Cathay General Bancorp (CATY) is a diversified financial services company with a rich history spanning over six decades. Founded in 1962, the company has grown to become a leading player in the banking industry, with a strong presence across the United States and an international footprint in Hong Kong.

Company Overview

At the heart of Cathay General Bancorp's success is its wholly-owned subsidiary, Cathay Bank. This state-chartered bank offers a wide range of financial products and services, catering to a diverse client base that includes individuals, small-to-medium sized businesses, and large corporate entities. With a focus on serving the Asian-American community, Cathay Bank has established a solid reputation for its personalized approach and deep understanding of its customers' unique needs.

As of September 30, 2024, Cathay General Bancorp operates an extensive network of branches across the United States and internationally. The company has 24 branches in Southern California, 19 branches in Northern California, 9 branches in New York State, four in Washington State, two in Illinois, two in Texas, and one each in Maryland, Massachusetts, Nevada, and New Jersey. Additionally, the company maintains an international presence with one branch in Hong Kong and representative offices in Taipei, Beijing, and Shanghai.

The company primarily operates in high-density Asian-populated areas of Southern and Northern California, New York City, Dallas, Houston, Seattle, Boston, Chicago, Edison (NJ), Rockville (MD), and Las Vegas. It also has loan clients in Hong Kong. Notably, Cathay General Bancorp does not have a specific industry concentration, and its loans are generally secured by real property or other collateral of the borrowers.

Historical Performance

Throughout its history, Cathay General Bancorp has demonstrated resilience in the face of economic challenges. During the Great Recession in the late 2000s, the company experienced an increase in non-performing assets and had to strengthen its allowance for loan losses. However, through prudent risk management and strategic decision-making, Cathay General Bancorp successfully navigated these difficult conditions and emerged as a stronger institution.

Financials

The company's financial performance has been consistent and impressive. As of the end of 2023, Cathay General Bancorp reported annual net income of $354.12 million, annual revenue of $810.04 million, annual operating cash flow of $384.74 million, and annual free cash flow of $381.34 million. These figures demonstrate the company's ability to generate strong and stable financial results, even in the face of challenging market conditions.

In the most recent quarter (Q3 2024), Cathay General Bancorp reported revenue of $189,520,000, net income of $67,514,000, operating cash flow of $81,248,000, and free cash flow of $82,697,000. This represents a 1% increase in net income compared to the previous quarter (Q2 2024), where the company reported net income of $66.8 million. The company's diluted earnings per share increased 2.2% to $0.94 per share in Q3 2024, compared to $0.92 per share in Q2 2024.

Liquidity

Cathay General Bancorp's liquidity position remains robust, with a healthy loan-to-deposit ratio of 77% as of the end of 2023. The company's capital ratios also exceed regulatory requirements, with a Common Equity Tier 1 ratio of 12.84% and a Total Risk-Based Capital ratio of 14.31% as of the same period. This solid financial footing provides the company with the flexibility to navigate the evolving banking landscape and capitalize on growth opportunities.

As of December 31, 2023, the company had cash holdings of $173,990,000. Additionally, as a shareholder of the Federal Home Loan Bank (FHLB), Cathay Bank has access to lower-cost FHLB financing when necessary. As of September 30, 2024, the Bank had an approved credit line with the FHLB of San Francisco totaling $8.13 billion, further enhancing its liquidity position.

Recent Performance

In the third quarter of 2024, Cathay General Bancorp continued to demonstrate its resilience. The company reported net income of $67.5 million, or $0.94 per diluted share, a 1% increase compared to the previous quarter. This performance was driven by a 3.5% annualized increase in total deposits, as well as a 0.3% annualized increase in total gross loans. The net interest margin for the quarter was 3.04%, a slight improvement from the previous quarter's 3.01%.

One notable development during the third quarter was the company's continued focus on managing its loan portfolio. Cathay General Bancorp reported a 0.84% non-accrual loan ratio as of September 30, 2024, which represented a $55.5 million increase from the previous quarter. The increase was primarily attributable to the placement of a $38 million loan relationship on non-accrual status due to interest delinquency. However, the company was able to recover $1.9 million in back interest on its largest non-accrual loan, a $23 million construction loan.

