Cathay General Bancorp(CATY) - 2020 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Unaudited financial statements detail Cathay General Bancorp's asset growth and net income decline, driven by credit loss provisions Condensed Consolidated Balance Sheets Total assets grew to $19.27 billion, fueled by loan and investment increases, alongside rising liabilities and stockholders' equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $19,267,037 | $18,094,144 | | Cash and short-term investments | $1,573,701 | $593,778 | | Loans, net | $15,434,096 | $14,951,631 | | Total Deposits | $16,281,904 | $14,692,308 | | Total Liabilities | $16,924,589 | $15,799,861 | | Total Stockholders' Equity | $2,342,448 | $2,294,283 | Condensed Consolidated Statements of Operations and Comprehensive Income Net income for Q2 2020 decreased to $54.3 million, primarily due to a $25.0 million provision for credit losses Key Performance Metrics (in thousands, except per share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $134,475 | $143,379 | $274,786 | $286,695 | | Provision for Credit Losses | $25,000 | $0 | $50,000 | $0 | | Net Income | $54,321 | $72,244 | $101,173 | $138,923 | | Diluted EPS | $0.68 | $0.90 | $1.27 | $1.73 | Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity increased by $48.2 million to $2.34 billion, driven by net income, partially offset by dividends and stock repurchases - Key drivers for the change in stockholders' equity in the first six months of 2020 included net income of $101.2 million, offset by cash dividends of $49.3 million and treasury stock purchases of $12.9 million[23] Condensed Consolidated Statements of Cash Flows Net cash increased by $979.9 million, driven by financing activities and deposit growth, despite cash used in investing Cash Flow Summary (Six Months Ended June 30, in thousands) | Cash Flow Category | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $172,231 | $173,523 | | Net cash used for investing activities | ($253,728) | ($814,030) | | Net cash provided by financing activities | $1,061,420 | $597,943 | | Increase/(Decrease) in cash | $979,923 | ($42,564) | Notes to Condensed Consolidated Financial Statements (Unaudited) Notes detail accounting policies, CECL delay, loan portfolio quality, COVID-19 modifications, and the suspended stock repurchase program - The company elected to delay adoption of the CECL model (ASU 2016-13) as permitted by the CARES Act, until the COVID-19 national emergency ends or December 31, 2020[37] - Under the CARES Act, the company is applying guidance to suspend TDR accounting for certain COVID-19 related loan modifications[81][82] - The company suspended its stock repurchase program, with $10.7 million remaining available under the May 2019 program as of June 30, 2020[188] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A details COVID-19's impact, including a $50.0 million credit loss provision, company response, and analysis of financial condition and capital adequacy Impact of and Response to COVID-19 Pandemic COVID-19 led to a $50.0 million credit loss provision, prompting loan modifications, PPP participation, and share repurchase suspension Loan Exposure to Industries Impacted by COVID-19 (as of June 30, 2020) | Industry | Loan Balance ($ in millions) | Percent of Total Portfolio | | :--- | :--- | :--- | | Restaurants | $169.1 | 1% | | Hotels/motels | $295.6 | 2% | | Retail businesses/properties | $1,746.2 | 11% | | Total | $2,210.9 | 14% | - As of June 30, 2020, the company processed 1,381 Paycheck Protection Program (PPP) loans totaling $261.7 million[210] - The company implemented loan modifications on approximately 723 commercial real estate loans totaling $1.5 billion and approved forbearance on 1,198 residential mortgage loans totaling $518.1 million[102][204] Results of Operations Q2 2020 net income fell 24.8% to $54.3 million, driven by a $25.0 million credit loss provision and compressed net interest margin Q2 2020 vs Q2 2019 Performance | Metric | Q2 2020 | Q2 2019 | | :--- | :--- | :--- | | Net Income (millions) | $54.3 | $72.2 | | Diluted EPS | $0.68 | $0.90 | | Return on average assets | 1.15% | 1.69% | | Net interest margin | 3.02% | 3.58% | - A $25.0 million provision for credit losses was recorded in Q2 2020, compared to zero in Q2 2019, due to COVID-19 economic deterioration[229] Balance Sheet Review Total assets grew 6.6% to $19.3 billion, with gross loans and deposits increasing, while non-performing assets and allowance for loan losses also rose - Gross loans increased by $532.8 million (3.5%) to $15.6 billion, including $261.7 million in PPP loans[252] - Non-performing assets increased by 49.0% to $85.2 million, representing 0.4% of total assets at June 30, 2020[258] - The allowance for loan losses increased by $46.5 million (37.7%) to $169.7 million, reflecting COVID-19 related economic deterioration[283] Capital Resources and Liquidity Total equity increased to $2.34 billion, with the company and bank remaining well-capitalized and maintaining strong liquidity Capital Adequacy Ratios (Bancorp) - June 30, 2020 | Ratio | Actual | Minimum Required | | :--- | :--- | :--- | | Common Equity Tier 1 | 12.88% | 7.00% | | Tier 1 Capital | 12.88% | 8.50% | | Total Capital | 14.81% | 10.50% | | Leverage Ratio | 10.46% | 4.00% | - The company paid total cash dividends of $49.3 million in the first six months of 2020, equivalent to $0.62 per share[314] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk, with a 200 bps rate increase estimated to boost net interest income by 11.3% over 12 months Interest Rate Sensitivity Analysis (as of June 30, 2020) | Change in Interest Rate (bps) | Estimated % Change in Net Interest Income (12 months) | | :--- | :--- | | +200 | 11.3% | | +100 | 5.3% | | -100 | -0.3% | | -200 | -0.1% | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - The principal executive and financial officers concluded that the company's disclosure controls and procedures are effective[336] - No material changes in internal control over financial reporting occurred during Q2 2020[337] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course litigation, with management expecting no material adverse financial impact - Management believes any liability from ongoing litigation would not materially adversely impact the company's financial condition, results, or liquidity[339] Item 1A. Risk Factors This section supplements 2019 Form 10-K risk factors with detailed COVID-19 risks, including demand decline, loan defaults, and net interest income impacts - A significant new risk factor addresses the COVID-19 pandemic's expected adverse effects on business and operations due to global economic downturn[342][343] - Specific pandemic risks include decreased demand for banking services, increased credit risk, net interest margin compression, and investment security volatility[345][346][349][350] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company made no common stock repurchases in Q2 2020, with $10.7 million remaining available under the program Issuer Purchases of Equity Securities (Q2 2020) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2020 | 0 | $0.00 | | May 2020 | 0 | $0.00 | | June 2020 | 0 | $0.00 | | Total | 0 | $0.00 | Other Items (Items 3, 4, 5, 6) This section covers remaining disclosures, noting no defaults, mine safety issues, or other information, and lists filed exhibits - No disclosures were made for Item 3 (Defaults Upon Senior Securities), Item 4 (Mine Safety Disclosures), or Item 5 (Other Information)[360][363][365]