Cathay General Bancorp — Q2 2022 Form 10-Q
Reporting period: Quarter ended June 30, 2022; unaudited consolidated results for Cathay General Bancorp and subsidiaries, including Cathay Bank. Amounts below are in U.S. dollars; financial statement amounts are generally presented in millions unless noted.
Business context and period highlights
Cathay Bank provides commercial and consumer banking through branches in several U.S. states and Hong Kong. On February 7, 2022, it acquired HSBC Bank USA’s West Coast consumer and retail business banking operations, adding 10 California branches, approximately $646 million in loan principal and $575 million in deposits. Purchase accounting remains preliminary.
- Gross loans reached $17.8 billion, up 8.8% from year-end 2021; second-quarter loan growth was $389.5 million, or 9.5% annualized.
- Q2 diluted EPS was $1.18, up 21.6% from Q2 2021 and 19.3% from Q1 2022, according to management.
Financial performance and position
| Metric | Q2 2022 | Comparable period |
|---|---|---|
| Net interest income, before provision | $175.2 million | $148.0 million in Q2 2021; up 18.4% |
| Provision for credit losses | $2.5 million | $9.0 million reversal in Q2 2021 |
| Non-interest income | $14.6 million | $12.6 million in Q2 2021 |
| Non-interest expense | $74.1 million | $69.7 million in Q2 2021 |
| Net income | $89.0 million | $77.2 million in Q2 2021; up 15.3% |
| Diluted EPS | $1.18 | $0.97 in Q2 2021 |
| Net interest margin | 3.52% | 3.24% in Q2 2021; 3.26% in Q1 2022 |
| Efficiency ratio | 39.06% | 43.41% in Q2 2021 |
| Return on average assets / equity | 1.69% / 14.62% | 1.60% / 12.53% in Q2 2021 |
Management attributed higher net interest income primarily to increased loan and securities income and lower deposit interest expense. The quarter’s expense increase was driven chiefly by salaries and benefits, partly related to the HSBC acquisition, and professional services; lower amortization of affordable-housing and alternative-energy investments partly offset the increase.
- Six months ended June 30: Net income was $164.0 million, up 8.9% from $150.6 million; diluted EPS was $2.17 versus $1.89. Net interest income before provision was $334.4 million versus $289.8 million, and net interest margin was 3.39% versus 3.22%.
- Cash flow, six months: Operating activities provided $179.1 million; investing activities used $1.089 billion, including an $803.1 million net increase in loans and $73.9 million for the acquisition; financing activities used $386.3 million. Cash, cash equivalents and restricted cash ended at $1.154 billion, down $1.296 billion from the start of the period.
- Balance sheet at June 30: Total assets were $21.24 billion; deposits $18.29 billion; total equity $2.43 billion. Gross loans were $17.79 billion and the allowance for loan losses was $148.8 million, or 0.84% of gross loans.
- Liquidity and borrowings: The average monthly liquidity ratio was 13.6%, compared with 17.3% at December 31, 2021. FHLB advances were $95 million, including $75 million maturing in July 2022; junior subordinated notes were $119.1 million. Management said available sources were expected to meet operating needs for the next 12 months.
- Capital: Bancorp and Bank common equity tier 1 ratios were 12.18% and 12.56%, respectively; total capital ratios were 13.74% and 13.46%. Both exceeded regulatory minimums to be considered well capitalized.
Material changes versus prior periods
- Loan growth reflected both organic expansion and the HSBC transaction; residential mortgage loans rose 20.7% from year-end, including loans acquired from HSBC.
- Deposits increased $228.5 million, or 1.3%, from year-end. The mix shifted toward money-market and savings deposits while time deposits declined.
- Non-performing assets fell to $66.5 million from $71.7 million at year-end; non-accrual loans declined to $60.7 million from $65.8 million. Non-performing assets were 0.3% of total assets.
- Available-for-sale securities had $103.1 million of gross unrealized losses at quarter-end, versus $10.6 million at year-end. The company attributed losses principally to interest-rate and spread movements, recorded them in other comprehensive income, and reported no credit-loss allowance on these securities.
- Accumulated other comprehensive loss was $71.3 million, compared with $3.1 million at year-end, principally reflecting securities valuation losses. Total equity declined $14.7 million despite first-half net income, reflecting OCI losses, $63.5 million of treasury-stock purchases and $51.1 million of dividends.
Outlook, risks and unusual items
- No specific earnings, loan-growth or margin guidance was provided. Management stated it believed liquidity would be adequate over the next 12 months, while noting possible time-deposit outflows at maturity.
- The allowance estimate incorporates baseline, upside and downside economic scenarios, with greatest weight on the baseline. Management estimated that using the downside scenario alone would increase the June 30 allowance by approximately $32 million, all else equal. It also added a reserve adjustment reflecting the risk of economic slowdown associated with higher interest rates.
- Interest-rate modeling estimated net interest income changes of +13.7% under a +200-basis-point shock and -19.3% under a -200-basis-point shock. Management cautioned that model assumptions and actual outcomes may differ.
- Key exposures include credit deterioration, real-estate collateral values, economic slowdown, interest-rate changes, liquidity and deposit competition, COVID-19 impacts, regulatory requirements and operational or technology risks. Commercial real-estate loans were 291.5% of risk-based capital, below the Bank’s stated 400% internal limit.
- Ordinary-course litigation was not expected by management to have a material adverse effect, although outcomes are uncertain and a material effect remains possible. The company reported no material change to previously disclosed risk factors and no material subsequent event through issuance.
- The board authorized a new $125 million share repurchase program in May 2022. The company repurchased 749,998 shares for $30.6 million during Q2 at an average $40.78 per share. The quarterly dividend was $0.34 per share.
Important facts for investors to verify
- Reconcile the allowance coverage disclosures: MD&A cites 248.3% coverage of non-performing loans in one place, while a table reports 238.46% for allowance for loan losses to non-performing loans. The filing text does not clearly reconcile these figures.
- Assess the scale and duration of the $103.1 million gross unrealized losses on available-for-sale securities and the effect of further rate or spread changes on equity and liquidity.
- Review deposit stability, particularly the approximately 97.5% of time deposits scheduled to mature within one year, and monitor funding costs as rates change.
- Track acquired HSBC loan performance, integration costs and final purchase-accounting adjustments, which remain preliminary during the measurement period.
- Evaluate loan-quality trends, CECL assumptions and commercial real-estate concentrations, including how a weaker economic scenario could affect provisions and capital.