Cathay General Bancorp — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Cathay General Bancorp is the holding company for Cathay Bank, a regional bank with branches across several U.S. states and Hong Kong. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest and dividend income | $323.5 | $226.0 | $909.0 | $587.5 |
| Net interest income, before credit provision | $185.6 | $197.5 | $559.6 | $531.9 |
| Provision for credit losses | $7.0 | $2.0 | $24.3 | $13.1 |
| Non-interest income | $7.8 | $9.9 | $45.2 | $44.7 |
| Non-interest expense | $94.0 | $75.4 | $270.0 | $222.2 |
| Net income | $82.4 | $99.0 | $271.6 | $263.0 |
| Diluted earnings per share | $1.13 | $1.33 | $3.73 | $3.50 |
| Net interest margin | 3.38% | 3.83% | 3.52% | 3.54% |
| Efficiency ratio | 48.57% | 36.35% | 44.64% | 38.54% |
- Q3 net income declined 16.8% year over year; nine-month net income rose 3.3%. Q3 returns on average assets and equity were 1.42% and 12.36%, respectively, versus 1.81% and 15.94% a year earlier.
- Q3 net interest income fell 6.0% as higher deposit expense more than offset increased interest income. Net interest margin was down from 3.44% in Q2 2023. Q3 average interest-bearing deposit cost was 3.23%, compared with 0.69% a year earlier.
- Q3 non-interest income was pressured by a $6.2 million unrealized loss on equity securities; wealth-management fees increased. Higher low-income housing and alternative-energy investment amortization, salaries, and professional services drove much of the expense increase.
- The nine-month effective tax rate was 12.6%, versus 22.9% in 2022, reflecting low-income housing and alternative-energy investment tax credits.
Financial position, liquidity and capital
- Total assets were $22.84 billion, up 4.1% from December 31, 2022. Gross loans were $19.02 billion, up 4.2%; growth in commercial mortgage and residential mortgage loans was partly offset by declines in commercial, construction, and equity-line loans.
- Deposits totaled $19.64 billion, up 6.1% from year-end 2022. Time deposits rose to $9.20 billion, or 46.9% of deposits, from 37.9%; non-interest-bearing demand deposits fell to 18.5% of deposits from 22.5%.
- Q3 deposits increased $538.6 million and gross loans increased $71.0 million, according to management. Uninsured deposits were $9.0 billion; uninsured and uncollateralized deposits were $8.2 billion, or 41.8% of total deposits.
- Cash and due from banks were $145.6 million and short-term investments and interest-bearing deposits were $1.02 billion. Nine-month operating cash flow was $318.9 million, investing cash outflow was $887.2 million, and financing cash inflow was $568.8 million. Cash, cash equivalents, and restricted cash ended the period at $1.16 billion.
- FHLB advances were $15.0 million, down from $485.0 million at year-end. Long-term debt was $119.1 million; the filing reports its weighted-average interest rate at 7.41%. FHLB unused borrowing capacity was $7.30 billion, and unpledged securities were $1.38 billion. Management said available liquidity sources exceeded uninsured and uncollateralized deposits and were adequate for the next 12 months.
- Average monthly liquidity ratio was 14.1%, versus 13.7% at year-end. Bancorp and Bank capital ratios exceeded regulatory well-capitalized thresholds; total risk-based capital ratios were 14.21% and 14.03%, respectively.
- Stockholders’ equity was $2.64 billion. The company paid $0.34 per share in Q3 dividends; nine-month dividends were $1.02 per share.
Material changes, risks and outlook
- Credit metrics weakened in some areas: non-accrual loans rose to $77.3 million from $68.9 million at year-end, and non-performing assets increased to $93.7 million from $84.5 million. Non-performing assets were 0.41% of total assets. The allowance for loan losses was $154.6 million; the total allowance including unfunded commitments was $166.0 million, or 0.87% of gross loans.
- Nine-month net charge-offs were $13.4 million, versus $0.05 million in the comparable 2022 period. Management attributed the allowance increase primarily to loan growth; a specific $4.2 million reserve was recorded for a construction loan. The filing says a 100% downside-scenario weighting would have increased the allowance by an estimated $37.3 million, all else equal.
- Commercial real estate loans were 289.1% of Bank risk-based capital, below the filing’s cited 300% supervisory concentration criterion and the Bank’s 400% internal limit. The portfolio is collateral-focused, and results remain sensitive to property values and borrower performance.
- Available-for-sale securities had $176.4 million of gross unrealized losses at quarter-end, primarily attributed to interest rates and liquidity/credit spreads. Management reported no credit impairment, no intent to sell, and no expectation it would be required to sell before recovery. Accumulated other comprehensive loss was $123.5 million, net of tax.
- The company wrote off $3.0 million of debt securities from failed Signature Bank in March 2023. Goodwill of $375.7 million was reviewed and management concluded it was not impaired.
- Management expects maturing time deposits to reprice higher and anticipates some competitive deposit outflows, but expects them to be manageable and replenishable through normal deposit growth. The filing provides no specific earnings or growth guidance.
- Risks highlighted include banking-sector confidence and market disruption, deposit competition and funding costs, interest-rate sensitivity, potential recession and credit deterioration, commercial real estate values, regulatory changes and possible additional FDIC assessments. Litigation is described as ordinary-course; management does not currently expect a material adverse impact, while noting outcomes are uncertain.
- The filing reports effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material subsequent event was reported.
Most important facts for investors to verify
- Whether deposit costs continue rising and time-deposit renewals affect deposit balances, net interest margin, and funding mix.
- Trends in non-accrual loans, non-performing assets, charge-offs, construction-loan exposures, and any further specific reserves.
- Commercial real estate portfolio concentration, collateral valuations, and performance of loans in stress or downside economic scenarios.
- Available liquidity and unpledged collateral relative to uninsured deposits, alongside the effects of securities losses and interest-rate movements.
- Whether the tax-credit-related benefits and investment amortization remain comparable in future periods, and how they affect reported earnings and efficiency.