Cathay General Bancorp — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are primarily with 2022. This is an annual filing, not a standalone fourth-quarter earnings report. Cathay General Bancorp is the holding company for Cathay Bank, a commercial bank serving businesses and consumers, with a concentration in California and additional U.S. and Hong Kong markets.
Financial performance and position
| Metric | 2023 | 2022 |
|---|---|---|
| Net income | $354.1 million | $360.6 million |
| Diluted EPS | $4.86 | $4.83 |
| Net interest income | $741.7 million | $733.7 million |
| Net interest margin | 3.45% | 3.63% |
| Provision for credit losses | $26.0 million | $14.5 million |
| Non-interest income | $68.3 million | $56.8 million |
| Non-interest expense | $380.5 million | $303.4 million |
| Efficiency ratio | 46.97% | 38.38% |
| Effective tax rate | 12.25% | 23.68% |
| Operating cash flow | $384.7 million | $467.4 million |
- Year-end balance sheet: Assets were $23.08 billion, net loans $19.38 billion, deposits $19.33 billion, and shareholders’ equity $2.74 billion. Gross loans rose 7.1% to $19.55 billion; deposits rose 4.4%.
- Loan mix and credit: Commercial real estate loans were $9.73 billion, or 49.8% of gross loans. Allowance for loan losses was $154.6 million; including the $9.1 million reserve for unfunded commitments, total allowance for credit losses was $163.7 million. Net charge-offs were $17.6 million, or 0.09% of average loans.
- Asset quality: Non-performing assets totaled $93.3 million, 0.48% of gross loans plus OREO, versus $84.5 million and 0.46% in 2022. Non-performing loans declined to $73.8 million, while OREO increased to $19.4 million.
- Funding and debt: Time deposits rose to $9.34 billion, while non-interest-bearing demand and money market deposits declined. Brokered deposits were $1.52 billion, or 7.9% of deposits; uninsured deposits were $8.71 billion. FHLB advances were $540 million, and junior subordinated notes were $119.1 million, with a 7.54% weighted-average rate.
- Capital and liquidity: Bancorp and Bank capital ratios exceeded “well-capitalized” regulatory thresholds. Bancorp’s CET1 ratio was 12.84%, total risk-based capital ratio 14.31%, and leverage ratio 10.55%. The Bank had a $7.99 billion approved FHLB line, with $6.60 billion unused borrowing capacity reported. Management said liquidity sources were adequate for the next 12 months; the average monthly liquidity ratio was 13.6% for December 2023.
Material changes versus 2022
- Net income declined 1.8%, despite higher net interest income and non-interest income. Higher operating expenses and credit-loss provision offset revenue growth.
- Interest income increased 45.9% to $1.24 billion, but interest expense rose 325.6% to $500.5 million as deposit and borrowing costs repriced upward. The average cost of interest-bearing deposits rose to 3.02% from 0.76%.
- Net interest margin narrowed by 18 basis points to 3.45%. Average loans increased 6.4%; average interest-bearing deposits increased 11.4%, driven chiefly by time deposits.
- Non-interest expense rose 25.4%. Affordable-housing and alternative-energy partnership amortization increased $44.6 million; FDIC and state assessments increased $15.6 million.
- Non-interest income included an $18.2 million net gain from equity securities, compared with $0.4 million in 2022. Securities losses were $3.0 million.
- Year-end unrealized losses on available-for-sale debt securities were $122.0 million, down from $149.5 million in 2022. Management attributed these losses to market factors rather than credit deterioration and recorded them in other comprehensive income, with no credit-loss allowance.
- Cash and cash equivalents and restricted cash ended the year at $828.8 million, down from $1.16 billion. Investing cash outflow was $1.48 billion, principally reflecting loan growth and investment activity.
Outlook, risks, and unusual items
- The filing provides no quantified earnings, loan-growth, deposit-growth, or margin guidance. Management expects maturing time deposits to reprice higher and anticipates some competitive runoff, but expects it to be manageable based on historical experience.
- Management’s interest-rate simulations estimate that an immediate 100-basis-point rise would increase next-12-month net interest income by 6.9%, while a 100-basis-point decline would reduce it by 4.4%. These are model estimates, not forecasts; management cautions that assumptions and actual outcomes may differ.
- Key risks include the concentration in California and real-estate lending, CRE and office-property conditions, higher rates and deposit competition, credit-loss estimation uncertainty, liquidity and uninsured-deposit confidence, and economic or geopolitical developments affecting clients with Asian ties. Cybersecurity, regulatory compliance, and operational risks are also emphasized.
- Unusual expense: The company recorded an $11.3 million FDIC special-assessment expense in fourth-quarter 2023, related to protection of uninsured depositors at failed banks.
- Tax effects: The 12.25% effective tax rate was materially reduced by low-income-housing and other tax credits; the filing reports $73.7 million of such credits in the tax-rate reconciliation. Partnership tax benefits depend on project compliance and may be subject to recapture.
- Credit estimate sensitivity: Management estimates that weighting the downside economic scenario at 100%, with other factors unchanged, would have increased the year-end allowance for credit losses by approximately $36.1 million.
- The company paid $1.36 per common share in dividends during 2023 and declared a $0.34-per-share first-quarter 2024 dividend. The 2022 repurchase program was completed in the first quarter of 2023 with a final $16.6 million repurchase.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The allowance for loan losses was identified as a critical audit matter. Management reported effective disclosure controls and internal controls.
Important facts for investors to verify
- Track CRE and office exposure, loan risk-rating migration, non-performing assets, charge-offs, and whether the allowance remains adequate as property values and refinancing conditions evolve.
- Monitor deposit mix, uninsured and brokered deposit levels, deposit pricing, time-deposit maturities, and actual versus expected deposit runoff.
- Assess whether asset yields can continue to offset funding-cost increases and whether net interest margin stabilizes or contracts further.
- Separate recurring earnings from the equity-securities gain, tax-credit benefits, partnership amortization, and FDIC special assessment.
- Review the securities portfolio’s unrealized losses, available liquidity and collateral capacity, and the assumptions behind management’s liquidity and interest-rate sensitivity models.
- Confirm future dividend capacity against Bank regulatory limits, capital needs, and the terms of the junior subordinated notes.