Cathay General Bancorp — 2021 Form 10-K
Business and period: Annual report for the fiscal year ended December 31, 2021, filed February 28, 2022. Cathay General Bancorp is the holding company of Cathay Bank, a commercial bank serving individuals and businesses, with a concentration in California and additional U.S. and Hong Kong markets. Unless noted otherwise, amounts are consolidated.
Financial results and condition
| Metric | 2021 | 2020 |
|---|---|---|
| Net income | $298.3 million | $228.9 million |
| Diluted EPS | $3.80 | $2.87 |
| Net interest income | $597.8 million | $552.1 million |
| Net interest margin | 3.22% | 3.12% |
| Non-interest income | $54.6 million | $42.8 million |
| Non-interest expense | $286.5 million | $283.5 million |
| Provision/(reversal) for credit losses | $(16.0) million | $57.5 million |
| Operating cash flow | $334.3 million | $320.0 million |
- Net interest income before credit-loss provision plus non-interest income totaled approximately $652.4 million. Interest income fell 4.9%, but interest expense declined 53.7%, primarily from lower time-deposit costs. The average yield on interest-earning assets fell to 3.59% from 3.96%.
- Return on average assets was 1.52% (1.22% in 2020); return on average equity was 12.11% (9.70%). The efficiency ratio improved to 43.92% from 47.65%. The effective tax rate rose to 21.88% from 9.89%, reflecting the prior-year benefit of tax credits and other items.
- At year-end, assets were $20.9 billion, net loans $16.2 billion, deposits $18.1 billion, and stockholders’ equity $2.45 billion. Assets increased 10.0%; gross loans rose 4.5% to $16.3 billion and deposits rose 12.1% from 2020.
- Loan growth was led by commercial mortgages, up $588 million to $8.1 billion. Commercial real estate and construction loans together were approximately $8.1 billion as reported in the risk discussion. The portfolio is materially concentrated in real estate lending.
- Cash and cash equivalents and restricted cash ended the year at $2.45 billion, up approximately $1.03 billion. Investing activities used $859.9 million, including net loan growth; financing activities provided $1.55 billion, primarily from deposit growth. December average monthly liquidity ratio was 17.3%, versus 14.7% a year earlier. The Bank reported a $5.0 billion FHLB credit line and $20 million of FHLB advances outstanding.
- Year-end allowance for loan losses was $136.2 million and reserve for unfunded commitments $7.1 million. Net charge-offs were $17.6 million, or 0.11% of average loans. Non-performing assets were $71.7 million, 0.44% of gross loans plus OREO, versus $77.6 million and 0.50% in 2020.
- Regulatory capital remained above well-capitalized thresholds: Bancorp common equity Tier 1 ratio 12.80%, total risk-based capital 14.41%, and leverage ratio 10.40%. The Bank’s corresponding ratios were 13.32%, 14.21%, and 10.82%.
Material changes versus 2020
- Net income increased $69.4 million, primarily from higher net interest income and the swing from a $57.5 million credit-loss provision to a $16.0 million reversal. Management attributed the reversal chiefly to improved economic forecasts and recovery conditions.
- Non-time deposits grew substantially, while time deposits declined. Year-end brokered deposits fell to $394 million, or 2.2% of deposits, from $1.2 billion, or 7.2%.
- Net loans grew $726.6 million. Commercial mortgage loans increased 7.8%; construction loans declined 10.1%.
- The company adopted CECL on January 1, 2021, recording a $3.1 million after-tax reduction to retained earnings. The filing says the new expected-loss approach and its forecast assumptions are significant estimates; a 100% downside-scenario weighting would have increased the year-end allowance by an estimated $80.3 million.
- Stockholders’ equity increased 1.2% despite $167.1 million in treasury-stock purchases and $99.3 million in cash dividends. The company repurchased $167.1 million of shares during 2021 under two programs.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings, growth, or margin guidance. Management said it believed available liquidity was adequate for the next 12 months and capital was sufficient, while reserving the option to take further steps if needed.
- COVID-19 remained a key uncertainty. At year-end, $70.0 million of loans remained under modifications. PPP loans outstanding were $90.5 million, with $337.0 million forgiven or repaid. Exposures included $1.9 billion in retail-related loans, $301 million in hotel/motel loans, and $144 million in restaurant loans.
- Principal risks include real-estate and commercial-credit concentration, potential deterioration in California and other local markets, interest-rate sensitivity, liquidity and deposit competition, economic and pandemic uncertainty, cybersecurity, regulation and compliance, and the transition from LIBOR. Approximately $2.2 billion of loans had LIBOR-related attributes at year-end.
- Available-for-sale securities had $10.6 million of gross unrealized losses at year-end, which management attributed mainly to market rates and spreads rather than credit deterioration; it reported no credit-loss allowance for those securities.
- Legal proceedings were described as routine; management did not expect pending matters to have a material consolidated effect, while noting that outcomes and ultimate losses remain uncertain. Affordable-housing and alternative-energy investments carried $107.7 million of unfunded commitments and tax-credit recapture/compliance risk.
- Subsequent events: Cathay Bank completed the purchase of HSBC’s West Coast consumer and retail business-banking operations, including 10 California branches, on February 7, 2022, for approximately $5 million. The company completed its September 2021 repurchase program on February 18, 2022, buying 704,927 additional shares for $32.9 million. A $0.34-per-share first-quarter 2022 dividend was declared.
Key facts for investors to verify
- How sustainable are the 2021 credit-loss reversal and the decline in the allowance, given the downside-scenario sensitivity and concentrated commercial real-estate exposure?
- How will higher interest rates affect net interest income, deposit costs, borrower performance, and the value of securities? The company’s model estimated net interest income would rise 19.63% under an immediate 200-basis-point increase, but management cautioned that model assumptions may differ from actual results.
- What are the integration costs, expected benefits, and deposit/customer retention implications of the HSBC business acquisition?
- Can deposit growth continue, and how will the maturity of time deposits—approximately 96% due within one year—affect funding costs and liquidity?
- Confirm the exact share count and repurchase totals: the filing’s cover page and market-information discussion contain inconsistent outstanding-share figures, while financial-statement share counts are separately reported.