Cathay General Bancorp — Q2 2023 Form 10-Q
Business context and reporting period. Cathay General Bancorp is the holding company for Cathay Bank, a regional bank operating across several U.S. states and in Hong Kong. This unaudited report covers the quarter and six months ended June 30, 2023. Balance-sheet comparisons are against December 31, 2022; earnings comparisons are against the corresponding 2022 periods.
Financial performance and condition
| Metric | Q2 2023 | Comparison |
|---|---|---|
| Net interest income, before provision | $181.5 million | Up 3.7% from Q2 2022 |
| Net interest margin | 3.44% | 3.52% Q2 2022; down from 3.74% Q1 2023 |
| Provision for credit losses | $9.2 million | $2.5 million Q2 2022 |
| Non-interest income | $23.1 million | Up 58.2% from Q2 2022, mainly on equity-security gains |
| Non-interest expense | $92.8 million | Up 25.2%; efficiency ratio 45.36%, versus 39.06% |
| Net income / diluted EPS | $93.2 million / $1.28 | Net income up 4.7%; diluted EPS was $1.18 in Q2 2022 |
| Returns | ROAA 1.67%; ROAE 14.47% | 1.69% and 14.62%, respectively, in Q2 2022 |
For the six months, net income was $189.2 million, up 15.4%; diluted EPS was $2.60 versus $2.17. Net interest income was $374.0 million, and net interest margin was 3.59%, versus 3.39% in the first half of 2022. The six-month efficiency ratio was 42.79%, compared with 39.77%.
- Balance sheet: Assets were $23.03 billion, up 4.9% from year-end 2022. Gross loans were $18.95 billion, up $698.8 million, or 3.8%; commercial mortgage and residential mortgage balances grew, while construction loans and equity lines declined.
- Deposits and liquidity: Deposits totaled $19.10 billion, up 3.2%. Time deposits rose to $8.97 billion and 47.0% of deposits from 37.9% at year-end; non-interest-bearing demand deposits fell to 18.6% from 22.5%. Uninsured deposits were $8.42 billion; uninsured and uncollateralized deposits were $7.49 billion, or 39.2% of deposits. Management reported that cash and short-term investments, unused FHLB capacity, and unpledged securities together exceeded uninsured and uncollateralized deposits.
- Borrowings and debt: FHLB advances were $815 million, including $800 million due in July 2023; unused FHLB borrowing capacity was $6.05 billion. Junior subordinated notes were $119.1 million, with a weighted-average rate of 7.19%, up from 4.01% at year-end. Long-term debt carrying value was $119.1 million.
- Capital: Bancorp and Bank common equity Tier 1 ratios were 12.38% and 12.80%, respectively; total capital ratios were 13.88% and 13.69%. Both exceeded regulatory “well capitalized” thresholds.
- Cash flow: For the first six months, operating cash flow was $211.8 million, investing cash outflow $746.0 million, and financing cash inflow $854.0 million. Cash, cash equivalents, and restricted cash ended at $1.48 billion, up $319.9 million from the beginning of the period.
Material changes and notable items
- Interest income increased substantially with higher rates, but deposit expense also climbed sharply: Q2 interest expense was $118.6 million versus $14.4 million a year earlier. The cost of interest-bearing deposits reached 2.91%, versus 0.37% in Q2 2022.
- Management attributed the Q2 expense increase chiefly to amortization of affordable-housing and alternative-energy investments, which was $21.7 million versus $7.2 million a year earlier. Q2 equity-security gains were $10.7 million; first-half gains were $15.5 million.
- The allowance for credit losses, including unfunded commitments, was $165.6 million, or 0.87% of gross loans. Nonperforming assets were $79.0 million, down 6.5% from year-end; non-accrual loans were $69.0 million, broadly unchanged. First-half net charge-offs were $6.8 million, compared with net recoveries of $0.5 million in the first half of 2022.
- Available-for-sale securities had fair value of $1.49 billion and gross unrealized losses of $142.3 million, chiefly attributed by the company to interest rates and spread movements rather than credit impairment. Accumulated other comprehensive loss was $99.0 million. The company recorded a $3.0 million write-off on Signature Bank debt securities in March 2023.
- The company repurchased 375,090 shares for $16.6 million in Q1, completing its May 2022 buyback program. It paid a $0.34-per-share Q2 dividend.
Outlook, risks and contingencies
- No specific earnings, loan-growth, or margin guidance is provided. Management said liquidity sources should be adequate for the next 12 months. It expects time deposits to reprice higher and anticipates some maturity-related outflows, but expects those outflows to be manageable and replaceable through normal deposit growth.
- Management’s credit-loss estimate placed the greatest weight on a downside economic scenario. A 100% downside-scenario weighting would, all else equal, have increased the June 30 allowance by approximately $51.8 million; management cautioned this sensitivity is not a forecast.
- Interest-rate sensitivity modeling estimated that a 200-basis-point rate increase would raise 12-month net interest income by 9.9% and reduce market value of equity by 8.0%; a 200-basis-point decrease would reduce net interest income by 13.6% and increase market value of equity by 8.7%. The filing cautions that model assumptions and actual results may differ.
- Key risks include rising deposit costs or deposit outflows, interest-rate and liquidity exposure, deterioration in loan quality or real-estate collateral values, economic weakness, and potential regulatory changes following bank failures. Commercial real estate loans were 282.2% of Bank risk-based capital, below the company’s stated 400% internal limit.
- Ordinary-course litigation was not expected by management to materially affect the company overall, though outcomes are uncertain. The filing reports no material subsequent events through issuance.
Investor verification priorities
- Track deposit mix, uninsured balances, time-deposit maturities and pricing, and whether the stated liquidity capacity remains available.
- Monitor the refinancing or repayment of the $800 million FHLB advance due in July 2023 and the associated funding cost.
- Verify the trend in net interest margin and deposit costs, especially given the decline in margin from Q1 to Q2.
- Review commercial real-estate exposure, loan delinquencies, non-accrual balances, charge-offs, and allowance assumptions against economic developments.
- Assess the size and persistence of unrealized securities losses and any further credit-related write-downs.
- Separate recurring operating performance from equity-security gains and affordable-housing/alternative-energy investment amortization, and confirm the related tax-credit effects.