Cathay General Bancorp (CATY) Q3 2026 Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bank Corp's third quarter 2026 earnings conference call. My name is Ashia, and I'll be your coordinator for today. At this time, all participants are in listen-only mode. Following the prepared remarks, there will be a question and answer session. If you would like to participate in this portion of the call, please press star followed by one at any time during the conference. If assistance is needed any time during the call, please press star followed by zero and a coordinator will be happy to assist you. Today's call is being recorded and will be available for replay at www.cathageneralbankcorp.com. Now, I would like to turn the call over to Georgia Lowe, Investor Relations of Cathay General Bank Corp. Please go ahead.

Thank you, Asha, and good afternoon. Here to discuss the financial results today are Mr. Chang Liu, our President and Chief Executive Officer, and Al Wang, our Executive Vice President and Chief Financial Officer. Before we begin, we wish to remind you that speakers on this call may make forward-looking statements within the meaning of applicable provisions of the Private Securities Litigation Reform Act of 1995 concerning future results and events, and that these statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These results and uncertainties are further described in the company's annual report on Form 10-K for the year ended December 31, 2025, at Item 1A in particular, and in other reports and filings with the Securities and Exchange Commission from time to time. As such, we caution you not to place undue reliance on such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update or review any forward-looking statements to reflect future circumstances, developments, or events, or the occurrence of unanticipated events. This afternoon, Cathay General Bancorp issued an earnings release outlining its third quarter 2026 results. To obtain a copy of our earnings release as well as our earnings presentation, please visit our website at CathayGeneralBancorp.com. After comments by management today, we will open up this call for questions. I will now turn the call over to our President and Chief Executive Officer, Mr. Chang Nu.

Thank you, Georgia. Good afternoon, and thank you for joining us today. I will begin on slide four. We deliver another strong quarter of operating performance, highlighted by record net interest income, continued margin expansion, strong loan and deposit growth. Net income was $95.2 million, or $1.43 per diluted share. Net interest income reached a record $211.9 million, increasing $11 million, or 5.5 percent from the prior quarter. Active balance sheet management, loan growth, and asset repricing helped drive another four basis points of net interest margin expansion to 3.52 percent. Pre-provision net revenue was $151.3 million, up to $21.3 million, or 16.4 percent from the prior quarter. Excluding the notable items in both periods, adjusted pre-provision net revenue was $140.6 million, up $11.7 million, or 9.1 percent, reflecting stronger revenue growth relative to expenses. We generated strong loan and deposit growth during the quarter. loans increased $575 million, or 2.8%, during the quarter, while deposits increased $773 million, or 3.7%, led by growth in non-interest-bearing demand and money market balances. Credit results this quarter included elevated charge-offs in three previously identified borrower-specific credits. We had substantial reserves in place against these credits and took appropriate action during the quarter. As a result, non-performing assets declined approximately 18%. Criticized and classified balances also declined. Outside of these credits, the broader profile remains stable and overall credit quality remains sound. The quarter also included several notable items. We recognized the $36.1 million valuation gain on equity securities. We also recognized a $15.1 million loss related to another securities repositioning transaction. The repositioning improved the yield on the securities portfolio and expected to add approximately $2.9 million to annual net interest income. To support the communities we serve and enhance tax efficiency, we committed $8 million to the Cathay Bank Foundation. We also incurred $5.4 million of contract termination costs to improve our operating model. Finally, during the quarter, we completed a planned redemption of $54.1 million of Trust Preferred Securities. The redemption provided a $3.1 million benefit, simplified our funding structure, and reduced interest expense going forward. Overall, we are pleased with the underlying trends in the business, including strong relationship growth, improving net interest income, continued investment in the franchise, and a strong capital position. I will now turn the call over to Mr. Al Wang to walk through our third quarter results in more detail. I'll provide some closing comments before we open up the call to Q&A.

