Cathay General Bancorp (the “Company”, “we”, “us”, or “our”) (Nasdaq: CATY), the holding company for Cathay Bank, today announced its unaudited financial results for the quarter ended September 30, 2023. The Company reported net income of $82.4 million, or $1.13 per share, for the third quarter of 2023.
FINANCIAL PERFORMANCE
| Three months ended | |||||
| (unaudited) | September 30, 2023 | June 30, 2023 | September 30, 2022 | ||
| Net income | $ 82.4 million | $ 93.2 million | $99.0 million | ||
| Basic earnings per common share | $1.14 | $1.29 | $1.34 | ||
| Diluted earnings per common share | $1.13 | $1.28 | $1.33 | ||
| Return on average assets | 1.42% | 1.67% | 1.81% | ||
| Return on average total stockholders' equity | 12.36% | 14.47% | 15.94% | ||
| Efficiency ratio | 48.57% | 45.36% | 36.35% | ||
THIRD QUARTER HIGHLIGHTS
- Total deposits increased by $538.6 million, or 11.6% annualized, to $19.6 billion in the third quarter of 2023.
- Total gross loans increased by $71.0 million, or 1.6% annualized, to $19.0 billion in the third quarter of 2023.
- Diluted earnings per share decreased to $1.13 for the third quarter of 2023 compared to $1.28 for the second quarter of 2023 due in part to changes in equity securities valuations.
- Our net interest margin declined slightly from 3.44% in the second quarter to 3.38% in the third quarter.
“For the third quarter of 2023, our total deposits increased by $538.6 million or 11.6% annualized to $19.6 billion. Our net interest margin declined slightly from 3.44% in the second quarter to 3.38% in the third quarter,” commented Chang M. Liu, President and Chief Executive Officer of the Company.
INCOME STATEMENT REVIEW
THIRD QUARTER 2023 COMPARED TO THE SECOND QUARTER 2023
Net income for the quarter ended September 30, 2023 was $82.4 million, a decrease of $10.8 million, or 11.6%, compared to net income of $93.2 million for the second quarter of 2023. Diluted earnings per share for the third quarter of 2023 was $1.13 per share compared to $1.28 per share for the second quarter of 2023. Net income for the third quarter included a $6.2 million unrealized loss on equity securities or $0.06 per diluted share, in the third quarter of 2023 compared to a $10.7 million unrealized gain on equity securities, or $0.10 per diluted share, for the second quarter of 2023.
Return on average stockholders’ equity was 12.36% and return on average assets was 1.42% for the quarter ended September 30, 2023, compared to a return on average stockholders’ equity of 14.47% and a return on average assets of 1.67% in the second quarter of 2023.
Net interest income before provision for credit losses
Net interest income before provision for credit losses increased $4.1 million, or 2.3%, to $185.6 million during the third quarter of 2023, compared to $181.5 million in the second quarter of 2023. The increase was due primarily to an increase in interest income from loans and securities, partially offset by an increase in deposit interest expense.
The net interest margin was 3.38% for the third quarter of 2023 compared to 3.44% for the second quarter of 2023.
For the third quarter of 2023, the yield on average interest-earning assets was 5.89%, the cost of funds on average interest-bearing liabilities was 3.33%, and the cost of interest-bearing deposits was 3.23%. In comparison, for the second quarter of 2023, the yield on average interest-earning assets was 5.68%, the cost of funds on average interest-bearing liabilities was 2.99%, and the cost of interest-bearing deposits was 2.91%. The increase in the costs of interest-bearing liabilities was mainly a result of higher interest rates on interest bearing deposits. The net interest spread, defined as the difference between the yield on average interest-earning assets and the cost of funds on average interest-bearing liabilities, was 2.56% for the third quarter of 2023, compared to 2.69% for the second quarter of 2023.
Provision for credit losses
The Company recorded a provision for credit losses of $7.0 million in the third quarter of 2023 compared with $9.2 million in the second quarter of 2023. As of September 30, 2023, the allowance for credit losses, comprised of the reserve for loan losses and the reserve for unfunded loan commitments, increased $312 thousand to $166.0 million, or 0.87% of gross loans, compared to $165.6 million, or 0.87% of gross loans, as of June 30, 2023.
| Three months ended | Nine months ended September 30, | |||||||||
September 30, 2023 | June 30, 2023 | September 30, 2022 | 2023 | 2022 | ||||||
| (In thousands) (Unaudited) | ||||||||||
| Charge-offs: | ||||||||||
| Commercial loans | $ 6,254 | $ 2,448 | $ 2,091 | $ 12,517 | $ 2,362 | |||||
| Real estate loans (1) | 1,221 | 34 | 137 | 5,341 | 138 | |||||
| Installment and other loans | 8 | 1 | — | 15 | — | |||||
| Total charge-offs | 7,483 | 2,483 | 2,228 | 17,873 | 2,500 | |||||
| Recoveries: | ||||||||||
| Commercial loans | 611 | 442 | 1,576 | 1,564 | 2,109 | |||||
| Construction loans | — | — | — | — | 6 | |||||
| Real estate loans (1) | 261 | 61 | 95 | 2,862 | 336 | |||||
| Total recoveries | 872 | 503 | 1,671 | 4,426 | 2,451 | |||||
| Net charge-offs/(recoveries) | $ 6,611 | $ 1,980 | $ 557 | $ 13,447 | $ 49 | |||||
(1) Real estate loans include commercial mortgage loans, residential mortgage loans and equity lines.
