Cathay General Bancorp — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; filed August 7, 2020. Cathay General Bancorp is the holding company for Cathay Bank. Results are unaudited and reflect the COVID-19 economic disruption.
Financial results and position
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Interest and dividend income | $174.0 million | $192.4 million | Down 9.6% |
| Net interest income, before provision | $134.5 million | $143.4 million | Down 6.2% |
| Provision for credit losses | $25.0 million | $0 | — |
| Non-interest income | $15.6 million | $12.8 million | Up 21.9% |
| Non-interest expense | $67.3 million | $69.5 million | Down 3.2% |
| Net income | $54.3 million | $72.2 million | Down 24.8% |
| Diluted earnings per share | $0.68 | $0.90 | Down |
| Net interest margin | 3.02% | 3.58% | Down 56 basis points |
| Return on average assets / equity | 1.15% / 9.31% | 1.69% / 13.27% | Both down |
| Efficiency ratio | 44.82% | 44.53% | Up 29 basis points |
For the six months ended June 30, net income was $101.2 million versus $138.9 million in 2019, diluted EPS was $1.27 versus $1.73, net interest margin was 3.17% versus 3.64%, and provision for credit losses was $50.0 million versus none. The six-month effective tax rate was 11.1%, compared with 19.2%, primarily reflecting higher tax credits from affordable housing and alternative-energy investments.
Balance sheet at June 30: Total assets were $19.27 billion, up 6.5% from year-end 2019; gross loans were $15.61 billion, up 3.5%; deposits were $16.28 billion, up 10.8%; and stockholders’ equity was $2.34 billion, up $48.2 million from year-end. Cash, due from banks and short-term investments totaled approximately $1.57 billion. Allowance for loan losses was $169.7 million, or 1.09% of gross loans.
Cash flow, six months: Operating activities provided $172.2 million, investing activities used $253.7 million, and financing activities provided $1.06 billion. Cash, cash equivalents and restricted cash increased $979.9 million to $1.57 billion. The filing does not present a conventional revenue subtotal; interest and dividend income is the principal revenue measure shown.
Debt and liquidity: June 30 borrowings included $230 million of FHLB advances and $119.1 million of long-term subordinated debt; there were no short-term borrowings. The company reported a 15.2% average monthly liquidity ratio, an FHLB credit line of $4.6 billion, and stated it believed liquidity was adequate for the next 12 months. Approximately 92% of time deposits mature within one year, creating potential renewal and runoff risk. The Bank and Bancorp exceeded “well capitalized” thresholds; total risk-based capital ratios were 14.54% and 14.81%, respectively.
Material changes and operating developments
- Lower market rates reduced asset yields: Q2 yield on average interest-earning assets fell to 3.91% from 4.81%. Lower loan and securities income drove the decline in net interest income, partly offset by lower funding costs.
- Gross loans grew $532.8 million from year-end, including $261.7 million of Paycheck Protection Program loans. Deposits increased $1.59 billion from year-end, supported by customer liquidity balances and PPP-related funds.
- Non-performing assets rose to $85.2 million from $57.2 million at year-end; non-accrual loans increased to $56.5 million from $40.5 million. Net charge-offs were $3.6 million in Q2, compared with net recoveries of $0.1 million in Q2 2019.
- COVID-19 modifications approved by June 30 included 723 commercial real estate loans totaling approximately $1.53 billion, 81 commercial loans totaling $141.6 million, and 1,198 residential mortgage loans totaling $518.1 million. These deferrals and forbearances may affect future collections, interest income and credit quality.
- The company approved 1,381 PPP loans totaling $261.7 million. It considered these loans generally low credit risk because they are SBA-guaranteed.
- Non-interest income rose in Q2 partly from a $5.8 million equity-security gain and securities gains; for the six months, equity-security results were a $0.3 million net loss versus a $7.4 million gain in 2019.
- The company suspended its share repurchase program amid pandemic uncertainty. It paid $49.3 million in common dividends during the first half and maintained a $0.31-per-share quarterly dividend.
Outlook, risks and unusual items
- Management warned that prolonged low rates could further pressure net interest income, margin and earnings, while weaker economic conditions could raise delinquencies, defaults, collateral losses and provisions. The filing provides no specific earnings or margin guidance.
- Management said the allowance incorporates COVID-19 assumptions but could prove insufficient if the pandemic or economic deterioration is worse or lasts longer than forecast. Retail, hotel/motel and restaurant-related exposures totaled $2.21 billion, or 14% of the loan portfolio.
- The company delayed adoption of the CECL credit-loss standard under the CARES Act. It expected a $10–$12 million cumulative adjustment to retained earnings and a $15–$17 million increase in the allowance at adoption. Preliminary estimates indicated incremental provision amounts of $10–$15 million for Q1 and $5–$10 million for Q2 above provisions under the incurred-loss method; the company said its estimate process remained in progress.
- Interest-rate simulation showed estimated net interest income sensitivity of +11.3% under a +200-basis-point shock, above the company’s stated policy tolerance of plus or minus 5%. Estimated market value of equity increased 6.8% in that scenario; the company’s stated policy tolerance was to limit loss to zero under a 200-basis-point change. Model estimates depend on assumptions and may differ from actual outcomes.
- Management reported no goodwill impairment at June 30 and no material subsequent events through issuance. It considered available-for-sale securities’ unrealized losses temporary and reported no impairment write-downs. Further deterioration could change these assessments.
- Ordinary-course litigation was not expected by management to have a material adverse impact, although outcomes remain uncertain. Disclosure controls were deemed effective, with no material Q2 change in internal control over financial reporting.
Important facts for investors to verify
- Whether pandemic-related loan deferrals transition into delinquencies, non-accruals, charge-offs or additional TDRs—and how the affected hotel, retail and restaurant exposures perform.
- Actual CECL adoption timing and impact compared with the preliminary allowance and retained-earnings estimates.
- Whether loan-loss provisions and reserve coverage remain adequate as non-performing assets rise and economic assumptions evolve.
- How low rates, deposit mix and time-deposit renewals affect net interest margin, funding costs and liquidity.
- Capital, dividends and the suspended buyback program as the company balances shareholder returns with pandemic-related uncertainty.
- Interest-rate risk results and the assumptions behind the reported sensitivity estimates, particularly the +200-basis-point scenario.