Cathay General Bancorp — Q2 2019 Form 10-Q
Business and period: Cathay General Bancorp is the holding company for Cathay Bank, a community and commercial bank operating across several U.S. states and Asia. This unaudited quarterly report covers the three and six months ended June 30, 2019; balance-sheet comparisons are with December 31, 2018. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Net interest income before credit-loss provision/reversal | $143.4 million | $140.0 million | +2.4% |
| Non-interest income | $12.8 million | $7.8 million | +64.1% |
| Non-interest expense | $69.5 million | $63.1 million | +10.1% |
| Income before tax | $86.6 million | $84.7 million | +2.3% |
| Net income | $72.2 million | $73.7 million | -2.0% |
| Diluted earnings per share | $0.90 | $0.90 | Unchanged |
| Net interest margin | 3.58% | 3.83% | -25 basis points |
Q2 return on average assets was 1.69% versus 1.88%; return on average equity was 13.27% versus 14.51%. The efficiency ratio increased to 44.53% from 42.69%. The effective tax rate was 16.6%, compared with 13.0%.
For the six months, net income was $138.9 million, up 1.0% year over year, and diluted EPS was $1.73 versus $1.68. Net interest income was $286.7 million, up 4.1%; net interest margin was 3.64% versus 3.79%. There was no loan-loss provision or reversal in Q2 2019; the first half of 2018 included a $3.0 million reversal.
Balance sheet, liquidity, and capital
- Assets: $17.61 billion at June 30, up 4.9% from year-end 2018.
- Loans: Gross loans were $14.59 billion, up 4.3% from year-end. Residential mortgages rose 7.4%, commercial mortgages 3.3%, and equity lines 21.0%. The company separately reported Q2 loan growth of $316.1 million, or 9.0% annualized.
- Deposits: $14.36 billion, up 4.8% from year-end; Q2 growth was $276.6 million, or 8.1% annualized. Time deposits rose to 53.7% of deposits from 49.0%. About 90% of time deposits mature within one year or less.
- Funding and debt: FHLB advances were $550.0 million; long-term debt was $169.8 million; other borrowings were $49.7 million. The $119.1 million junior subordinated notes carried a 4.57% weighted-average rate. The $50.6 million U.S. Bank term loan bears a floating rate and is scheduled to mature in 2020.
- Cash flow: For the first half, operating activities provided $173.5 million, investing activities used $814.0 million, and financing activities provided $597.9 million. Cash, cash equivalents, and restricted cash declined $42.6 million to $557.7 million.
- Liquidity: Average monthly liquidity ratio was 12.8%, versus 12.0% at year-end. The Bank had a $4.3 billion FHLB credit line, with $550.0 million of advances outstanding, and $24.3 million of Federal Reserve discount-window capacity. Management said liquidity sources should be adequate for the next 12 months.
- Capital: Bancorp’s CET1 ratio was 12.26% and total capital ratio 13.92%; the Bank’s were 13.15% and 14.02%, respectively. Both exceeded the stated well-capitalized thresholds. Total stockholders’ equity was $2.20 billion.
Material changes and notable items
- Interest income increased, led by loan growth and higher loan yields, but funding costs rose substantially. Q2 interest expense increased to $49.1 million from $27.5 million, principally reflecting higher time-deposit balances and costs. Average cost of interest-bearing deposits rose to 1.58% from 0.92%.
- Equity securities produced a $3.2 million Q2 gain, compared with a $1.1 million loss a year earlier; first-half gains were $7.4 million versus a $5.0 million loss. This contributed materially to higher non-interest income.
- Q2 non-interest expense rose mainly due to salaries and benefits (+$2.6 million), affordable-housing and alternative-energy investment amortization (+$4.0 million), and a $2.2 million increase in provision for unfunded commitments; lower marketing expense partly offset these increases.
- Non-performing assets rose to $80.5 million from $58.3 million at year-end, and equaled 0.5% of assets. Non-accrual loans increased to $54.7 million from $41.8 million; loans past due 90 days or more and still accruing were $14.5 million. The allowance for loan losses was $122.7 million, or 0.84% of gross loans; its coverage of non-performing loans declined from 268.5% to 177.2%.
- Commercial real estate loans were 274% of risk-based capital, below the Bank’s 400% internal limit. Management reported no concentration to multiple borrowers in similar activities exceeding 10% of total loans.
- The company adopted the new lease standard in 2019, recognizing a $36.5 million operating-lease right-of-use asset and $37.9 million lease liability at June 30. It was still evaluating the expected effect of the new expected-credit-loss standard (CECL), effective in 2020.
- Share repurchases totaled $31.6 million in the first half, including purchases under the new $50 million program announced in May; $28.3 million remained authorized at quarter-end. Cash dividends were $0.31 per share per quarter.
Outlook, risks, and contingencies
The filing provides no specific earnings, margin, loan-growth, or deposit-growth guidance. Management expected deposit maturities to create some competitive runoff, but anticipated that outflows would not be significant and could be replenished through normal deposit growth. These are forward-looking expectations, not guarantees.
Principal disclosed risks include economic and credit deterioration, additional loan-loss provisions and charge-offs, interest-rate and liquidity exposure, deposit competition, regulatory and compliance requirements, and operational, technology, legal, and market risks. The company reported ordinary-course litigation and said any resulting liability was not expected to materially harm consolidated financial condition, results, or liquidity; ultimate losses could differ from recorded accruals. It also had $117.3 million of unfunded affordable-housing and alternative-energy investment commitments. Management considered unrealized losses on available-for-sale securities temporary and reported no intent or expected requirement to sell the affected securities before recovery.
Interest-rate simulations showed estimated net interest income sensitivity of +6.4% under a 200-basis-point rate rise and -17.6% under a 200-basis-point decline. The filing cautions that the model depends on assumptions and actual outcomes may differ. Management reported effective disclosure controls and no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan delinquencies, non-accrual loans, non-performing assets, and allowance coverage continue to worsen or stabilize.
- Whether deposit pricing and the high share of time deposits continue to pressure net interest margin, and how deposit maturities affect funding costs and liquidity.
- How much reported earnings depend on equity-security valuation gains, tax credits, and affordable-housing and alternative-energy investments and related amortization.
- The company’s eventual CECL implementation impact and any resulting change in allowance levels or credit-loss expense.
- Capital and liquidity trends, scheduled FHLB and term-loan maturities, and continued capacity for dividends and share repurchases.