Cathay General Bancorp — Q1 2021 Form 10-Q
Business context and reporting period. Cathay General Bancorp is the holding company for Cathay Bank, a U.S. regional bank with operations across several states and in Hong Kong. This unaudited report covers the quarter ended March 31, 2021; income and cash-flow comparisons are to Q1 2020, while balance-sheet comparisons are generally to December 31, 2020. Amounts below are U.S. dollars.
Financial performance and condition
| Metric | Q1 2021 / March 31, 2021 | Comparable period / change |
|---|---|---|
| Net interest income before provision | $141.8 million | $140.3 million in Q1 2020, up 1.1% |
| Provision for credit losses | $13.6 million reversal | $25.0 million provision in Q1 2020 |
| Net interest income after provision | $155.4 million | $115.3 million in Q1 2020 |
| Non-interest income / expense | $10.0 million / $71.4 million | $5.8 million / $65.2 million in Q1 2020 |
| Net income; diluted EPS | $73.4 million; $0.92 | $46.9 million; $0.59 in Q1 2020 |
| Net interest margin | 3.20% | 3.34% in Q1 2020; 3.12% in Q4 2020 |
| Return on average assets / equity | 1.57% / 12.18% | 1.05% / 8.12% in Q1 2020 |
| Efficiency ratio | 47.03% | 44.60% in Q1 2020 |
| Total assets | $19.23 billion | $19.04 billion at December 31, 2020 |
| Gross loans / deposits | $15.65 billion / $16.35 billion | Loans were nearly flat; deposits rose 1.5% from year-end |
| Allowance for loan losses | $147.3 million, or 0.94% of gross loans | $166.5 million at year-end; coverage of non-performing loans fell to 152.5% from 229.2% |
| Borrowings | $75.0 million FHLB advances; $119.1 million long-term debt | FHLB advances were $150.0 million at year-end; long-term debt was unchanged |
| Stockholders’ equity | $2.46 billion | Up $45.1 million from year-end |
Cash and due from banks plus short-term investments were approximately $1.75 billion at quarter-end. Net cash provided by operating activities was $91.6 million; financing activities provided $144.3 million. The cash-flow statement displays investing cash flow of positive $97.4 million but labels it “used,” an apparent inconsistency in the filing text. Cash, cash equivalents and restricted cash ended at $1.75 billion, versus $1.42 billion at the start of the period.
Both Bancorp and the Bank exceeded regulatory well-capitalized thresholds. At March 31, Bancorp’s common equity Tier 1 ratio was 14.00%, total capital ratio 15.82%, and leverage ratio 11.11%. The average monthly liquidity ratio was 15.5%, compared with 14.7% at year-end.
Material changes versus comparable periods
- Net income rose 56.5% year over year, primarily reflecting the credit-loss reversal and lower interest expense. The reversal followed improved economic forecasts; Q1 2021 also included $7.8 million of net charge-offs.
- Net interest margin declined year over year as asset yields fell, although it improved from Q4 2020. Average yield on interest-earning assets was 3.68%, versus 4.44% in Q1 2020; average funding cost fell to 0.67% from 1.49%.
- Non-performing assets increased to $101.5 million from $77.6 million at year-end, and the ratio to total assets rose to 0.5% from 0.4%. Non-accrual loans increased to $94.4 million from $67.7 million.
- Non-interest expense increased 9.5%, including higher compensation, a $1.0 million contribution to the Cathay Bank Foundation to combat anti-Asian American hate crimes, and $0.7 million of debt-redemption costs. The comparison was also affected by $4.1 million of other-real-estate-owned income in Q1 2020.
- Deposits increased, led by money market, savings and non-interest-bearing balances, while time deposits declined. Gross loans were essentially unchanged from year-end.
Outlook, risks and unusual items
- Outlook: The filing provides no formal earnings or financial guidance. Management said it believed capital and liquidity were sufficient for the next 12 months, while noting uncertainty around the duration and effects of COVID-19.
- Credit and COVID-19: Management cautioned that worsening or longer-lasting economic conditions could increase expected credit losses and impair asset quality. Reported exposures in restaurants, hotels/motels and retail-related lending totaled $2.18 billion, or 14% of loans. COVID-19 modifications outstanding included $56.1 million across seven CRE loans and $38.0 million across six commercial loans; residential mortgage modifications were $31.4 million.
- PPP: At quarter-end, 2,770 PPP loans had a current balance of $334.4 million, and $71.9 million had been forgiven. The Company considers these SBA-guaranteed loans generally not to represent material credit risk.
- Allowance methodology: The Company adopted CECL on January 1, 2021. Adoption increased the loan allowance by $0.6 million and the unfunded-commitment reserve by $0.5 million, with an after-tax $0.8 million reduction to opening retained earnings. Estimates depend on economic forecasts and significant management judgment.
- Concentrations and rates: CRE loans were 271% of Bank risk-based capital, below the stated 300% supervisory criterion but a material portfolio exposure. The interest-rate simulation estimated that a +200-basis-point shock would increase modeled net interest income 16.6%; a −200-basis-point shock would reduce it 1.5%. These are model estimates, not forecasts.
- Other items: A $75 million stock-repurchase program was approved on April 1, 2021, after quarter-end; no shares were repurchased in Q1. The quarterly dividend was $0.31 per share. The Company recorded a $0.7 million debt-redemption cost and a $0.2 million right-of-use asset impairment related to early lease termination.
- Contingencies: Management did not expect ordinary-course litigation to materially affect the Company overall, but acknowledged legal outcomes are uncertain and could have a material adverse effect. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the rise in non-accrual loans and non-performing assets continues, and how collateral values, charge-offs and allowance coverage evolve.
- How sensitive future credit-loss provisions are to changing economic assumptions under the newly adopted CECL methodology.
- Performance and repayment trends for COVID-affected borrowers, CRE exposures and remaining PPP balances.
- Deposit retention and funding costs as time deposits mature; management noted potential runoff and competition.
- Execution and funding of the newly authorized $75 million repurchase program, alongside dividend and capital needs.
- The cash-flow statement’s positive investing-cash-flow amount labeled “used,” and any related presentation or source-text correction.