Cathay General Bancorp — Q1 2019 Form 10-Q
Business context and reporting period. Cathay General Bancorp is the holding company for Cathay Bank, a commercial bank operating across several U.S. states and in Hong Kong. This unaudited filing covers the three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net income | $66.7 million | $63.8 million in Q1 2018; up 4.5% |
| Diluted EPS | $0.83 | $0.78 in Q1 2018 |
| Net interest income before credit-loss provision | $143.3 million | $135.3 million in Q1 2018; up 5.9% |
| Net interest margin | 3.70% | 3.75% in Q1 2018; 3.77% in Q4 2018 |
| Total non-interest income | $12.9 million | $5.3 million in Q1 2018 |
| Total non-interest expense | $71.0 million | $61.0 million in Q1 2018; up 16.4% |
| Efficiency ratio | 45.42% | 43.35% in Q1 2018 |
| Total assets | $17.12 billion | $16.78 billion at December 31, 2018 |
| Gross loans | $14.28 billion | $14.00 billion at December 31, 2018; up $281.6 million |
| Total deposits | $14.09 billion | $13.70 billion at December 31, 2018; up $383.9 million |
| Total stockholders’ equity | $2.16 billion | $2.12 billion at December 31, 2018 |
| Cash, cash equivalents and restricted cash | $538.4 million at period-end | Down $61.9 million during the quarter |
- Earnings drivers and margins: Interest income rose $28.1 million year over year, mainly from loan growth and higher loan yields. Interest expense rose $20.1 million, largely because time-deposit expense increased. Average earning-asset yield was 4.85%, while average interest-bearing liability cost was 1.55%.
- Unusual income and expenses: Equity-securities gains were $4.2 million, versus a $3.8 million loss in Q1 2018, contributing substantially to higher non-interest income. Non-interest expense growth included $5.0 million more amortization of affordable-housing and alternative-energy investments, $1.8 million more salaries and benefits, $1.3 million more marketing expense, and a $1.6 million increase in the provision for unfunded commitments.
- Cash flow: Operating activities provided $87.2 million, investing activities used $373.7 million, and financing activities provided $224.6 million. Investing cash use chiefly reflected $281.2 million of net loan growth and purchases of securities. Financing included $383.9 million of net deposit growth, partly offset by net FHLB repayments.
- Credit quality: The allowance for loan losses was $122.6 million, or 0.86% of gross loans. The company recorded no loan-loss provision in Q1 2019, compared with a $3.0 million reversal in Q1 2018; net recoveries were $164,000. Nonperforming assets rose to $69.2 million from $58.3 million at year-end, and non-accrual loans increased to $56.7 million from $41.8 million. The allowance-to-nonperforming-loan ratio was 216.2%; including the off-balance-sheet commitment reserve, the reported allowance-for-credit-losses coverage measure was 223.0%.
- Debt and funding: FHLB advances were $420 million, down from $530 million at year-end; $350 million was due in April 2019. Long-term debt was $174.4 million, including $119.1 million of junior subordinated notes. Time deposits were $7.51 billion, 53.3% of deposits, and about 89% were scheduled to mature within one year.
- Liquidity and capital: Management reported an average monthly liquidity ratio of 12.1% and stated that available funding sources were expected to meet needs over the next 12 months. The Bank had a $6.9 billion approved FHLB credit line and $1.2 billion of unpledged securities available for liquidity or collateral. Bancorp and Bank capital ratios exceeded minimums to be considered well capitalized; total risk-based capital ratios were 14.12% and 14.36%, respectively.
Material changes versus comparable periods
- Net income and diluted EPS increased year over year, but return on average assets declined to 1.61% from 1.65%, and return on average equity to 12.57% from 12.99%.
- Loan growth was concentrated in commercial mortgages, residential mortgages and equity lines; construction loans declined. Deposits increased, but time deposits rose to a larger share of the funding mix.
- The net interest margin and spread narrowed year over year despite higher net interest income, as funding costs increased faster than asset yields.
- Nonperforming assets and non-accrual loans increased from December 2018, while the allowance-to-nonperforming-loan coverage ratio declined from 268.5% at year-end.
- The company adopted the new lease standard on January 1, 2019, recording an operating-lease right-of-use asset of $40.6 million and lease liability of $41.2 million at adoption. At March 31, the reported balances were $38.6 million and $39.5 million, respectively.
Outlook, risks and notable items
- The filing gives no numerical earnings or growth guidance. Management said it expected liquidity to remain adequate over the next 12 months and expected time-deposit maturities to result in no significant outflow based on historical experience, while acknowledging competitive pressure.
- Interest-rate simulation showed estimated net interest income changes of +8.9% for a 200-basis-point rise and -19.3% for a 200-basis-point decline. Both exceed the company’s stated policy tolerance of plus or minus 5% under a 200-basis-point move; the filing cautions that model estimates depend on assumptions and may differ from actual results.
- Management identified loan-loss allowance estimates as a significant accounting judgment. The forthcoming CECL credit-loss standard was still under evaluation, and its financial-statement impact had not been determined.
- Other stated risks include economic and credit deterioration, interest-rate and liquidity exposure, regulatory requirements, information-system disruption or security breaches, and legal proceedings. Management said ordinary-course litigation was not expected to materially affect the company; the filing reported no material change to previously disclosed risk factors.
- After quarter-end, the company completed its prior $45 million repurchase program and announced a new program authorizing up to $50 million in repurchases. During Q1 it repurchased 233,700 shares for $8.6 million and paid a $0.31-per-share dividend.
- Management reported effective disclosure controls and no material first-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether higher non-accrual loans and nonperforming assets persist or result in increased provisions, charge-offs, or reduced coverage.
- Whether deposit pricing and the large near-term time-deposit maturity schedule put further pressure on funding costs and net interest margin.
- How actual performance compares with the interest-rate simulation, particularly the modeled downside under falling rates.
- The quality, collateral values and repayment performance of the loan portfolio, including commercial real estate exposure and construction loans with interest reserves.
- The eventual CECL implementation impact, and the pace and capital effects of the newly authorized share repurchase program and dividend policy.