Cathay General Bancorp — 2018 Form 10-K Summary
Business context and reporting period
This annual report covers the fiscal year ended December 31, 2018; it is not a standalone fourth-quarter filing. Cathay General Bancorp is a bank holding company whose principal subsidiary, Cathay Bank, serves individuals and small to medium-sized businesses through a multistate branch network and a Hong Kong branch. Lending is concentrated in commercial real estate, residential mortgages, and commercial loans, with a significant presence in California.
Financial performance and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Net interest income before credit-loss reversal | $565.9 million | $495.7 million |
| Net income | $271.9 million | $176.0 million |
| Diluted earnings per share | $3.33 | $2.17 |
| Net interest margin | 3.79% | 3.63% |
| Efficiency ratio | 44.25% | 44.40% |
| Return on average assets | 1.70% | 1.19% |
| Return on average equity | 13.18% | 9.10% |
- Net income rose $95.8 million, or about 54%. Higher net interest income and lower income taxes were key contributors.
- Interest income increased 19.4% to $688.0 million, while interest expense rose 51.7% to $122.1 million, mainly as deposit costs—particularly time-deposit costs—increased.
- Non-interest income declined to $31.7 million from $36.3 million, reflecting the absence of most of the prior-year acquisition gain and a $2.8 million loss on equity securities. Non-interest expense increased 11.9% to $264.4 million, including higher staff costs and affordable-housing and alternative-energy partnership amortization.
- The effective tax rate fell to 19.5% from 41.0%. The 2017 rate included $23.4 million of additional tax expense from remeasuring deferred tax assets after the Tax Cuts and Jobs Act; 2018 benefited from $34.5 million of tax credits.
- Total assets were $16.8 billion, up 7.7%. Gross loans rose 8.5% to $14.0 billion; deposits increased 7.9% to $13.7 billion. Residential mortgage loans grew 20.6%, commercial loans 11.4%, and commercial mortgage loans 3.7%; construction loans decreased 14.3%.
- Cash flow from operations was $336.5 million; investing activities used $1.134 billion, primarily reflecting loan growth and partnership investments; financing activities provided $863.3 million. Cash and cash equivalents increased $65.5 million to $600.3 million.
- Total equity was $2.12 billion. Bancorp regulatory capital ratios were 12.43% common equity Tier 1, 14.15% total risk-based capital, and 10.83% leverage; the Bank also exceeded well-capitalized thresholds.
Material changes versus the prior comparable period
- Net interest income increased 14.2%; margin expanded by 16 basis points. Loan growth and higher asset yields more than offset faster growth in funding costs.
- The allowance for loan losses was $122.4 million, down slightly from $123.3 million. The company recorded a $4.5 million reversal for credit losses, compared with a $2.5 million reversal in 2017, and reported $3.6 million in net loan recoveries.
- Non-performing assets were essentially unchanged at $58.3 million; the ratio to gross loans and OREO improved to 0.42% from 0.45%. Non-accrual loans declined to $41.8 million from $48.8 million, while accruing loans past due 90 days or more were $3.8 million.
- Time deposits increased to $6.7 billion and represented 49.0% of deposits, versus 42.5% a year earlier. Brokered deposits were $902.1 million, or 6.6% of deposits, versus 6.0%.
- Available-for-sale securities were $1.24 billion, down from $1.31 billion. Unrealized losses were $27.0 million, which management attributed primarily to higher interest rates and wider spreads and assessed as temporary; accumulated other comprehensive loss was $18.0 million.
- In 2018 the company repurchased 1.11 million shares for $42.6 million and paid $1.03 per share in cash dividends, up from $0.87 in 2017. The remaining authorization under the new repurchase program was $9.9 million at year-end.
Debt, liquidity, outlook, and risks
- Year-end FHLB advances were $530 million; long-term debt was $189.4 million, including $119.1 million of junior subordinated notes. Repurchase-agreement borrowings were zero, versus $100 million in 2017. FHLB advances included $260 million maturing in January 2019.
- The average monthly liquidity ratio for December was 12.0%, compared with 12.1% a year earlier. The Bank reported a $6.7 billion approved FHLB credit line and approximately $1.2 billion of available-for-sale securities available for liquidity or collateral. Management expected liquidity sources to meet operating needs over the next 12 months, while noting competition and possible runoff as time deposits mature; approximately 84% of time deposits matured within one year.
- No numerical earnings or growth guidance is provided. Management said economic growth appeared to be slowing and highlighted uncertainty around interest rates, trade policies, and local and international conditions. Interest-rate simulations estimated that an immediate 200-basis-point rise would increase next-12-month net interest income 8.59%, while a 200-basis-point decline would reduce it 18.57%; these are model estimates, not forecasts.
- Key exposures include commercial real estate and construction lending (about $7.3 billion combined), California real estate and economic conditions, rising deposit costs, and concentration in commercial lending. The filing also identifies regulatory and compliance burdens, liquidity, cybersecurity, third-party vendor, Asian-market, acquisition-integration, and tax-credit realization risks.
- Off-balance-sheet commitments to extend credit totaled $2.69 billion; standby and commercial letters of credit and bill-of-lading guarantees totaled approximately $281.6 million. These are contractual amounts, not expected losses or necessarily expected cash outflows.
- Unusual and accounting items include the 2017 SinoPac Bancorp/Far East National Bank acquisition, which generated a $5.6 million gain; a $2.8 million 2018 loss on equity securities after adoption of fair-value accounting; and a $4.5 million impairment charge for low-income housing investments. The company expected adoption of lease accounting to add $32–$37 million of operating lease assets and liabilities in 2019. The future impact of the expected-credit-loss standard had not yet been determined.
Important facts for investors to verify
- Loan concentrations, especially commercial real estate and construction exposure, geographic concentration, and changes in criticized, non-accrual, and restructured loans.
- Whether loan-loss reserves remain appropriate as loans grow and economic conditions or collateral values change; the allowance is based on management estimates.
- Deposit pricing, time-deposit renewal and runoff, brokered-funding levels, and the effect of higher funding costs on net interest margin.
- Liquidity and debt maturities, including the January 2019 FHLB maturity, and the availability of pledged versus unpledged collateral.
- The sensitivity of earnings and capital to interest rates, given the filing’s modeled downside under falling rates and the limitations of its simulation assumptions.
- Realization and potential recapture of housing and energy tax credits, the impact of accounting-standard adoption, and the status of legal contingencies. Management stated that pending litigation was not expected to have a material overall effect.
The audited financial statements received an unqualified opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2018.