Non-interest income
Non-interest income, which includes revenues from depository service fees, letters of credit commissions, securities gains (losses), wealth management fees, and other sources of fee income, was $7.8 million for the third quarter of 2023, a decrease of $15.3 million, or 66.2%, compared to $23.1 million for the second quarter of 2023. The decrease was primarily due to a $16.9 million decrease in unrealized gains on equity securities offset, in part, by a $1.5 million increase in commissions from wealth management, when compared to the second quarter of 2023.
Non-interest expense
Non-interest expense increased $1.2 million, or 1.3%, to $94.0 million in the third quarter of 2023 compared to $92.8 million in the second quarter of 2023. The increase in non-interest expense in the third quarter of 2023 was primarily due to an increase of $1.7 million in salaries and employee benefits, an increase of $1.4 million in amortization expense of investments in low-income housing and alternative energy partnerships, offset, in part, by a decrease of $1.0 million in professional services expenses when compared to the second quarter of 2023. The efficiency ratio, defined as non-interest expense divided by the sum of net interest income before provision for loan losses plus non-interest income, was 48.57% in the third quarter of 2023 compared to 45.36% for the second quarter of 2023.
Income taxes
The effective tax rate for the third quarter of 2023 was 10.95% compared to 9.20% for the second quarter of 2023. The effective tax rate includes the impact of alternative energy investments, including the impact of a new solar tax credit fund that closed in the second quarter of 2023, and low-income housing tax credits.
BALANCE SHEET REVIEW
Gross loans were $19.02 billion as of September 30, 2023, an increase of $71.0 million, or 0.4%, from $18.95 billion as of June 30, 2023. The increase from June 30, 2023 was primarily due to an increase of $218.3 million, or 2.3%, in commercial mortgage loans, and an increase of $143.4 million, or 2.6%, in residential mortgage loans offset, in part, by a decrease of $227.3 million, or 6.8%, in commercial loans, a decrease of $47.4 million, or 9.1%, in real estate construction loans, and a decrease of $18.2 million, or 6.7%, in home equity loans.
The loan balances and composition as of September 30, 2023, compared to June 30, 2023, and September 30, 2022, are presented below:
| September 30, 2023 | June 30, 2023 | September 30, 2022 | |||
| (In thousands) (Unaudited) | |||||
| Commercial loans | $ 3,090,609 | $ 3,317,868 | $ 3,367,437 | ||
| Residential mortgage loans | 5,685,844 | 5,542,466 | 5,130,650 | ||
| Commercial mortgage loans | 9,511,805 | 9,293,475 | 8,677,733 | ||
| Equity lines | 253,826 | 272,055 | 350,448 | ||
| Real estate construction loans | 474,294 | 521,673 | 573,421 | ||
| Installment and other loans | 7,444 | 5,257 | 7,114 | ||
| Gross loans | $ 19,023,822 | $ 18,952,794 | $ 18,106,803 | ||
| Allowance for loan losses | (154,619) | (155,109) | (148,817) | ||
| Unamortized deferred loan fees | (9,521) | (9,497) | (6,936) | ||
| Total loans, net | $ 18,859,682 | $ 18,788,188 | $ 17,951,050 | ||
Total deposits were $19.64 billion as of September 30, 2023, an increase of $538.6 million, or 2.8%, from $19.10 billion as of June 30, 2023.
The deposit balances and composition as of September 30, 2023, compared to June 30, 2023, and September 30, 2022, are presented below:
| September 30, 2023 | June 30, 2023 | September 30, 2022 | |||
| (In thousands) (Unaudited) | |||||
| Non-interest-bearing demand deposits | $ 3,623,483 | $ 3,561,237 | $ 4,398,152 | ||
| NOW deposits | 2,454,878 | 2,404,470 | 2,570,036 | ||
| Money market deposits | 3,222,612 | 3,033,868 | 4,935,266 | ||
| Savings deposits | 1,131,352 | 1,131,602 | 1,128,823 | ||
| Time deposits | 9,203,263 | 8,965,826 | 5,543,474 | ||
| Total deposits | $ 19,635,588 | $ 19,097,003 | $ 18,575,751 | ||
ASSET QUALITY REVIEW
As of September 30, 2023, total non-accrual loans were $77.3 million, an increase of $8.3 million, or 12.0%, from $69.0 million as of June 30, 2023.
The allowance for loan losses was $154.6 million and the allowance for off-balance sheet unfunded credit commitments was $11.4 million as of September 30, 2023. The allowances represent the amount estimated by management to be appropriate to absorb expected credit losses inherent in the loan portfolio, including unfunded credit commitments. We reported net charge-offs of $6.6 million for the three months ended September 30, 2023, of which $4.3 million had been reserved for in prior quarters. The allowance for loan losses represented 0.81% of period-end gross loans, and 195.09% of non-performing loans as of September 30, 2023. The comparable ratios were 0.82% of period-end gross loans, and 206.89% of non-performing loans as of June 30, 2023.
