Cathay General Bancorp — Q2 2021 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2021; unaudited consolidated results for Cathay General Bancorp and subsidiaries, including Cathay Bank. The bank operates across multiple U.S. states and in Hong Kong, with a substantial commercial real estate and mortgage lending business.
Key financial metrics
| Metric | Q2 2021 / June 30, 2021 | Comparison |
|---|---|---|
| Net income | $77.2 million; diluted EPS $0.97 | Net income +42.2% and EPS $0.68 in Q2 2020 |
| Net interest income before credit-loss provision | $148.0 million | +10.0% year over year |
| Net interest margin | 3.24% | 3.02% Q2 2020; 3.20% Q1 2021 |
| Non-interest income / expense | $12.6 million / $69.7 million | Income down 19.2%; expense up 3.6% year over year |
| Efficiency ratio | 43.41% | 44.82% Q2 2020 |
| Loans / allowance for loan losses | $15.69 billion / $131.3 million | Gross loans +0.3% from year-end 2020; allowance was 0.84% of gross loans |
| Deposits | $16.54 billion | +2.7% from year-end 2020; non-time deposits grew $462.2 million during Q2, per management |
| Assets / stockholders’ equity | $19.35 billion / $2.45 billion | Assets +1.6% from year-end 2020 |
| Borrowings | $20.0 million FHLB advances; $119.1 million long-term junior subordinated notes | FHLB advances were $150.0 million at year-end 2020 |
| Liquidity and capital | Average monthly liquidity ratio 16.8%; Bancorp CET1 13.77%, total capital 15.47% | Management says capital exceeds “well-capitalized” thresholds |
For the six months ended June 30, net income was $150.6 million versus $101.2 million in 2020, and diluted EPS was $1.89 versus $1.27. Operating cash flow was $166.4 million; investing cash flow was negative $49.6 million; financing cash flow was positive $184.7 million. Cash, cash equivalents and restricted cash ended at $1.72 billion, $301.5 million above year-end. The cash-flow statement labels this movement a “decrease,” although the reported beginning and ending balances indicate an increase.
Material changes versus comparable periods
- Q2 earnings improved as net interest income rose and the company recorded a $9.0 million reversal of credit-loss provision, versus a $25.0 million provision in Q2 2020. Management attributed the 2021 reversals mainly to improved economic forecasts.
- Lower deposit funding costs helped net interest income, while lower loan and securities yields reduced interest income. The cost of interest-bearing deposits declined to 0.48% from 1.16% in Q2 2020.
- Non-interest income fell year over year largely because Q2 2020 included stronger equity-security gains. Q2 2021 salaries and employee benefits rose $4.6 million year over year.
- Nonperforming assets were $74.2 million, down 4.4% from year-end 2020; nonaccrual loans were $67.8 million. Net charge-offs were $7.3 million in Q2 and $15.0 million for the first half.
- Deposits shifted toward non-time accounts: time deposits fell to 35.9% of deposits from 41.4% at year-end. Approximately 98% of time deposits mature within one year or less.
Outlook, risks, contingencies and unusual items
- No numerical earnings or operating guidance is provided. Management expects available liquidity sources to meet operating needs for the next 12 months, but notes that COVID-19 could affect deposits and other liquidity sources.
- COVID-related exposures include $238.9 million of outstanding PPP loans, with $191.2 million forgiven, and outstanding modifications on commercial real estate, commercial and residential loans. Management cautions that borrower performance and future credit losses remain uncertain.
- The CECL expected-loss standard was adopted January 1, 2021. The filing reports a $3.1 million after-tax reduction to opening retained earnings and also describes a correction to the adoption amounts, including a $2.3 million after-tax reduction; investors should review the adoption and correction disclosures.
- The company repurchased 1.53 million shares for $63.5 million in the first half under a $75 million program. It completed the remaining $11.5 million buyback on August 5, 2021.
- Management cites interest-rate exposure, credit deterioration, real estate collateral values, economic and pandemic uncertainty, and regulatory, legal, technology and liquidity risks. Its interest-rate simulation projected a 15.9% increase in net interest income under a +200 basis-point shock and an 11.0% increase in market value of equity; management cautions that modeled results depend on assumptions.
- Ordinary-course litigation is not expected by management to materially affect the company overall, but outcomes remain uncertain. No material change to the prior annual-report risk factors was reported. Disclosure controls were assessed as effective, with no material second-quarter change to internal control over financial reporting.
Important facts for investors to verify
- Reconcile the cash-flow statement’s “decrease” label with the cash balances, which show a $301.5 million increase.
- Review the CECL adoption and correction disclosures, including the effects on opening retained earnings, loan-loss allowance and unfunded-commitment reserve.
- Track allowance adequacy and credit performance, including net charge-offs, nonaccrual loans, COVID-related modifications and the large commercial real estate portfolio.
- Confirm reported liquidity and capital measures, deposit maturity/runoff trends, and the impact of buybacks and dividends on capital.
- Check the filing’s COVID-affected industry exposure table: the reported balances total $2.18 billion, but the displayed percentages do not clearly reconcile to those balances.