Cathay General Bancorp — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; balance-sheet comparisons are with December 31, 2020 unless otherwise noted. The unaudited filing covers Cathay General Bancorp and subsidiaries, including Cathay Bank, a regional bank with branches in several U.S. states and Hong Kong.
Financial performance
| Metric | Q3 2021 | Comparable period |
|---|---|---|
| Net income | $72.4 million | $56.8 million in Q3 2020; up 27.5% |
| Diluted EPS | $0.93 | $0.71 in Q3 2020 |
| Net interest income, before provision | $152.5 million | $137.5 million in Q3 2020; up 10.9% |
| Net interest margin | 3.22% | 3.02% in Q3 2020; 3.24% in Q2 2021 |
| Non-interest income | $12.2 million | $10.0 million in Q3 2020 |
| Non-interest expense | $72.2 million | $76.0 million in Q3 2020 |
| Efficiency ratio | 43.85% | 51.53% in Q3 2020 |
| Return on average assets / equity | 1.45% / 11.61% | 1.18% / 9.53% in Q3 2020 |
For the first nine months, net income was $223.0 million, up 41.1% from $158.0 million; diluted EPS was $2.82 versus $1.98. Net interest income was $442.3 million versus $412.3 million, and net interest margin was 3.22% versus 3.12%. The nine-month efficiency ratio was 44.71%, compared with 46.98%.
Q3 net interest income benefited primarily from lower deposit interest expense. Average earning-asset yield declined to 3.56% from 3.78%, while average funding cost fell to 0.48% from 1.04%. Q3 provision for credit losses was $3.1 million, versus $12.5 million in Q3 2020; the first-nine-month provision was a net reversal of $19.5 million, versus a $62.5 million provision in 2020.
Financial position, liquidity and capital
- Assets and loans: Total assets were $19.86 billion, up 4.3% from year-end. Gross loans were $15.98 billion, up 2.1%; commercial mortgage loans rose 3.7%. Management reported loans excluding PPP loans grew 9.1% annualized during Q3.
- Deposits: Total deposits were $17.01 billion, up $897.5 million (5.6%) from year-end. Non-time deposits increased $686.3 million during Q3, or 25.9% annualized. Time deposits were $5.73 billion, with approximately 96% maturing within one year or less.
- Cash and cash flow: Cash, cash equivalents and restricted cash ended the first nine months at $1.82 billion. Operating cash flow was $237.5 million; investing activities used $428.2 million and financing activities provided $593.7 million.
- Debt: FHLB advances were $20.0 million, down from $150.0 million at year-end. Long-term junior subordinated notes remained $119.1 million; other affordable-housing borrowings were $23.2 million.
- Liquidity: The average monthly liquidity ratio was 18.1%, versus 14.7% at year-end. The Bank had an approved $4.8 billion FHLB credit line and management stated that available sources were expected to meet operating needs over the next 12 months, while noting pandemic-related uncertainty.
- Capital and shareholder returns: Stockholders’ equity was $2.46 billion. Bancorp and Bank capital ratios exceeded regulatory minimums and well-capitalized thresholds. The Company paid $73.3 million in dividends and repurchased $100.7 million of shares during the first nine months; a new $125 million repurchase authorization was approved in September.
Credit quality, changes and unusual items
- Non-performing assets were $78.3 million, or 0.4% of assets, versus $77.6 million at year-end. Non-accrual loans were $68.7 million. The allowance for loan losses was $131.9 million, or 0.83% of gross loans; reported coverage was 180.7% of non-performing loans. Including the $8.1 million reserve for unfunded commitments, the filing reports broader allowance coverage of 191.8%.
- The allowance declined from $166.5 million at year-end. The comparison is affected by the January 2021 adoption of CECL, which reduced retained earnings by $3.1 million after tax and changed allowance measurement; prior-period results were not restated. Management cited improved economic forecasts as contributing to reserve releases, but noted that estimates depend on forecasts and significant judgment.
- COVID-19 exposures included $169.4 million of outstanding PPP loans, with $264.4 million forgiven; six CRE modifications totaling $44.8 million, three commercial modifications totaling $2.8 million, and seven residential mortgage modifications totaling $5.1 million. Management warned that pandemic effects could worsen borrower performance and future credit losses. Retail-related, hotel/motel and restaurant exposures totaled $2.19 billion, reported as 3.6% of the loan portfolio.
- Q3 net interest margin improved year over year but eased from Q2. Non-interest expense fell year over year mainly because amortization of low-income housing and alternative-energy investments was $3.8 million lower. The nine-month effective tax rate rose to 21.3% from 8.6%, in part because 2020 benefited from higher alternative-energy tax credits.
- Available-for-sale securities had $8.1 million of gross unrealized losses at quarter-end, attributed by management primarily to market yields and spreads; no credit-loss allowance was recorded. Accumulated other comprehensive income moved from $5.3 million at year-end to a $0.4 million loss, reflecting securities and hedge valuation changes.
- Q3 included $0.5 million of acquisition, integration and reorganization costs. Nine-month results included $0.7 million of debt-redemption costs. The filing reports no material subsequent events and no material change to previously disclosed risk factors.
Outlook, risks and contingencies
The filing provides no specific earnings, loan-growth or margin guidance. Management described an improving economic backdrop but emphasized uncertainty from COVID-19, borrower and collateral performance, interest-rate movements, deposit competition and the assumptions used in CECL estimates. The company’s interest-rate simulation estimated that an immediate +200-basis-point shock would increase modeled net interest income by 18.2% and market value of equity by 14.5%; the filing cautions that model assumptions are uncertain and actual results may differ. Ordinary-course litigation is disclosed; management did not expect it to have a material adverse impact overall, but acknowledges outcomes are uncertain and a pending or threatened matter could be material.
Important facts for investors to verify
- How loan growth, particularly commercial real estate exposure, and post-pandemic borrower performance affect credit costs and non-performing assets.
- Whether the CECL reserve remains adequate as forecasts change; note the lower allowance versus year-end and the transition-related comparability limitation.
- Deposit retention and repricing as the large near-term time-deposit maturities come due, and the effect on funding costs and net interest margin.
- The assumptions and limits behind the reported interest-rate sensitivity simulations, especially the modeled response to rising rates.
- The effects of share repurchases, dividends, and tax-credit investments on capital, earnings per share, and the effective tax rate.
- Potential outcomes of legal matters and the company’s ability to maintain stated liquidity under adverse conditions.