Cathay General Bancorp — Q3 2022 Form 10-Q
Reporting period: Quarter ended September 30, 2022; comparisons are primarily with Q3 2021 and, for balance-sheet items, December 31, 2021. Cathay General Bancorp is the holding company for Cathay Bank. The filing is unaudited.
Business context and notable developments
In February 2022, Cathay Bank acquired HSBC Bank USA’s West Coast consumer and retail business banking operations, adding 10 California branches, approximately $646 million of loans and $575 million of deposits. Purchase accounting remains preliminary. The acquired business contributed to year-over-year balance-sheet growth.
Financial performance
| Metric | Q3 2022 | Comparable period / change |
|---|---|---|
| Net interest income, before credit-loss provision | $197.5 million | Up 29.5% from $152.5 million in Q3 2021 |
| Net interest margin | 3.83% | 3.22% in Q3 2021; 3.52% in Q2 2022 |
| Net income | $99.0 million | Up 36.7% from $72.4 million |
| Diluted earnings per share | $1.35 | $0.93 in Q3 2021 |
| Non-interest income | $9.9 million | Down 18.9% from $12.2 million, mainly reflecting a $3.7 million equity-securities loss |
| Non-interest expense | $75.4 million | Up 4.4% from $72.2 million |
| Efficiency ratio | 36.35% | 43.85% in Q3 2021 |
| Return on average assets / equity | 1.81% / 15.94% | 1.45% / 11.61% in Q3 2021 |
Higher loan and securities income, along with higher yields as interest rates rose, supported net interest income. The average yield on interest-earning assets increased to 4.38% from 3.56%; the cost of interest-bearing deposits rose to 0.69% from 0.44%. The provision for credit losses was $2.0 million, versus $3.1 million a year earlier.
For the first nine months of 2022, net income was $263.0 million, up 18.0%; diluted EPS was $3.52 versus $2.82. Net interest margin was 3.54% versus 3.22%, and net interest income before provision was $531.9 million versus $442.3 million.
Balance sheet, credit, funding and capital
- Assets and lending: Total assets were $21.89 billion, up 4.8% from year-end 2021. Gross loans were $18.11 billion, up 10.8%; Q3 loan growth was 7.8% annualized. Residential mortgage loans and commercial loans were among the principal areas of growth.
- Deposits and borrowings: Deposits were $18.58 billion, up 2.9% from year-end. FHLB advances were $360 million, including $225 million of overnight borrowings; $325 million of advances were due in October 2022. Long-term debt was $119.1 million. The rate on junior subordinated notes averaged 5.59%, versus 2.38% at year-end 2021.
- Credit quality: The allowance for loan losses was $148.8 million, or 0.82% of gross loans; the allowance including unfunded commitments was $156.4 million. Non-performing assets were $75.4 million, or 0.3% of assets. Non-accrual loans were $68.1 million. Net charge-offs were $0.6 million in Q3 and $49,000 for the first nine months.
- Liquidity and cash flows: Management reported an average monthly liquidity ratio of 13.7%, versus 17.3% at year-end, and considered liquidity adequate for the next 12 months. For the first nine months, operating cash flow was $370.0 million, investing cash flow was negative $1.65 billion and financing cash flow was positive $95.7 million; cash, cash equivalents and restricted cash declined $1.19 billion to $1.26 billion.
- Capital and shareholder returns: Stockholders’ equity was $2.42 billion, down $26.7 million from year-end. Bancorp and Bank CET1 ratios were 12.06% and 12.54%, respectively; both exceeded well-capitalized requirements. The company paid $0.34 per share in Q3 dividends and repurchased 1.08 million shares for $46.3 million during the quarter.
Material changes, outlook and risks
Interest-rate-driven declines in available-for-sale securities’ fair value produced $115.6 million of after-tax unrealized losses year to date and contributed to accumulated other comprehensive loss of $112.9 million. Management attributed the losses primarily to market-rate and spread movements, reported no credit impairment, and stated it did not expect to need to sell the securities before recovery.
The filing provides no specific earnings or balance-sheet guidance. Management said it expects liquidity to be adequate over the next 12 months, while noting that competition could cause some time-deposit runoff at maturity. Approximately 97.3% of time deposits matured within one year or less. The CECL allowance incorporates baseline, upside and downside economic scenarios; management estimated that a 100% downside-scenario weighting would raise the allowance by approximately $40.8 million, all else equal.
Interest-rate simulations estimated net interest income changes of +10.6% under a 200-basis-point rise and -18.3% under a 200-basis-point decline. Management cautioned that simulations depend on assumptions about rates, prepayments, loan and deposit behavior, and may differ from actual results. Other disclosed risks include economic and real-estate weakness, credit deterioration, liquidity and interest-rate risk, regulatory and technology risks, and legal contingencies. Management reported no material change to the risk factors in its 2021 Form 10-K. It believes ordinary-course litigation is not expected to materially affect the company, but outcomes remain uncertain.
Important facts for investors to verify
- How quickly deposit costs and deposit mix respond to further rate changes, and whether the reported margin improvement is sustainable.
- The October 2022 maturity and repayment or refinancing of $325 million in FHLB advances, alongside time-deposit maturities and the liquidity ratio.
- Trends in non-accrual loans, past-due balances, criticized loan grades, charge-offs and the assumptions underlying the CECL allowance.
- The impact of the securities portfolio’s unrealized losses on tangible capital and liquidity if securities must be sold or rates and spreads move further.
- Post-acquisition loan, deposit and branch performance, as well as the finalization of preliminary purchase accounting.
- A filing inconsistency: one MD&A passage describes non-accrual loans as decreasing from $65.8 million at December 31, 2021, whereas the reported $68.1 million September 30, 2022 balance and the detailed comparison table indicate an increase. Verify the intended comparison.