Thank you, Chang. I'll start with our balance sheet on slide five. Period end loans net of fees were $21.2 billion, increasing approximately $573 million, or 2.8 percent link quarter, reflecting strong loan growth, particularly in C&I. On the deposit side, period imbalances rose approximately $773 million, or 3.7%, to $21.8 billion, led by non-interest-paying demand and money market deposits. That growth helped fund our lending and improved our net loan-to-deposit ratio to approximately 96%. Tangible book value per share grew $0.61 to $40.54, even after this quarter's share repurchases. Slide six shows our average loan and deposit mix. Average loans were $20.5 billion, representing annualized growth of 5.9%. Average deposits reached $21.4 billion, representing annualized growth of 13.8%. Our Cree concentration ratio was 283%, remaining below both regulatory thresholds and our internal limits. Slide 7 summarizes our cash and available for securities portfolio. Cash and short-term investments increased this quarter, reflecting strong deposit growth and the timing of our balance sheet management activities. By contrast, the AFS securities portfolio declined modestly, reflecting a lower reinvestment rate and the impact of sharply higher market rates. During the quarter, we sold approximately $89 million of agency MBS, yielding 1.83 percent, and reinvested in agency MBS, yielding 5.65 percent. The new securities have a similar average life, and shorter duration. So we picked up yield without adding interest rate or credit risk. So far this year, we've repositioned approximately $460 million of securities through three transactions. Together, these transactions are expected to add approximately $11.4 million to annual net interest income, with an aggregate earned back period of approximately 3.6 years. Our securities portfolio remains highly liquid and defensively positioned. Effective duration is approximately 2.1 years, and 61% of projected cash flows are expected to return through 2027. That limits our duration exposure and gives us substantial near-term capacity to reinvest in a higher-rate environment. Moving to slide eight, net income increased 3.2% link quarter to $95.2 million. Record net interest income and higher non-interest income supported the increase. Higher provision expense and non-interest expense offset part of that benefit. On slide 9, I'll walk through the yields and funding costs. Net interest income increased $11 million to a record $211.9 million, driven by loan growth, day count, and continued margin expansion. Net interest margin increased four basis points to 3.52%, as higher loan yields more than offset the increase in funding costs. Loan yields increased five basis points to 6.02%, reflecting higher rates as well as interest recoveries and prepayment penalties. That benefit was partially offset by higher funding costs. Total deposit costs rose four basis points to 2.43%, and interest-bearing deposit costs rose five basis points to 2.91%. Overall, we continue to see positive momentum in net interest income, supported by balance sheet growth and asset repricing. Moving to slide 10, non-interest income increased to $42.8 million, driven mainly by the notable items Chang mentioned earlier. These included $36.1 million unrealized gain on equity securities and the $3.1 million benefit from the trust-preferred redemption. Those gains were partially offset by the $15.1 million repositioning loss. Excluding these items, adjusted non-interest income was $18.8 million, down slightly from last quarter, mainly due to lower wealth management fees. Moving to slide 11, non-interest expense increased to $103.4 million from $92.3 million last quarter. The increase was primarily driven by the two other notable items Cheng mentioned earlier. We committed $8 million to the Cathay Bank Foundation to support the communities we serve while also providing a tax benefit. We also incurred $5.4 million of contract termination costs as we made changes to improve our operating model. Outside of those items, compensation and benefits increased by $1.5 million, partially offset by approximately $3.4 million of lower tax credit investment amortization. Excluding those notable items, adjusted non-interest expense was $82.9 million, up approximately 1.2% from the prior quarter. With only modest growth in underlying expenses, strong revenue growth further drove improvement to our efficiency ratios. Our reported efficiency ratio improved to 40.6%, while our adjusted efficiency ratio, excluding the notable items, improved to 35.9%. Turning to slide 12, the allowance for loan loss increased approximately $5 million to $224 million, while the allowance ratio remained relatively stable at 1.06% of gross loans. The provision for credit loss was $28.6 million this quarter, primarily reflecting strong loan growth and updated loss assumptions, incorporating recent charge-off experience. Net charge-off increased to $25.3 million, or 49 basis points annualized. These charge-offs were concentrated in the three previously identified credits. They included one fully reserved construction loan and two movie theater Cree loans acquired through the Far East National Bank Acquisition. We previously provisioned $9.1 million for those two movie theater loans in the third quarter of 2025. Classified balances and non-performing assets declined during the quarter, largely reflecting the charge offs. Beyond those credits, broader portfolio trends remained generally stable and overall credit quality remained sound. Turning to slide 13, capital ratios declined modestly, reflecting strong loan growth and share repurchases, while the redemption of our trust-perfured securities reduced total risk-based capital. During the quarter, we repurchased approximately 801,000 shares for $50.3 million at an average price of approximately $62.81 per share. Even with those impacts, our capital position remained strong. We ended the quarter with a CET1 ratio of 13.51% and total risk-based capital ratio of 15%, both well above regulatory minimum requirements. I'll wrap up on slide 14 with our full-year outlook. outlook. Based on our strong year-to-date loan growth, we are raising our full-year outlook to 5% to 6% from 3.5% to 4.5% previously. We are also increasing our deposit growth outlook to 4% to 5% compared with the prior expectation of 3% to 4%. We continue to expect adjusted non-interest expense growth of 3.5% to 4.5% of the year. Our full-year NIM outlook remains at 3.40% to 3.50%. Our rate outlook now assumes two 25 basis points increases during 2026, including the September increase and another increase in December. Finally, we now expect our full-year effective tax rate to be between 21.5% and 22.5%. And with that, I'll turn the call back over to Chang.

