CATY Q2 Deep Dive: Loan Growth Surges, Credit Trends Mixed as Deposit Costs Ease

Regional bank Cathay General Bancorp (NASDAQ:CATY) reported revenue ahead of Wall Street’s expectations in Q2 CY2025, with sales up 9.7% year on year to $197.1 million. Its non-GAAP profit of $1.10 per share was 1.1% above analysts’ consensus estimates.

Is now the time to buy CATY? Find out in our full research report (it’s free).

StockStory’s Take

Cathay General Bancorp’s second quarter saw a negative market reaction, despite the company surpassing Wall Street’s revenue and earnings expectations. Management attributed the quarter’s outperformance to robust loan growth in both commercial and commercial real estate segments, as well as disciplined deposit cost management. CEO Chang Liu pointed out that strong loan origination, particularly in commercial and CRE, drove net interest income higher. However, the quarter also saw a notable increase in net charge-offs and classified loans, signaling ongoing credit quality concerns.

Looking ahead, management’s updated guidance is shaped by a cautious stance on the lending environment and sensitivity to broader economic factors. CEO Chang Liu emphasized the bank’s expectation for loan demand to moderate in the second half of the year, noting, "We want to be sensitive to economic landscape changes, including tariff noise and CPI adjustments." CFO Heng Chen highlighted that net interest margin could benefit from further rate cuts, but also warned that improvements in deposit costs may be largely realized. The company plans to remain disciplined in balancing loan growth with prudent risk management and deposit pricing.

Key Insights from Management’s Remarks

Management cited balanced growth across commercial and real estate lending, improved deposit mix, and a focus on fixed-rate loan composition as key drivers of the quarter, while credit metrics and funding costs remain active areas of attention.

• Commercial and CRE loan momentum: Strong growth in both commercial and commercial real estate lending fueled overall loan balances, with new customer relationships and increased utilization of existing lines contributing to the increase.
• Shift toward fixed-rate loans: The loan portfolio is now 62% fixed-rate or hybrid in fixed-rate period, which management believes will help stabilize yields as interest rates decline.
• Increased charge-offs and classified loans: The quarter saw a spike in net charge-offs, primarily from a previously reserved large commercial loan, and a rise in classified assets due to a single commercial relationship facing cash flow issues. Management described the credit environment as having “a lot of noise,” with economic forecasts and specific large credits driving provision levels.
• Deposit growth and cost control: Deposits grew modestly, supported by seasonal factors and targeted marketing, while time deposit rates declined amid a less promotional environment. CFO Heng Chen highlighted that the bank benefited from lower cost of funds and expects further improvement if rates decline.
• Liquidity and funding adjustments: A late-quarter surge in loan demand required short-term Federal Home Loan Bank borrowings, which management plans to replace with lower-cost brokered certificates of deposit, reflecting an agile approach to funding needs.

Drivers of Future Performance

Management expects loan growth to slow and net interest margin to remain sensitive to interest rate changes and deposit pricing trends.

• Loan growth moderation: While the first half of the year saw strong loan origination, management expects a return to low single-digit growth in the second half, citing uncertainty around economic conditions and borrower demand. CEO Chang Liu noted the importance of monitoring both tariff impacts and consumer price trends in shaping future loan demand.
• Deposit pricing flexibility limited: CFO Heng Chen indicated that most of the benefit from previous rate cuts has already flowed through to deposit costs. Future improvements are expected to be modest, with further margin upside dependent on additional rate cuts by the Federal Reserve.
• Credit quality watchpoints: Management remains focused on managing credit risk, especially given the recent increase in classified and nonaccrual loans. The allowance for credit losses is being closely calibrated using economic forecasts, with unemployment trends and specific borrower performance as key inputs.

Catalysts in Upcoming Quarters

In the coming quarters, our analysts will focus on (1) the pace and quality of new loan originations, particularly in the commercial and CRE segments, (2) management’s effectiveness in controlling deposit costs amid a competitive funding environment, and (3) any further developments in credit quality, especially regarding classified and nonaccrual loans. Changes in interest rates and borrower sentiment will also be critical factors to monitor.

Cathay General Bancorp currently trades at $47.99, in line with $47.88 just before the earnings. Is the company at an inflection point that warrants a buy or sell? Find out in our full research report (it’s free).

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