CATHAY GENERAL BANCORP quarterly report, Q3 FY2020

Full document

Cathay General Bancorp — Q3 2020 Form 10-Q

Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2020. Cathay General Bancorp is the holding company for Cathay Bank, a regional bank operating mainly in the United States, with a branch in Hong Kong and representative offices in Asia. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.

Key financial results and condition

  • Quarterly earnings: Q3 net income was $56.8 million, down 22.0% from $72.8 million in Q3 2019. Diluted EPS was $0.71 versus $0.91. Return on average assets was 1.18% versus 1.65%, and return on average equity was 9.53% versus 12.98%.
  • Year-to-date earnings: Nine-month net income was $158.0 million, down 25.4% from $211.8 million; diluted EPS was $1.98 versus $2.64.
  • Interest income and margins: Q3 interest and dividend income was $172.2 million, compared with $197.8 million. Net interest income before provision was $137.5 million, down 6.5% from $147.0 million. Net interest margin was 3.02%, down from 3.56% a year earlier and unchanged from Q2 2020. Nine-month net interest margin was 3.12% versus 3.61%.
  • Credit provision and expenses: Q3 provision for credit losses was $12.5 million, compared with a $2.0 million reversal in Q3 2019; the provision was down from $25.0 million in Q2 2020. Non-interest expense rose 15.9% year over year to $76.0 million, mainly reflecting a $9.2 million increase in amortization of affordable-housing and alternative-energy investments. The Q3 efficiency ratio increased to 51.53% from 41.67%.
  • Taxes and non-interest income: Q3 non-interest income was $10.0 million versus $10.4 million. The Q3 effective tax rate was 3.7% versus 22.4%, and the nine-month rate was 8.6% versus 20.3%; management attributed the lower 2020 rates primarily to tax credits from low-income-housing and alternative-energy investments.
  • Balance sheet and funding: Total assets were $19.0 billion at September 30, up 5.0% from year-end 2019. Gross loans were $15.57 billion, up 3.3%; deposits were $16.03 billion, up 8.8%. Cash, cash equivalents and restricted cash totaled $1.43 billion at quarter-end. Shareholders’ equity was $2.37 billion.
  • Credit quality: Allowance for loan losses was $179.1 million, or 1.15% of gross loans, versus $123.2 million, or 0.82%, at December 31, 2019. Nonperforming assets increased to $85.0 million from $57.2 million; non-accrual loans rose to $77.2 million from $40.5 million. Allowance for loan losses was 223.8% of nonperforming loans.
  • Cash flow: For the first nine months, operating cash flow was $233.1 million versus $323.7 million in 2019; investing cash outflow was $175.3 million versus $999.7 million; financing cash inflow was $782.4 million versus $900.8 million. Cash, cash equivalents and restricted cash increased $840.3 million, mainly amid deposit growth and liquidity management.
  • Debt and liquidity: At September 30, FHLB advances were $230 million, junior subordinated notes were $119.1 million, and borrowings related to affordable-housing investments were $23.8 million; short-term borrowings were zero. The average monthly liquidity ratio was 16.0%, versus 12.9% at year-end 2019. Management said liquidity was adequate for the next 12 months and reported capital ratios above regulatory “well-capitalized” thresholds.

Material changes versus comparable periods

  • Lower market rates reduced loan and securities yields and contributed to the year-over-year decline in net interest income and margin; lower funding costs partly offset the effect.
  • Credit costs rose substantially: the nine-month provision was $62.5 million versus a $2.0 million reversal in 2019, reflecting pandemic-related economic deterioration and higher specific reserves.
  • Nonperforming assets and non-accrual loans increased materially from year-end 2019, while the allowance-to-nonperforming-loan ratio declined.
  • Deposits increased by $1.34 billion, including growth in non-interest-bearing, NOW and money-market balances; time deposits declined as wholesale time deposits ran off. FHLB advances fell from $670 million at year-end to $230 million.
  • Available-for-sale securities declined to $1.08 billion from $1.45 billion at year-end. The company reported $1.25 million of gross unrealized losses at quarter-end and said it considered them temporary, with no intent or expected need to sell before recovery.

Outlook, risks and unusual items

  • COVID-19 exposure and response: Management warned that prolonged economic weakness could worsen credit quality, collateral values, loan demand, earnings and liquidity. Loans to restaurants, hotels/motels and retail-related businesses totaled $2.21 billion, or 14% of the loan portfolio. The company reported 95 outstanding commercial real-estate modifications totaling $428.1 million, 24 commercial-loan modifications totaling $64.6 million, and residential mortgage and HELOC modifications as well.
  • PPP: The company had 1,437 SBA Paycheck Protection Program loans outstanding, with a current balance of $265.7 million. PPP loans bear 1% interest and are SBA-guaranteed; management viewed them as generally not presenting material credit risk.
  • CECL adoption: The company had elected to delay adoption of the current expected credit loss standard under the CARES Act, until the national emergency ends or December 31, 2020, whichever comes first. It expected an initial retained-earnings adjustment of $10–$12 million and an allowance increase of $15–$17 million. Its preliminary model estimates for quarterly 2020 allowance effects were still in progress and subject to change.
  • Interest-rate sensitivity: The filing’s model estimated that a 200-basis-point rate increase would raise 12-month net interest income by 8.8% and market value of equity by 7.1%; management cautioned that model assumptions and actual outcomes can differ.
  • Capital returns: The company paid $0.31 per share in quarterly dividends. It repurchased no shares in Q3; subsequent to quarter-end, it repurchased 120,000 shares for $2.9 million, with $7.8 million remaining under the repurchase authorization. Management said future dividends and buybacks would be assessed against pandemic-related capital and liquidity needs.
  • Other items and contingencies: Management reported no goodwill impairment in its Q3 assessment and no material subsequent events requiring financial-statement recognition or disclosure. Ordinary-course litigation was not expected by management to have a material adverse impact, but outcomes remain uncertain. The filing provides no specific earnings guidance.

Important facts for investors to verify

  1. Whether pandemic conditions, borrower modifications and exposure to commercial real estate lead to further deterioration in non-accrual loans, charge-offs or required loan-loss provisions.
  2. Final CECL adoption timing and the actual opening-equity and allowance adjustments, which were estimates and still under development.
  3. Whether the large deposit inflow persists, and how time-deposit maturities and potential withdrawals affect liquidity and funding costs.
  4. Whether low interest rates continue to pressure net interest margin and earnings, and how actual performance compares with the filing’s rate-sensitivity model.
  5. How recurring investment-related amortization and tax credits affect reported expenses, effective tax rates and the sustainability of net income.
  6. Capital, dividend and repurchase decisions as the company responds to pandemic uncertainty and evolving credit conditions.