Thank you, Al. We are pleased with our performance through the first nine months, including strong balance sheet growth, record net interest income, and continued margin expansion. That momentum is reflected in the higher full-year loan and deposit growth outlooks we announced today. During the quarter, we took several proactive steps to support our communities, improve our earnings profile, and optimize our funding and capital structure while continuing to support organic growth. We believe these actions leave us well positioned as we move forward. Looking ahead, our priorities remain straightforward. Disciplined relationship growth, sound credit quality, and prudent capital management. With that, we can now open it up for questions.

Ladies and gentlemen, if you have a question at this time, please press the star key followed by one on your touchstone telephone. We ask that you please limit yourself to one question and one follow-up question. You may then return to the queue. If your question has been answered and you wish to remove yourself from the queue, please press star then two. To prevent any background noise, we ask that you please place yourself on mute once your question has been stated. Your first question comes from David Chiaverney with Jeffries. Please go ahead.

Hi, thanks for taking the questions. I wanted to start on the net interest margin, very nice trend here over the past several quarters. And looking at the guide range being unchanged, seems to be conservative, but can you talk about how we should think about the NIM into the fourth quarter and then maybe layer into that your rate sensitivity and how rate hikes could impact the forward look on NIM.

Yeah, so I'm not ready to call kind of a peak on NIM. I still think there's room for expansion. We do have in the guide a 25 basis point increase in December, which will kind of, you know, help us from the asset side. So we've got, I would say on the asset side, Over the next year, we've got, you know, $8.9 billion of loans repricing. Obviously, we have, you know, a billion plus of cash and a large part of our investment portfolio, half of which are in Treasury. So we'll get some tailwind from the asset side. On the deposit side, I would say that, you know, we do have some headwinds with, you know, we've got $3.4 billion of CDUs rolling off this quarter at a rate of $3.46. So, as you might know, we ran a summer CD promo, for example, at $365 and $385 for six and 12 months, respectively. So, just with those data points, there's going to be some more pressure. And you saw some pressure on deposit costs just this quarter. It went up about five basis points. So, we expect the pressure to continue with competition. And that's not just for us, but across the industry. But we feel pretty confident that, you know, we still have room to expand. If I look at, for example, the margin in the month of September, X kind of prepayments and recoveries. I mean, we were just for that month at, you know, 353. So, you know, I think we'll probably be at the upper end of the range. But remember, that's a full year range. So, you know, so I think we're pretty confident, at least in the near term, with where we'll be in terms of margin.

Great. Thanks for that. And my follow up is on the deposit side. Non-interest bearing deposits up nicely year over year. What's driving this strong growth and how do the pipelines look? Could this momentum continue?

I think the team did a really nice job this quarter. I mean, we grew non-interest sparing $331 million in one quarter. So that's kind of, I would probably say that that's not sustainable. So I wouldn't kind of bake that in into the forward guide. But, you know, it is an area of focus for us in the branch network. And so I don't know, Che, if you want to.

Yeah, so I'll add to that a little bit. I think some of the law firm practice that we have, that's adding good sort of much lower cost deposits to our sort of liability side. And I think our communication and sort of collaboration with the branches is a lot stronger now, where they know the direction going forward is to really bringing lower cost of funds. The CD campaign, while it's at $365, $385, you know for a fact that's not at the top of the market. So while that's a tool for them to kind of defend the CD base, at the same time, they're also using that to bringing other type of deposits that's going to help to contribute that lower cost end of the balance.

