Cathay General Bancorp — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 28, 2020. This is an annual report, not a standalone fourth-quarter filing. Cathay General Bancorp is a bank holding company operating primarily through Cathay Bank, with a significant California presence and additional U.S. and Hong Kong operations.
Financial and operating results
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Interest income | $769.3 million | $688.0 million | Up 11.8% |
| Net interest income, before credit-loss reversal | $574.9 million | $565.9 million | Up 1.6% |
| Non-interest income | $44.8 million | $31.7 million | Up $13.0 million, mainly from equity-security gains and wealth-management fees |
| Non-interest expense | $277.3 million | $264.4 million | Up 4.9% |
| Net income | $279.1 million | $271.9 million | Up 2.7% |
| Diluted earnings per share | $3.48 | $3.33 | Up 4.5% |
| Net interest margin | 3.54% | 3.79% | Down 25 basis points |
| Return on average assets / equity | 1.61% / 12.63% | 1.70% / 13.18% | Both lower |
| Efficiency ratio | 44.75% | 44.25% | Higher, reflecting expense growth |
Amounts are consolidated; dollar amounts are rounded. The 2019 $7.0 million reversal of credit losses increased reported net interest income after that reversal to $581.9 million. Net recoveries were $7.8 million, compared with $3.6 million in 2018.
Balance sheet, capital, liquidity and cash flow
- At year-end, total assets were $18.1 billion, net loans $15.0 billion, deposits $14.7 billion and total equity $2.29 billion. Assets grew 7.7%; gross loans grew 7.9% to $15.1 billion; deposits grew 7.3%.
- Loan growth was concentrated in commercial mortgages, up 8.2% to $7.3 billion, and residential mortgages, up 10.7% to $4.1 billion. Commercial loans were $2.8 billion; construction loans were $579.9 million.
- Cash, cash equivalents and restricted cash were $593.8 million at year-end, versus $600.3 million in 2018. Operating cash flow was $435.0 million; investing cash flow was negative $1.38 billion, largely reflecting loan growth and securities purchases; financing cash flow was positive $940.2 million, mainly from deposit and FHLB funding.
- Year-end borrowings included $670 million of FHLB advances, $25.7 million of short-term borrowings and $119.1 million of junior subordinated notes. The $70.3 million U.S. Bank term loan was prepaid in full in November 2019. The residual SinoPac acquisition payable was $7.0 million, due in July 2020.
- The average monthly liquidity ratio for December was 12.9%, versus 12.0% a year earlier. The Bank had a $4.5 billion FHLB credit line; $1.4 billion of available-for-sale securities was reported as available for additional liquidity or collateral. Management said liquidity was adequate for the next 12 months.
- Bancorp and Bank capital ratios exceeded regulatory well-capitalized thresholds. Bancorp common equity Tier 1, total risk-based capital and leverage ratios were 12.51%, 14.11% and 10.83%; Bank ratios were 12.97%, 13.81% and 11.23%, respectively.
Material changes versus 2018
- Earnings increased modestly as loan growth lifted interest income, but the benefit was substantially offset by higher funding costs: interest expense rose 59.2% to $194.4 million. Average interest-bearing deposit cost increased to 1.55% from 1.03%, and time-deposit expense increased to $152.8 million from $86.4 million.
- The net interest margin contracted to 3.54% from 3.79%, despite a higher average yield on interest-earning assets. Net interest income increased only 1.6%.
- Non-interest income rose, including a $5.7 million net gain from equity securities compared with a $2.8 million loss in 2018. The effective tax rate was 20.1%, versus 19.5%; tax credits recognized from alternative energy, low-income housing and other sources totaled $39.6 million.
- Non-performing assets declined to $57.2 million from $58.3 million, and were 0.38% of gross loans plus OREO, versus 0.42%. The allowance for loan losses was $123.2 million; allowance for credit losses including unfunded commitments was $127.1 million.
- Brokered deposits increased to $1.3 billion, or 9.1% of deposits, from $902.1 million, or 6.6%. Time deposits represented 50.7% of year-end deposits; approximately 91% matured within one year.
- Equity increased 8.1% to $2.29 billion. The company paid $1.24 per common share in dividends and repurchased $26.4 million of shares during 2019; $23.6 million remained under its $50 million repurchase authorization at year-end.
Outlook, commentary, risks and unusual items
- The filing provides no numerical earnings or growth guidance. Management expected liquidity to be adequate over the following 12 months, while noting that deposit competition could cause some time-deposit runoff.
- Management identified slowing or uncertain economic conditions, U.S.-China trade tensions, real-estate-market weakness and the coronavirus outbreak emerging in early 2020 as risks. These were forward-looking concerns at the filing date, not reported 2019 impacts.
- Credit risk is concentrated in commercial and commercial real-estate lending and in California markets. Commercial real-estate loans were 277% of Bank risk-based capital at year-end; construction, land-development and other land loans were 34%.
- The company planned to adopt CECL on January 1, 2020. It expected a one-time cumulative-effect adjustment but said the amount and overall effect could not yet be determined; model validation and implementation work remained underway.
- Affordable-housing and alternative-energy investments totaled $308.7 million, with $114.5 million of unfunded commitments. Returns depend in part on realizing tax credits; the company reported a $2.1 million impairment charge on low-income-housing investments in 2019.
- Interest-rate simulations estimated that an immediate 200-basis-point increase would raise next-12-month net interest income 6.66%, while a 200-basis-point decrease would reduce it 13.08%. Management cautioned that these model results depend on assumptions and are not forecasts.
- The company reported ongoing legal claims but management did not expect their resolution to materially affect consolidated financial condition, results or liquidity. The 2019 financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- How CECL adoption affected the allowance, retained earnings and regulatory capital from January 1, 2020, once quantified.
- Whether higher deposit costs, brokered funding and near-term time-deposit maturities continue to pressure net interest margin and liquidity.
- Credit quality and collateral trends in commercial real-estate, construction and California exposures, including classified loans, TDRs and allowance adequacy.
- The sustainability of earnings excluding equity-security gains and tax-credit benefits, and the future performance and funding needs of tax-advantaged investments.
- Whether actual interest-rate and deposit behavior differs materially from the company’s sensitivity simulations and liquidity assumptions.