Cathay General Bancorp — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Comparisons are primarily with Q1 2021 for operating results and December 31, 2021 for balance-sheet amounts. The company is a bank holding company operating Cathay Bank.
Financial performance and condition
- Earnings: Net income was $75.0 million, up 2.2% from $73.4 million. Diluted EPS was $0.99 versus $0.92; basic EPS was $1.00 versus $0.92.
- Revenue and margins: Net interest income before provision rose 12.3% to $159.2 million. Net interest margin was 3.26%, compared with 3.20%; net interest spread was 3.15%, compared with 3.01%. Non-interest income increased 102% to $20.2 million, including a $6.0 million equity-securities gain versus a $2.8 million loss a year earlier. Non-interest expense was $72.7 million, up 1.8%; the efficiency ratio improved to 40.5% from 47.0%.
- Returns: Return on average assets was 1.46%, down from 1.57%; return on average equity was 12.29%, up from 12.18%.
- Credit costs and asset quality: Provision for credit losses was $8.6 million, compared with a $13.6 million reversal in Q1 2021. Net recoveries were $0.3 million. The allowance for loan losses was $145.8 million, or 0.84% of gross loans. Non-accrual loans rose to $86.3 million from $65.8 million at year-end; non-performing assets were $90.7 million, or 0.4% of assets. Allowance coverage of non-performing loans declined to 168.3% from 202.4% at year-end.
- Balance sheet and funding: Total assets were $20.9 billion, essentially unchanged from year-end. Gross loans rose 6.5% to $17.4 billion; deposits were approximately flat at $18.1 billion. Cash and due from banks plus short-term investments totaled about $1.26 billion. Total equity was $2.42 billion, down $24.0 million, reflecting chiefly securities-related OCI losses, share repurchases and dividends.
- Cash flow: Operating activities provided $86.5 million, versus $91.6 million. Investing activities used $646.6 million, including $413.7 million of net loan growth and $73.9 million for the acquisition. Financing activities used $631.5 million, including a reported $573.7 million net decrease in deposits, dividends and buybacks. Cash, cash equivalents and restricted cash fell $1.19 billion to $1.26 billion. These cash-flow movements should be read alongside the acquisition and balance-sheet deposit figures.
- Debt and capital: Long-term debt was $119.1 million; FHLB advances were $20.0 million, and other affordable-housing borrowings were $23.1 million. Bancorp and Bank capital ratios exceeded regulatory “well capitalized” thresholds: total risk-based capital ratios were 13.96% and 13.65%, respectively.
Material changes and unusual items
- Cathay Bank completed its acquisition of HSBC’s West Coast consumer and retail business banking operations on February 7, 2022. It added 10 California branches and acquired deposits of about $575 million and loans with stated principal of $646 million. Purchase accounting was preliminary; recorded goodwill was $3.5 million.
- Available-for-sale securities had $66.9 million of gross unrealized losses at quarter-end, compared with $10.6 million at December 31, 2021. The company attributed the losses principally to interest-rate and spread movements, recorded the after-tax effect in OCI, and reported no credit-loss allowance on these securities. Accumulated other comprehensive loss was $46.0 million.
- The company repurchased 704,927 shares for $32.9 million at an average $46.67 per share; its $125 million authorization was completed and terminated in February.
- Effective tax rate increased to 23.5% from 21.9%. Acquisition, integration and restructuring costs were $3.9 million versus $0.7 million.
Outlook, risks and contingencies
- No specific earnings, growth or margin guidance is provided. Management said it expects available liquidity sources to meet operating needs for the next 12 months and expects time-deposit runoff to be manageable, while noting competition and possible pandemic-related effects. Average monthly liquidity ratio was 15.45%, down from 17.3% at year-end; the Bank had a $5.2 billion approved FHLB credit line.
- Management’s credit-loss estimate used blended baseline, upside and downside economic scenarios, with greatest weight on baseline. Management estimated that applying 100% downside-scenario weighting would increase the March 31 allowance by approximately $49 million, all else equal. The filing emphasizes uncertainty in forecasts and the judgment involved in CECL estimates.
- Interest-rate simulation showed estimated net interest income increases of 16.2% under +200 basis points and decreases of 7.0% under -200 basis points. The company’s stated policy tolerance is plus or minus 5% for those scenarios. Estimated market value of equity changes were +8.3% and -8.1%, respectively; the downside result also exceeds the stated zero-loss tolerance.
- Key risks include loan deterioration, economic and real-estate conditions, rising interest rates, liquidity and deposit competition, COVID-19 impacts, regulation, operational and cyber risks, and uncertainty in litigation. Management reported no material change to the risk factors in its 2021 Form 10-K. Ordinary-course litigation was not expected by management to materially affect the company, though outcomes remain uncertain.
- Management identified no material subsequent events through issuance. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Track non-accrual loans, especially the increase in commercial non-accrual balances, and the declining allowance coverage ratio.
- Assess the effect of rate movements on net interest income and securities values, including the sensitivity results relative to the company’s stated policy limits.
- Review the acquisition’s final purchase accounting, integration costs, acquired-loan performance and deposit retention.
- Reconcile cash-flow deposit movements with period-end deposits and acquired deposits; assess deposit mix, time-deposit maturities and liquidity.
- Monitor the realization of securities’ amortized cost, capital after OCI and shareholder distributions, and changes to CECL assumptions or economic forecasts.