Cathay General Bancorp — Q1 2023 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2023; compared primarily with Q1 2022 for operating results and December 31, 2022 for balance-sheet changes. Cathay General Bancorp is the holding company for Cathay Bank, a U.S. commercial bank with branches in several states and Hong Kong. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Key financial metrics
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net income | $96.0 million | $75.0 million in Q1 2022 |
| Diluted EPS | $1.32 | $0.99 in Q1 2022; $1.33 in Q4 2022 |
| Net interest income, before provision | $192.4 million | $159.2 million in Q1 2022 |
| Net interest margin | 3.74% | 3.26% in Q1 2022; 3.87% in Q4 2022 |
| Provision for credit losses | $8.1 million | $8.6 million in Q1 2022 |
| Non-interest income / expense | $14.2 million / $83.2 million | $20.2 million / $72.7 million in Q1 2022 |
| Net cash from operating activities | $121.2 million | $86.5 million in Q1 2022 |
| Total assets | $22.03 billion | $21.95 billion at December 31, 2022 |
| Gross loans / deposits | $18.32 billion / $18.65 billion | $18.25 billion / $18.51 billion at December 31, 2022 |
| Stockholders’ equity | $2.54 billion | $2.47 billion at December 31, 2022 |
Q1 2023 cash flows included $128.4 million used in investing activities and $21.8 million used in financing activities. Cash, cash equivalents and restricted cash decreased $29.1 million during the quarter to $1.13 billion. The filing does not provide a standalone profit-margin measure; it reports a 40.25% efficiency ratio, versus 40.52% in Q1 2022. Return on average assets was 1.76% and return on average equity was 15.39%.
At March 31, deposits were $18.65 billion, including $8.64 billion in time deposits, up from $7.01 billion at year-end. FHLB advances were $360 million, and long-term debt was $119.1 million. The junior subordinated notes carried a 7.04% weighted-average rate. The Bank reported $6.55 billion of unused FHLB borrowing capacity and $1.40 billion of unpledged securities. Regulatory capital ratios exceeded the stated “well capitalized” thresholds.
Material changes versus comparable periods
- Net income increased 28% year over year. Higher loan and securities yields lifted interest income, while interest expense rose sharply as deposit costs increased. Net interest margin improved year over year but fell from 3.87% in Q4 2022 to 3.74% in Q1 2023.
- Non-interest income declined $6.0 million year over year, including a $3.0 million write-off of Signature Bank securities, lower swap dealer fees, and lower unrealized equity-security gains. Non-interest expense rose $10.5 million, principally from higher affordable-housing and alternative-energy investment amortization, compensation, FDIC assessments, and technology costs; lower acquisition-related costs partly offset these increases.
- Gross loans increased 0.3% from year-end. Residential mortgage and commercial mortgage balances grew, while commercial loans and home equity lines declined.
- Deposits increased $143.6 million, but the mix shifted toward time deposits. Non-interest-bearing demand deposits fell to 20.1% of deposits from 22.5% at year-end.
- Nonperforming assets rose 7% from year-end to $90.4 million, or 0.4% of assets. Nonaccrual loans increased to $73.6 million from $68.9 million, though they were below the $86.3 million reported a year earlier. The allowance for credit losses, including unfunded commitments, was $158.5 million, or 0.87% of gross loans.
- Unrealized losses on available-for-sale securities were $132.2 million gross at quarter-end, down from $149.5 million at year-end. Management attributed losses primarily to interest rates and market spreads, reported no credit-loss allowance on these securities, and said it did not intend or expect to be required to sell them before recovery.
Outlook, commentary, risks and unusual items
- No formal earnings or financial guidance is provided. Management said it believed liquidity sources were adequate for the Bank’s operating needs over the next 12 months. It anticipated time deposits would reprice higher and acknowledged possible outflows at maturity, while expecting them to be manageable based on historical experience and normal deposit growth.
- Uninsured deposits were $8.74 billion; after $0.80 billion of collateralized deposits, uninsured and uncollateralized deposits were $7.94 billion, or 42.6% of total deposits. Management stated that available liquidity sources exceeded this latter amount.
- For its credit-loss estimate, the Company weighted the downside economic scenario most heavily, with the remainder primarily allocated to the baseline and a small amount to the upside scenario. The downside case included recessionary conditions and material declines in commercial real estate and home prices. Holding other factors constant, assigning 100% weight to that downside scenario would have increased the allowance by approximately $43.1 million.
- Commercial real estate loans were 288% of total risk-based capital, below the stated supervisory reference level of 300% and the Bank’s internal limit of 400%. The portfolio remains exposed to real estate values, borrower performance and economic conditions.
- The filing identifies industry-wide bank failures and uncertainty as risks to depositor confidence, funding costs, liquidity, capital requirements, FDIC assessments and the Company’s share price. It also cites interest-rate, credit, regulatory, operational, legal and economic risks. Management said ordinary-course litigation was not expected to have a material adverse effect, while noting outcomes are uncertain.
- The Company completed its May 2022 repurchase program in February 2023, buying 375,090 shares for $16.6 million at an average $44.20 per share. It paid a $0.34-per-share dividend. The quarter included a $3.0 million write-off of Signature Bank debt securities. Management reported no material subsequent events through issuance of the statements.
Important facts for investors to verify
- Whether deposit balances and mix remain stable, particularly uninsured and uncollateralized deposits, and how time-deposit repricing affects funding costs and net interest margin.
- Whether credit quality changes, including nonaccrual loans, charge-offs and commercial real estate exposure, require higher provisions or reserves; review the assumptions behind the $43.1 million downside-scenario sensitivity.
- How available-for-sale securities’ unrealized losses and liquidity needs evolve, and whether the Company can avoid selling securities before their expected recovery.
- Liquidity availability and funding terms, including near-term FHLB advance maturities, borrowing capacity, and collateral availability.
- Whether reported capital ratios, dividends and repurchases remain sustainable under changing economic, regulatory and funding conditions.