Cathay General Bancorp — Q1 2024 Form 10-Q
Business context and period. This unaudited quarterly report covers the three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023. Cathay General Bancorp is the holding company for Cathay Bank, a regional bank operating across several U.S. states and parts of Asia. Amounts below are in U.S. dollars.
Financial results and condition
- Earnings: Net income was $71.4 million, down 25.6% from $96.0 million in Q1 2023. Basic and diluted EPS were $0.98, versus $1.32. Return on average assets was 1.23% (1.76% prior year); return on average equity was 10.40% (15.39%).
- Interest income and margins: Net interest income before provision was $168.6 million, down 12.4% year over year. Interest income rose to $332.6 million from $285.4 million, but interest expense increased to $164.1 million from $93.0 million, primarily as deposit costs rose. Net interest margin was 3.05%, versus 3.74% a year earlier and 3.27% in Q4 2023; net interest spread was 2.14%, versus 3.08%.
- Other income and expenses: Non-interest income was $6.6 million, down from $14.2 million, reflecting a $9.0 million unrealized loss on equity securities, compared with a $4.9 million gain a year earlier. Non-interest expense increased 12.0% to $93.2 million, including higher compensation and FDIC and regulatory assessments. The efficiency ratio rose to 53.22% from 40.25%.
- Credit costs and asset quality: Provision for credit losses was $1.9 million, versus $8.1 million; net charge-offs were $1.1 million, versus $4.9 million. Total allowance for credit losses, including unfunded commitments, was $164.4 million, or 0.85% of gross loans. Non-performing assets rose 34% from year-end to $125.1 million (0.53% of assets); non-accrual loans increased to $98.1 million from $66.7 million. Allowance coverage of non-performing loans declined to 155.56% from 221.58%.
- Balance sheet and funding: Total assets were $23.40 billion, up 1.4% from year-end. Gross loans held for investment were $19.43 billion, down 0.6%; commercial real estate loans were $9.82 billion, about 51% of gross loans. Deposits increased $520.8 million to $19.85 billion, while non-interest-bearing deposits declined and time deposits increased to 50.7% of deposits. Uninsured deposits were $8.82 billion; uninsured and uncollateralized deposits were $8.09 billion, or 40.8% of deposits.
- Liquidity and debt: Cash and due from banks plus short-term investments totaled approximately $1.18 billion at quarter-end. The Bank reported $7.21 billion of unused FHLB borrowing capacity and $1.62 billion of unpledged securities; management said available liquidity sources exceeded uninsured and uncollateralized deposits. FHLB advances were $265 million, including $250 million maturing in April 2024; long-term debt was $119.1 million. The monthly liquidity ratio was 13.8%.
- Cash flow and capital: Operating cash flow was $88.2 million, compared with $121.2 million in Q1 2023; investing cash flow was positive $37.1 million, versus negative $128.4 million; financing cash flow was positive $221.9 million, versus negative $21.8 million. Stockholders’ equity was $2.78 billion. Bancorp and Bank capital ratios exceeded minimums for “well capitalized” status; Bancorp’s CET1 ratio was 13.08% and total capital ratio was 14.55%. The quarterly dividend was $0.34 per share.
Material changes and notable items
- Deposit growth supported liquidity, but higher deposit pricing and a shift toward time deposits pressured net interest income and margin.
- Non-accrual loans and non-performing assets increased, particularly construction and commercial real estate non-accrual exposures. CRE and construction loans represented 287% of Bank risk-based capital; 48% of CREC loans were in California. Management reported a 50% weighted-average LTV for the CREC portfolio and noted that office loans were 15% of CREC loans.
- Available-for-sale securities had $130.9 million of gross unrealized losses at quarter-end. Management attributed losses primarily to interest rates and market spreads, reported no credit-loss allowance, and said it did not expect to sell impaired securities before recovery. A $6.4 million after-tax securities holding loss contributed to other comprehensive loss.
- The Company recorded an additional $2.9 million FDIC special assessment expense in Q1, following $11.3 million recognized in Q4 2023. The FDIC may adjust the assessment period or impose a final shortfall assessment.
- Q1 included the sale for $1.4 million of the failed Signature Bank security previously written off in 2023. No material subsequent events were reported through issuance.
Outlook, risks, and contingencies
No specific earnings or growth guidance was provided. Management anticipated that time deposits could reprice lower if expected 2024 Federal Reserve rate cuts occur, while acknowledging possible deposit outflows at maturity amid competition; it expected any outflow to be manageable and stated that liquidity should meet operating needs for the next twelve months. Interest-rate modeling estimated that a 200-basis-point increase would raise 12-month net interest income 14.2% but reduce market value of equity 8.1%; a 200-basis-point decrease would reduce net interest income 11.4% and increase market value of equity 11.59%. The filing cautions that these models rely on assumptions and actual results may differ.
Key risks include economic and real-estate weakness, further loan deterioration and credit provisions, interest-rate and liquidity risk, deposit competition, regulatory and compliance costs, operational and cybersecurity risks, and legal or regulatory matters. Management said ordinary-course litigation was not expected to materially affect the Company as a whole, but outcomes remain uncertain and could be material. The allowance for credit losses is highly judgmental; management estimated that a 100% downside-scenario weighting, with other factors unchanged, would increase the allowance by approximately $50 million. The filing reported no material change to the risk factors in the 2023 Form 10-K.
Important facts for investors to verify
- Whether deposit pricing and time-deposit renewals continue to compress net interest margin, and how balances change as large time deposits mature.
- Whether rising non-accrual loans—especially CRE and construction exposures—lead to higher charge-offs, provisions, or reduced allowance coverage.
- Trends in California and office-property values, loan collateral and borrower performance, given the portfolio’s CRE concentration.
- Actual liquidity and funding conditions, including the April 2024 maturity of $250 million in FHLB advances and the FDIC assessment’s final cost.
- Changes in unrealized securities losses, capital ratios, and the sensitivity of earnings and economic value to interest-rate movements.