The changes in non-performing assets and modifications to borrowers experiencing financial difficulties as of September 30, 2023, compared to June 30, 2023, and September 30, 2022, are presented below:
| (Dollars in thousands) (Unaudited) | September 30, 2023 | June 30, 2023 | % Change | September 30, 2022 | % Change | ||||||||||||
| Non-performing assets | |||||||||||||||||
| Accruing loans past due 90 days or more | $ | 1,924 | $ | 5,968 | (68 | ) | $ | 3,172 | (39 | ) | |||||||
| Non-accrual loans: | |||||||||||||||||
| Construction loans | 16,992 | — | — | — | — | ||||||||||||
| Commercial mortgage loans | 32,539 | 39,558 | (18 | ) | 26,911 | 21 | |||||||||||
| Commercial loans | 14,661 | 17,574 | (17 | ) | 26,604 | (45 | ) | ||||||||||
| Residential mortgage loans | 13,138 | 11,872 | 11 | 14,601 | (10 | ) | |||||||||||
| Installment and other loans | — | — | — | 9 | (100 | ) | |||||||||||
| Total non-accrual loans | $ | 77,330 | $ | 69,004 | 12 | $ | 68,125 | 14 | |||||||||
| Total non-performing loans | 79,254 | 74,972 | 6 | 71,297 | 11 | ||||||||||||
| Other real estate owned | 14,407 | 4,067 | 254 | 4,067 | 254 | ||||||||||||
| Total non-performing assets | $ | 93,661 | $ | 79,039 | 18 | $ | 75,364 | 24 | |||||||||
| Accruing loan modifications to borrowers experiencing financial difficulties (1) | $ | 1,489 | $ | — | — | $ | — | — | |||||||||
| Accruing troubled debt restructurings (TDRs) | $ | — | $ | — | — | $ | 15,208 | (100 | ) | ||||||||
| Allowance for loan losses | $ | 154,619 | $ | 155,109 | (0 | ) | $ | 148,817 | 4 | ||||||||
| Total gross loans outstanding, at period-end | $ | 19,023,822 | $ | 18,952,794 | 0 | $ | 18,106,803 | 5 | |||||||||
| Allowance for loan losses to non-performing loans, at period-end | 195.09 | % | 206.89 | % | 208.73 | % | |||||||||||
| Allowance for loan losses to gross loans, at period-end | 0.81 | % | 0.82 | % | 0.82 | % | |||||||||||
(1) Beginning after January 1, 2023, modifications are reported in accordance with the new guidance under ASU 2022-02.
The ratio of non-performing assets to total assets was 0.41% as of September 30, 2023, compared to 0.34% as of June 30, 2023. Total non-performing assets increased $14.7 million, or 18.6%, to $93.7 million as of September 30, 2023, compared to $79.0 million as of June 30, 2023, primarily due to an increase of $10.3 million, or 254.2%, in other real estate owned, an increase of $8.3 million, or 12.1%, in non-accrual loans offset, in part, by a decrease of $4.0 million, or 67.8%, in accruing loans past due 90 days or more.
CAPITAL ADEQUACY REVIEW
As of September 30, 2023, the Company’s Tier 1 risk-based capital ratio of 12.70%, total risk-based capital ratio of 14.21%, and Tier 1 leverage capital ratio of 10.44%, calculated under the Basel III capital rules, continue to place the Company in the “well capitalized” category for regulatory purposes, which is defined as institutions with a Tier 1 risk-based capital ratio equal to or greater than 8%, a total risk-based capital ratio equal to or greater than 10%, and a Tier 1 leverage capital ratio equal to or greater than 5%. As of June 30, 2023, the Company’s Tier 1 risk-based capital ratio was 12.38%, total risk-based capital ratio was 13.88%, and Tier 1 leverage capital ratio was 10.45%.
CONFERENCE CALL
Cathay General Bancorp will host a conference call to discuss its third quarter 2023 financial results this afternoon, Monday, October 23, 2023, at 3:00 p.m., Pacific Time. Analysts and investors may dial in and participate in the question-and-answer session. To access the call, please dial 1-833-816-1377 and refer to Conference Code 10183158. The presentation accompanying this call and access to the live webcast is available on our site at www.cathaygeneralbancorp.com and a replay of the webcast will be archived for one year within 24 hours after the event.
ABOUT CATHAY GENERAL BANCORP
Cathay General Bancorp is a publicly traded company (Nasdaq: CATY) and is the holding company for Cathay Bank, a California state-chartered bank. Founded in 1962, Cathay Bank offers a wide range of financial services and currently operate over 60 branches across the United States in California, New York, Washington, Texas, Illinois, Massachusetts, Maryland, Nevada, and New Jersey. Overseas, it has a branch outlet in Hong Kong, and a representative office in Beijing, Shanghai, and Taipei. To learn more about Cathay Bank, please visit [url="]www.cathaybank.com