To address the increase in non-accrual loans, Cathay General Bancorp recorded a provision for credit losses of $14.5 million in the third quarter, up from $6.6 million in the previous quarter. This decision reflects the company's proactive approach to managing credit risk and maintaining a robust allowance for loan losses, which stood at 0.85% of total loans as of September 30, 2024.

Business Segments and Products

Cathay General Bancorp's main business segments revolve around its loan portfolio and deposit base. As of September 30, 2024, the company's gross loans held for investment totaled $19.37 billion. The loan portfolio is diversified across different sectors, with the largest segments being:

1. Commercial real estate loans: $9.98 billion (51.5% of total loans)
2. Residential mortgage loans and equity lines: $5.98 billion (30.9%)
3. Commercial loans: $3.11 billion (16.0%)

Within the commercial real estate segment, the portfolio is further diversified across different property types, with the largest concentrations in retail (23%), multifamily (27%), office (14%), and warehouse (12%) properties. The bank focuses on providing financing to experienced real estate investors and developers.

On the deposit side, Cathay General Bancorp's deposit base totaled $19.94 billion as of September 30, 2024. The largest components of the deposit base were:

1. Time deposits: $10.25 billion (51.4% of total deposits)
2. Non-interest-bearing demand deposits: $3.25 billion (16.3%)
3. Money market deposits: $3.13 billion (15.7%)

The company has been focused on growing its deposit base to support its lending activities. In addition to its core lending and deposit-taking activities, Cathay General Bancorp also generates revenue from sources such as depository service fees, wealth management fees, letters of credit commissions, and gains/losses on securities.

Future Outlook

Despite the challenges posed by the evolving credit environment, Cathay General Bancorp remains well-positioned to navigate the future. The company has a diversified loan portfolio, with commercial real estate loans and commercial and industrial loans accounting for approximately 51% and 16% of the total loan mix, respectively, as of September 30, 2024. Furthermore, the bank's focus on the Asian-American community provides it with a unique and valuable market niche, allowing it to capitalize on the growing economic influence of this demographic.

Looking ahead, Cathay General Bancorp has provided guidance for 2024:

• Loan growth is expected to be between -1% and 0% based on current trends.

• Net interest margin is anticipated to range between 3.05% and 3.10% for the full year.
• The effective tax rate is expected to be between 10.5% and 11.5%.
• Solar tax credit investment amortization is projected to be $32.5 million in 2024, with $1.5 million in Q4 2024.

These projections reflect the company's ability to effectively manage its interest rate risk and navigate the current economic environment.

In addition to its organic growth initiatives, Cathay General Bancorp has demonstrated a commitment to shareholder value creation through its capital management strategies. In May 2024, the company announced a new $125 million stock repurchase program, and during the third quarter, it repurchased 832,460 shares at an average cost of $42 per share, totaling $35 million. This proactive approach to capital allocation underscores the company's confidence in its long-term prospects and its dedication to enhancing shareholder returns.

Challenges and Opportunities

Cathay General Bancorp's success is not without its challenges, however. The banking industry continues to face headwinds, including increased regulatory scrutiny, evolving customer preferences, and the ongoing threat of cybersecurity risks. The company's geographic concentration in the Asian-American market, while a strength, also exposes it to regional economic fluctuations and potential geopolitical tensions.

Nevertheless, Cathay General Bancorp's proven track record of financial discipline, risk management, and strategic foresight positions it well to navigate these challenges and capitalize on future growth opportunities. The company's experienced management team, strong brand recognition, and deep community ties provide a solid foundation for continued success in the years ahead.

Conclusion

In conclusion, Cathay General Bancorp is a well-established and diversified financial services company that has demonstrated its ability to deliver consistent financial performance and navigate the evolving banking landscape. With a focus on serving the Asian-American community, a robust balance sheet, and a commitment to shareholder value creation, the company is poised to continue its growth trajectory and solidify its position as a leading player in the banking industry. Its strong liquidity position, diversified loan portfolio, and strategic focus on high-growth markets provide a solid foundation for future success, even as it faces the challenges inherent in the dynamic banking sector.