Very helpful. Thank you.

The next question comes from Gary Tanner with DA Davidson. Please go ahead.

Thanks. Good afternoon. I wanted to ask about loan growth. The guide was increased to 5% to 6%, but that kind of full-year guide seems to suggest fourth-quarter growth could be anywhere from kind of flat to up 3%. So could you talk about that a little bit? Are you seeing any specific slowdown? Is it just where the pipelines are, any impact of interest rates, et cetera, that maybe is having a lean conservative for the fourth quarter?

So, yeah, Gary, the way we're thinking about it is, you know, I think we saw the biggest growth in Q2 and Q3. Our Q1 was pretty flat. Q4 historically has been flat based on my experience, although we're seeing some pretty good pipelines so far. CNI has been kind of the driver of that growth, and we see that in sort of just a broad-based, different type of industries, whether it's sort of the manufacturing, distribution, and the service providers. So we're continuing to kind of expect some of that to pull through, but it's harder for us to say how much of that is really going to be a significant growth event for Q4. So I think we're comfortable with the revised guide that we issued today.

Okay, appreciate that. And then just in terms of the LIHTC amortization fourth quarter, what do you expect that number to be?

Yeah, so this quarter obviously came in a little bit below expectations and kind of what I was going to. It was mainly due to timing and kind of updates of prior estimates. You know, Q3 had some true-ups that came in during the quarter, and we also got a small amount of solar investment distributions on investments where our basis was zero or fully amortized. So those were recorded against amortization expense. So I'm expecting kind of more of the $9 million to $10 million per quarter. Obviously, as you know, that can vary quarter to quarter, and it depends on the financials that we get relative to project performance and tax credit recognition.

Got it. Thank you.

Once again, if you have a question, please press star, then 1. And the next question comes from Andrew Terrell with Stevens. Please go ahead.

Hey, good afternoon. Andrew. Could you talk a little bit more about just the contract termination that took place this quarter, just how that plays into operating expenses moving forward? And then just more broadly, any kind of areas you're looking to get efficiency out of, and how does that play into just kind of value thinking about expense growth from here?

Yeah, so I would say that that contract termination fee, we noted it as kind of a notable item because it is kind of more of a one-time type of charge. It really wasn't an expense savings plan per se. It was really more a vendor agreement for one of our lines of business that we plan to upgrade because another vendor we're looking at we think has kind of a stronger platform and tech platform. So we're hoping that, you know, obviously it's going to generate revenue growth for us in the future. Hopefully that any, I don't know, Shank, if you want to weigh in.

No, that's great. If I could just follow up on the margin quickly as well. Do you have, I might have missed it, do you have the dollar amount or the basis point impact of the interest recovery in loan yields this quarter?

Yeah, yeah. Most of it was recoveries and not prepayment penalties, but it was about, you know, 3.7, 3.8 million of recoveries. It was about six basis points for the quarter. So core NIM would have been around 346.

Got it. Okay. That's it for me.

Thank you. The next question comes from Matthew Clark with Piper Sandler. Please go ahead.

Hey, good afternoon. Thanks for the questions. On the net charge-offs this quarter, can you just isolate, you know, how much of the net charge-offs were tied to those three credits that were previously reserved against?

Sure.

I guess I'm just trying to get it. I'm trying to – yeah, go ahead.

Yeah, yeah, sorry. So those two theater loans from the Far East Bank acquisition, those two totaled about 18. And we have one particular construction loan that had problems with water damage and mold contamination and leading to structural issues. So that's also something that's kind of unforeseen for us. It was a multifamily product. It was here in SoCal, and that's about almost a $9 million exposure.

Got it. Thank you. And then just on – maybe I can do a combo here. Do you have the spot rate on deposits at the end of September and then your appetite to continue to buy back stock here, you know, a nice step up here in 3Q?

Yeah, so the September kind of interest rate deposit cost for interest-bearing was like $292. All in, it was $243, obviously, you know, helping with the growth in non-interest-bearing. And, you know, we're – in terms of buybacks, you know, we – obviously, you know, the same caveats always apply relative to kind of the market, loan growth, and kind of the outlook. But, you know, we're pretty comfortable with kind of how we – the buybacks from this past quarter, we think the stock is still attractive, attractively priced, and the earnback is very acceptable to us. So that's kind of where we are with the buybacks. Hopefully that helps to answer your question.

