Cathay General Bancorp (NASDAQ:CATY): Solid Fundamentals Amid Challenging Environment

Published on September 24, 2024 | Ticker: CATY

Cathay General Bancorp, a leading regional bank serving the Asian-American community, demonstrated resilience in the face of a challenging economic landscape. With a strong focus on commercial and real estate lending, the company navigated the recent market volatility with prudence, delivering solid financial results for its shareholders.

Financials

For the full year 2023, Cathay General Bancorp reported net income of $354.1 million, a testament to the bank's ability to generate consistent profitability. The company's annual revenue reached $1.30 billion, showcasing its capacity to drive top-line growth. Additionally, the bank's annual operating cash flow stood at $384.7 million, while its annual free cash flow amounted to $381.3 million, underscoring the strength of its cash generation capabilities.

In the latest quarter, the bank reported net income of $66.8 million, a 6.4% decrease compared to the previous quarter. Diluted earnings per share for the second quarter of 2024 were $0.92, down from $0.98 in the prior quarter. The decrease in net income was primarily due to a $4.7 million increase in the provision for credit losses and a $4.1 million charge related to the accelerated amortization of solar tax credit investments.

Cathay General Bancorp's net interest margin (NIM) for the second quarter of 2024 was 3.01%, compared to 3.05% in the previous quarter. The company noted that it saw signs of the NIM bottoming out, with the NIM for the month of June reaching 3.06%. Management expected the NIM to improve in the second half of 2024 as $7.2 billion in high-cost CDs mature and reprice at lower rates.

Loan Portfolio

The bank's total gross loans decreased by $72 million, or 1.5% annualized, during the second quarter of 2024. This was primarily driven by decreases in commercial loans, residential mortgages and HELOCs, and construction loans, partially offset by an increase in commercial real estate loans. Due to the slower-than-expected loan growth in the first half of 2024, the company revised its overall loan growth guidance for the year to a range of 0% to 2%.

Cathay General Bancorp's loan portfolio remained well-diversified, with 64% of the loans being fixed-rate or hybrid loans in their fixed-rate period, excluding fixed-to-float interest rate swaps on 4% of total loans. The bank's commercial real estate (CRE) loan portfolio, which accounted for 50.6% of the total loan portfolio, continued to be a focus area. As of June 30, 2024, the average loan-to-value (LTV) of the CRE portfolio was 50%, and the retail property loan portfolio comprised 24% of the total CRE portfolio.

Risks and Challenges

The bank's asset quality metrics showed some deterioration in the second quarter. Nonaccrual loans increased to $107.3 million, or 0.55% of total loans, as of June 30, 2024, up from $98.1 million, or 0.50%, at the end of the previous quarter. The increase in nonaccrual loans was primarily due to two CRE loans totaling $8.3 million, with no projected losses based on recent appraisals. The bank recorded net charge-offs of $8 million in the second quarter, compared to $1.1 million in the previous quarter.

Liquidity

Cathay General Bancorp's capital position remained strong, with a Tier 1 leverage ratio of 10.83% and a total risk-based capital ratio of 14.74% as of June 30, 2024. These ratios exceeded the regulatory requirements for well-capitalized institutions, providing the bank with ample cushion to support future growth and withstand potential economic headwinds.

The bank's liquidity position also remained robust, with an unused borrowing capacity from the Federal Home Loan Bank of $7.1 billion and the Federal Reserve Bank of $174 million, as well as $1.7 billion in un-deployed securities as of June 30, 2024. These sources of available liquidity more than covered 100% of the bank's uninsured and un-collateralized deposits, which stood at $8.2 billion, or 41.5% of total deposits, as of the same date.

Outlook

Looking ahead, Cathay General Bancorp provided updated guidance for the remainder of 2024. The company expected overall deposit growth to be in the range of 3% to 4%, while core noninterest expense, excluding tax credit and core deposit intangible amortization and OREO expense, was expected to increase by 4% to 5%. The bank also anticipated a total 2024 solar tax credit investment amortization of $32.5 million, with $10 million in the third quarter and $2 million in the fourth quarter.

Conclusion

Cathay General Bancorp demonstrated its ability to navigate the current economic landscape, delivering solid financial results and maintaining a strong capital and liquidity position. The bank's diversified loan portfolio, prudent risk management, and strategic focus on the Asian-American community continued to be key drivers of its success. As the company navigates the evolving market conditions, investors can take comfort in Cathay General Bancorp's proven track record and its commitment to delivering long-term value for its shareholders.

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