Cathay General Bancorp — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. The filing was signed February 26, 2021. Cathay General Bancorp is a bank holding company whose principal subsidiary, Cathay Bank, serves individuals and businesses through branches primarily in California and across several other U.S. states, with a Hong Kong branch.
Financial performance and condition
| Metric | 2020 | 2019 | Change or context |
|---|---|---|---|
| Net income | $228.9 million | $279.1 million | Down $50.3 million, about 18% |
| Diluted earnings per share | $2.87 | $3.48 | Down $0.61 |
| Interest income | $700.6 million | $769.3 million | Down 8.9% |
| Net interest income, before credit-loss provision | $552.1 million | $574.9 million | Down 4.0% |
| Credit-loss provision/(reversal) | $57.5 million | ($7.0 million) | Material increase, primarily reflecting pandemic-related economic uncertainty |
| Net interest margin | 3.12% | 3.54% | Down 0.42 percentage points |
| Non-interest income | $42.8 million | $44.8 million | Down about 4.3% |
| Non-interest expense | $283.5 million | $277.3 million | Up 2.2% |
| Efficiency ratio | 47.65% | 44.75% | Higher ratio reflects weaker operating efficiency |
| Effective income tax rate | 9.9% | 20.1% | Lower mainly due to tax credits |
The company reported return on average assets of 1.22% and return on average equity of 9.70%, compared with 1.61% and 12.63%, respectively, in 2019. The 2020 effective tax rate included $56.5 million of alternative-energy, low-income-housing and other tax credits.
Fourth-quarter results
Unaudited fourth-quarter 2020 net income was $70.9 million, or $0.89 per diluted share, compared with $67.4 million, or $0.84 per diluted share, in fourth-quarter 2019. Fourth-quarter 2020 net interest income was $139.8 million, and the company recorded a $5.0 million reversal of credit-loss provision.
Balance sheet, funding and capital
- At December 31, 2020, total assets were $19.04 billion, net loans were $15.48 billion, deposits were $16.11 billion and shareholders’ equity was $2.42 billion.
- Gross loans grew 3.8% to $15.64 billion. Commercial mortgage loans were $7.56 billion; residential mortgages and equity lines were $4.57 billion; commercial loans were $2.84 billion; and construction loans were $679.5 million.
- Deposits increased 9.5% to $16.11 billion. Demand, NOW and money-market balances grew, while time deposits declined 10.3% to $6.67 billion. Brokered deposits were $1.2 billion, or 7.2% of deposits.
- Cash, cash equivalents and restricted cash were $1.42 billion at year-end, compared with $593.8 million a year earlier. The December 2020 average monthly liquidity ratio was 14.7%, versus 12.9% in December 2019. Management said it expected liquidity to be adequate for the next 12 months.
- Year-end borrowings included $150 million of Federal Home Loan Bank advances and $119.1 million of junior subordinated notes. The notes’ reported weighted-average interest rate was 2.40%. The company also reported $23.7 million of other borrowings related to affordable-housing investments.
- The Bancorp’s common equity Tier 1, total risk-based capital and leverage ratios were 13.53%, 15.47% and 10.94%, respectively; the Bank’s were 13.83%, 14.99% and 11.19%. Both were reported as well capitalized.
- Cash dividends were $1.24 per common share for 2020. The company completed its $50 million repurchase program in December 2020, having repurchased 1.54 million shares in total at an average $32.43 per share.
Cash flows
Net cash provided by operating activities was $320.0 million, compared with $435.0 million in 2019. Investing activities used $242.2 million, versus $1.38 billion in 2019, while financing activities provided $749.5 million. Financing included a $1.42 billion increase in deposits, partly offset by repayments of borrowings, $98.7 million of dividends and $23.6 million of treasury-stock purchases. Year-end cash, cash equivalents and restricted cash rose by $827.3 million. These cash-flow totals reflect banking balance-sheet movements and should not be interpreted as conventional free cash flow.
Material changes versus 2019
- Profitability weakened: net income fell 18%, net interest margin declined to 3.12%, and the efficiency ratio rose to 47.65%.
- The $57.5 million credit-loss provision replaced a $7.0 million reversal in 2019. Net charge-offs were $14.2 million, compared with net recoveries of $7.8 million in 2019.
- Non-performing assets rose to $77.6 million from $57.2 million; non-performing assets were 0.50% of gross loans plus OREO, versus 0.38%. Non-accrual loans increased to $67.7 million from $40.5 million.
- Loans and deposits expanded, while available-for-sale securities declined to $1.04 billion from $1.45 billion. Short-term investments and interest-bearing deposits increased by $865.9 million.
- Equity increased 5.4% to $2.42 billion, despite the lower earnings, reflecting retained income and other equity movements.
Outlook, commentary, risks and unusual items
- COVID-19 and credit: Management said the pandemic and economic outlook could further affect borrowers, collateral values, asset quality and earnings. Higher-risk disclosed exposures included retail businesses/properties of $1.72 billion, hotels/motels of $298.9 million and restaurants of $160.3 million.
- Loan assistance and PPP: At year-end, outstanding COVID-related modifications included $81.0 million of CRE loans, $56.7 million of commercial loans and $40.7 million of residential mortgages. The Bank had processed 1,362 PPP loans with a $240.9 million balance and reported $23.3 million forgiven. PPP loans are SBA-guaranteed; the filing says the Bank generally viewed them as not presenting material credit risk.
- Interest rates: Management cited historically low rates as a risk to future net interest income and margins. Its year-end simulation estimated net interest income would rise 8.17% under an immediate 200-basis-point rate increase and decline 0.17% under an immediate 200-basis-point decrease; the filing cautions that model assumptions may not match actual results.
- CECL accounting: The filing states the company planned to adopt CECL on January 1, 2021, estimating an allowance increase of $13 million to $15 million and a retained-earnings adjustment of $10 million to $12 million. Elsewhere, it describes the statutory deferral as potentially extending to January 1, 2022; the stated company adoption plan is January 1, 2021.
- Tax-credit investments: The company held $309.0 million of affordable-housing and alternative-energy investments and had $103.1 million of related unfunded commitments. Tax credits remain subject to project compliance and potential recapture. Partnership-related operating expense rose to $58.2 million from $39.7 million.
- Contingencies and controls: Management said pending legal matters were not expected to materially affect consolidated condition, results or liquidity, while acknowledging outcomes are uncertain. Management and KPMG reported effective internal control over financial reporting; the financial-statement audit opinion was unqualified. The allowance for loan losses was identified as a critical audit matter.
- Guidance: The filing provides no specific earnings or revenue forecast. Management expressed confidence in near-term liquidity and capital adequacy but emphasized substantial uncertainty around the pandemic and economic recovery.
Most important facts for investors to verify
- Whether credit quality and the allowance remain adequate as pandemic-related deferrals end, particularly in CRE, retail, hospitality and restaurant exposures.
- Subsequent levels of non-accrual loans, charge-offs, criticized loan grades and COVID-related modifications, and the adequacy of collateral valuations.
- The actual CECL adoption date and realized opening allowance and retained-earnings adjustments, given the differing timing language in the filing.
- Whether deposit growth and liquidity remain durable as a large portion of time deposits mature within one year, and how funding costs evolve.
- Whether net interest margin and earnings can stabilize in the low-rate environment, and how actual results compare with the interest-rate sensitivity simulations.
- The sustainability and compliance of tax-credit benefits, the returns on partnership investments, and the effect of related amortization and unfunded commitments.
- Dividend and capital-allocation decisions, including the capacity for future dividends or repurchases under regulatory, capital and debt restrictions.