Yep, that's great.

The next question comes from Kelly Motta with KBW. Please go ahead.

Thank you so much for the question. I'd like to kick it back to loan growth. Commercial in particular has been incredibly strong all year and especially in Q3. Just wondering if you could provide additional color as to the drivers of that and if you're seeing – it sounds like, you know, there's still a decent outlook here. but if higher rates are impacting, you know, borrower behavior at this point.

Sure, Kelly. So we're still seeing just, you know, the stronger loan growth on the CNI side, you know, the industries that we serve in the manufacturing side, the distribution side. Some of them, there are sort of the wholesalers in the food business. Their business is doing well. In terms of the sort of the rate hire for longer, you know, I talked to my CNI folks and the lender side, that's really a need-based and a value proposition. If they need the loan and they need the lines, they're going to continue to use it regardless of the rate environment. I think the higher rate environment may hate the CRE demand a little bit more. And even on the CRE side, that's going to hit maybe the purchases side a little bit more. On the refi, in the last few months of the quarter, we saw a little bit of activity in sort of cash out refi and still within our credit parameters. But, you know, when there's a cash out refi or maturity refi, then they still have to do those. And then on the, you know, so for the C&I side, I think it's really just on a need basis and what kind of value we can provide to the new prospects and the new clients that come into our bank as well.

Got it. That's helpful. And then somebody touched on this earlier, but just to close the loop on the non-interest bearing deposit growth, So, clearly, you're working very hard at that, and the results are showing through. If I look at it at a spot basis, they were up much more meaningfully than where the average balances are. I'm just wondering, as I'm thinking about just near-term modeling, if there was any kind of larger, chunkier flows in Q3 that I should be cognizant of when thinking through what to a jumping-off point for average balances.

Yeah, I think it was pretty – I think generally it was broad-based across the board, but I think at the end of the quarter there were some larger deposit inflows at the end in September, but I'd have to go back and look at kind of the month-over-months.

Got it. That's helpful. Maybe last question for me is just on the expenses. You've done a really nice job with holding and growing margin while growing the balance I know it's a little early to start thinking about next year, but as you think ahead, you know, what are the strategic priorities in terms of investments and your ability to continue to drive what's been really nice positive operating leverage now for the past couple So maybe I'll start and I'll certainly chime in.

And I think, you know, strategically, we've got to think about where we need to invest, right? I think we need to invest in our people, you know, on some of the front line, whether it's the lending side or the deposit side, that's where you can kind of see the investment, sort of a return on that investment. Additionally, you know, sort of the technology front and anything, any tech that's kind of client facing, including anything that's operationally with AI and efficiencies we can gain out of AI. Some of the things we're using here, you know, with, for example, you know, some of the AI-based platforms that's available to us, we're already seeing some increases in how the lending teams are either running their product or their book and their loan reviews and those kind of things. So we're seeing some efficiencies there. So that's where really our focus should be. And long term, you know, some of the expenses, we're not prepared to give you the guide for 27. But, you know, still going to be sort of the salaries and the tech investment side that you're going to see the bulk of it.

I'll step back.

Thank you so much.

Thanks.

Once again, if you have a question, please press star then one. The next question comes from Andrew Leish with Stonex. Please go ahead.

Everyone, good afternoon. Most of my questions have been answered, but just wanted to circle on back to the fee income side, non-interest income. The decline in wealth management revenue, I'm just curious what might have been driving that. Yeah, that was just, you know, it was transaction-based volume. There was nothing kind of significant or unusual. I'd say we had a – you can see over the trend over the last several quarters, particularly since our new leader came in for that business, things have been – you know, revenues have been very strong.

So we're expecting kind of a take-up, maybe not back to the Q2 level, but we think that there will be a take-up next quarter. got it um yep just looking through the rest of it you've covered everything else i'll step back thanks okay thanks thank you for your participation i will now turn the call back over to cathay general bank corps management for closing remarks please go ahead i want to thank everyone for joining us and for your interest in cathay bank we look forward to speaking with you at our next quarterly earnings release call ladies and gentlemen thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.