Cathay General Bancorp — 2022 Form 10-K
Business context and reporting period. This is the annual report for the fiscal year ended December 31, 2022, not a standalone fourth-quarter filing. Cathay General Bancorp is the holding company for Cathay Bank, a commercial bank focused on individuals and small-to-medium-sized businesses, with operations concentrated in California and additional U.S. markets and Hong Kong. At year-end, consolidated assets were $21.95 billion, net loans were $18.10 billion, deposits were $18.51 billion, and shareholders’ equity was $2.47 billion.
Financial performance and condition
| Metric | 2022 | 2021 |
|---|---|---|
| Net income | $360.6 million | $298.3 million |
| Diluted earnings per share | $4.83 | $3.80 |
| Net interest income | $733.7 million | $597.8 million |
| Net interest margin | 3.63% | 3.22% |
| Non-interest income | $56.8 million | $54.6 million |
| Non-interest expense | $303.4 million | $286.5 million |
| Efficiency ratio | 38.38% | 43.92% |
| Return on average assets / equity | 1.69% / 14.70% | 1.52% / 12.11% |
- Earnings drivers: Net income rose 20.9%, primarily as higher loan interest income lifted net interest income. Interest expense also increased, by 71.0%, reflecting higher rates and borrowing costs. The provision for credit losses was $14.5 million, versus a $16.0 million reversal in 2021. The effective tax rate was 23.7%, up from 21.9%.
- Loans and securities: Gross loans grew 11.7% to $18.25 billion. Commercial mortgage loans were $8.79 billion, residential mortgages $5.25 billion, and commercial loans $3.32 billion. The HSBC West Coast branch acquisition contributed loans and deposits. Available-for-sale securities were $1.47 billion, up from $1.13 billion.
- Credit quality: The allowance for loan losses was $146.5 million; the separate reserve for unfunded credit commitments was $8.7 million. Net charge-offs were $2.6 million, or 0.01% of average loans. Non-performing assets increased to $84.5 million from $71.7 million; non-performing assets were 0.46% of gross loans and OREO, compared with 0.44% a year earlier.
- Funding, liquidity, and debt: Deposits rose 2.5% to $18.51 billion. Time deposits increased to $7.01 billion, while money market and non-interest-bearing demand deposits declined. Brokered deposits were $1.2 billion, or 6.2% of deposits. FHLB advances were $485 million, including $150 million overnight; $300 million of advances matured in January 2023. Junior subordinated notes totaled $119.1 million. The average monthly liquidity ratio for December was 13.7%, down from 17.3%.
- Cash flow: Operating activities provided $467.4 million; investing activities used $1.85 billion, including $1.27 billion of net loan growth and $73.9 million for acquisitions; financing activities provided $94.7 million. Cash, cash equivalents, and restricted cash declined $1.29 billion to $1.16 billion.
- Capital and shareholder returns: Bancorp CET1 and total risk-based capital ratios were 12.21% and 13.73%; the Bank’s were 12.75% and 13.61%. Both were above well-capitalized thresholds. The company paid $1.36 per share in cash dividends and repurchased $141.3 million of stock during 2022.
Material changes versus 2021
- Net interest income rose 22.7%, as average loans increased 11.4% and the average yield on interest-earning assets increased to 4.21% from 3.59%. Net interest margin expanded by 41 basis points.
- Gross loans increased $1.91 billion; deposits increased $446.4 million. Short-term investments and interest-bearing deposits fell by approximately $1.35 billion.
- Interest expense rose $48.8 million, partly reflecting higher deposit rates and increased FHLB borrowing. Average deposit cost rose to 0.58% from 0.37%.
- Other comprehensive loss was $99.2 million, primarily reflecting the decline in fair value of available-for-sale securities as market rates rose. Accumulated other comprehensive loss stood at $102.3 million at year-end. Management attributed the securities’ unrealized losses to market factors, not credit deterioration, and recorded no credit-loss allowance on them.
- The February 2022 HSBC West Coast transaction added 10 California branches; the acquired business had approximately $646 million of loan principal and $575 million of deposits. The final purchase accounting remained subject to the measurement period.
Outlook, commentary, risks, and unusual items
- The filing provides no specific numerical earnings or growth guidance. Management stated that it expected available funding sources to provide adequate liquidity for the next 12 months, while anticipating some time-deposit runoff at maturity that it expected to be replenished through normal deposit growth.
- Management highlighted higher interest rates, inflation, slowing growth, and uncertain economic conditions as potential pressures on margins, borrowers, collateral values, and credit quality. The bank’s loan portfolio is heavily real-estate-backed and concentrated in California; commercial real estate loans were 287% of Bank risk-based capital at year-end.
- For its CECL allowance estimate, management gave the greatest weight to a downside economic scenario. A 100% downside-scenario weighting would have increased the year-end allowance by an estimated $45.4 million, all else equal; the company cautioned this sensitivity is not a forecast.
- Approximately $149.5 million of gross unrealized losses were recorded on available-for-sale securities, largely mortgage-backed securities. Management said it did not intend, and did not expect to be required, to sell impaired securities before recovery of amortized cost.
- Affordable-housing and alternative-energy investments generated tax benefits but carry compliance and potential tax-credit recapture risks. The company recorded $6.2 million of impairment charges on low-income housing investments in 2022 and had $133.5 million of unfunded partnership commitments.
- Other key risks include commercial real estate and construction credit exposure, deposit competition and funding costs, interest-rate sensitivity, cyber and third-party risks, regulatory compliance, and the transition from LIBOR. Approximately $1.39 billion of loans had LIBOR-related attributes at year-end.
- Legal proceedings were described as arising in the ordinary course; management did not expect pending matters to materially affect consolidated financial condition, results, or liquidity. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether loan and deposit growth, especially time deposits and brokered funding, remains sustainable and cost-effective.
- Whether rising rates and economic weakness affect net interest margin, deposit retention, borrowers’ repayment capacity, and real-estate collateral values.
- Changes in non-performing loans, charge-offs, and allowance coverage, including the assumptions and scenario weights underlying the CECL estimate.
- The trajectory and liquidity implications of unrealized securities losses, including any need to sell securities before recovery.
- Repayment or refinancing of near-term FHLB advances and the company’s liquidity position as time deposits mature.
- Completion and realized benefits of the HSBC acquisition, plus the remaining authorization and subsequent completion of the 2022 stock repurchase program.