CATHAY GENERAL BANCORP (CATY) stock intrinsic value fair value estimate & owner earnings analysis

Cathay General Bancorp owns Cathay Bank, a Los Angeles commercial bank founded in 1962 to serve Chinese-American families and businesses. It now has about $24.7 billion of assets, $21.1 billion of deposits and $20.4 billion of loans, with branches concentrated in Southern and Northern California and further branches in New York, Washington, Illinois, Texas, Maryland, Massachusetts, Nevada and New Jersey, plus one branch in Hong Kong. The business is simple to describe: it gathers deposits, much of them from relationship customers in its community, and lends them out, mostly against real estate. Commercial mortgages were 52% of gross loans at the end of 2025 and residential mortgages 29%, so the bank's fortunes are tied to property values in Los Angeles, the San Francisco Bay Area and New York. Because a bank's operating cash flow is dominated by loan and deposit movements, we measure what it earns for its owners as net income to common shareholders. Branch spending is small (about $5 million a year) and stock compensation is already charged in net income. Earnings per diluted share were $2.19 in 2016, $2.17 in 2017 (depressed by a one-time write-down of deferred tax assets when the federal tax rate was cut), $3.33, $3.48, $2.87 (the 2020 pandemic reserve build), $3.80, $4.83, $4.86, $3.95 and $4.54 in 2025. We anchor on the eight years from 2018 to 2025, which cover a full interest-rate cycle - near-zero rates, the sharp rise of 2022-2023 and the deposit-cost squeeze of 2024 - all under today's tax rate. The median of total net income over that span is about $292 million and the median of the last five years is $315 million; we use $305 million, between the two, because the loan book and deposit base have grown since 2018. About half of per-share growth since 2018 came from buybacks, which reduced the diluted share count from 81.6 million to about 67.3 million, so we project total earnings and divide by today's share count rather than projecting per-share growth. Recent results: net income fell 19% in 2024 as deposit costs peaked, then grew 10% in 2025 to $315 million. First-half 2026 net income was $179 million, up 22% on the first half of 2025, which annualises to about $358 million. We do not lift the anchor on two strong quarters. Net charge-offs were 0.18% of average loans in 2025, 0.15% in 2024 and 0.09% in 2023 - very low by historical standards, which is part of why recent earnings look good. Base case (about $78 a share): earnings start from the $305 million anchor and grow 2% a year, roughly the bank's long-run loan growth, with each year's growth funded by retaining about 2% of equity so it is not double-counted as cash to owners. We include one moderate credit episode in years four and five costing about $115 million a year after tax (losses of about 1.5% of today's loan book in total), because property-backed lenders do not go ten years without one. After year ten, earnings of about $370 million continue without further growth; what sustains them is a deposit franchise in its communities that has persisted for six decades. The growth credited is only the bank's demonstrated pace of balance-sheet growth; we give no credit for margin expansion or new markets. Bear case (about $40 a share): a repeat of the 2008-2010 credit cycle, which Cathay itself went through. In that cycle the bank lost money in 2009, took $258 million of government TARP capital and issued new common shares at depressed prices. We model cumulative loan losses of 8% of today's loan book spread over three years, pre-tax pre-provision earnings of about $370 million, and net losses of roughly $390 million over those three years. Tangible common equity would fall from about 11% to roughly 9.4% of tangible assets; we assume no distributions during the cycle, a slow recovery to about $240 million a year of earnings by years seven to ten, and 15% dilution from a capital raise at trough prices, as happened last time. The bear value sits almost exactly at today's tangible book value of about $40 a share, which we think fair: after a severe cycle the franchise is worth roughly its rebuilt capital, not much more. Bull case (about $96 a share): earnings settle near the current run rate of about $345 million, with 3% annual growth funded from retained capital and only a mild credit episode (about 0.75% of loans). This rests on the improvement already visible in 2025 and 2026 continuing, not on any new venture. Debt: as a bank, deposits and borrowings are its raw material and interest is an operating cost already deducted in earnings, so no debt is subtracted from these values; leverage risk is carried in the bear case's credit cycle and dilution. What we are least sure of: first, how much of the 2025-2026 recovery is a lasting earnings level rather than a benign credit moment - charge-offs below 0.2% are not normal for a commercial-real-estate lender. Second, the depth of the next property downturn in Los Angeles and New York office and retail property. Third, deposit costs if rates move. If credit is worse than our base but short of 2009, the shares are worth roughly $55-65. If the 2009 cycle repeats with dilution, about $40. Margin-of-safety price: we are reasonably confident in the earnings level, because eight years of history across a full rate cycle bound it fairly tightly ($229-361 million). The worst plausible outcome is a property-led credit cycle like 2009; the bank survived that one, and starts this time with more capital, but shareholders were diluted. During the holding period the bank pays $1.52 a share a year in dividends and buys back stock. $42 is a little above tangible book value and roughly what the shares would be worth after a 2009-style cycle; measured against that price the dividend yield is about 3.6%, and the shares need to move only toward the base case over three to four years for the base case to imply 20% a year. Above that, a severe credit cycle in the first few years would leave little room to reach the target. The margin-of-safety price is $42. Our previous estimate used a different valuation basis and its figures are not comparable to these.