates, deposit pricing and loan growth on net interest margin and earnings.
- Assess the condition and concentration of commercial real estate exposures, especially retail and hotel/motel loans, alongside collateral values and modifications.
- Reconcile a filing inconsistency in FHLB maturity disclosures: the Note 11 text says $275 million matures in April 2021, while the MD&A borrowing discussion says April 2020. Verify the correct maturity date and any repayment or refinancing.
- Review liquidity, capital, dividend decisions and any resumption of share repurchases as pandemic conditions evolve.