Cathay General Bancorp (CATY) Q2 2026 earnings call transcript

Thank you, Asha, and good afternoon. Here to discuss the financial results today are Mr. Cheng Liu, our President and Chief Executive Officer, and Mr. Ao Wang, our Executive Vice President and Chief Financial Officer. Before we begin, we wish to remind you that the 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. Thank you. developments or events or the occurrence of unanticipated events. This afternoon, CATHAY GENERAL BANCORP issued an earnings release outlining its second quarter 2026 results. To obtain a copy of our earnings release as well as our earnings presentation, please visit our website at cathygeneralbancorps.

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 Liu.

Thank you, Georgia. Good afternoon, and thank you for joining us today. I will begin on slide four. We delivered strong financial performance in the second quarter, reporting net income of $92.2 million, or $1.37 per diluted share. Net interest income increased to $200.9 million, and net interest margin expanded to 3.48%, marking the eighth consecutive quarter of NIM expansion. This reflects our continued focus on managing funding costs in a competitive environment. During the quarter, we completed another securities repositioning as part of our ongoing balance sheet optimization efforts. The transaction resulted in a $10.6 million loss on sale, but will improve future earnings and will further support margin expansion. Credit quality remains strong, reflecting discipline underwriting. Net charge-off declined, while criticized and classified asset levels improved.

Our reported efficiency ratio increased to 41.5% from 40.4% last quarter, primarily due to higher low-income housing tax credit amortization. On an adjusted basis, the efficiency ratio was 37.0% compared to 36.9% in the prior quarter. Capital management remains an important part of our overall strategy. We continue to operate from a strong capital position, which gives us flexibility to support growth, return capital to shareholders, and optimize our funding profile. During the quarter, we repurchased 242,000 shares at an average cost of $58 per share. In addition, our board recently approved an increase in our share repurchase authorization from $150 million to $200 million, subject to regulatory approval, reflecting our continued focus on disciplined and prudent capital returns. Separately, we intend to redeem a portion of our outstanding trust-preferred securities as part of our ongoing capital and balance sheet optimization efforts, which are expected to reduce our funding costs and improve recurring earnings.

From an operating standpoint, we saw improved momentum as the quarter progressed. Lone growth accelerated during the second quarter, and we continue to see healthy client activity and a solid pipeline heading into the second half of the year. These trends contributed to continued growth across the balance sheet while maintaining strong liquidity and capital levels. I will now turn the call over to Al to walk through our second 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 of $20.6 billion grew 2.2% link quarter, supporting continued growth in interest income. Period end deposits increased 1.9% link quarter to $21.1 billion. While year-to-date deposit growth remains modest at $167 million, or 0.8%, quarterly deposit growth accelerated meaningfully during May and June, reflecting improved momentum entering the second half of the year. Capital levels remain strong, with regulatory capital ratios well above minimum requirements and internal operating targets.

While tangible book value per share increased 3% link quarter and 10% year-over-year. Slide 6 breaks down our average loan and deposit mix. Average loan balances increased 1% link quarter on an annualized basis, while the composition remained relatively stable and well-diversified. Cree concentration of 277% declined one basis point and continues to stay below regulatory guidelines.

Average deposits increased 2% in quarter on an annualized basis. Non-maturity deposits increased while time deposits declined during the quarter, resulting in a more favorable funding mix and lower concentration in CDs. Our uninsured deposit ratio remained stable at 45%. Slide 7 illustrates the strong liquidity credit and interest rate risk profile of our AFS securities portfolio In June we sold million of lower securities and recognized a million loss as part of our ongoing balance aggregate earn period of approximately 3 years and were executed with no meaningful change to the portfolio overall duration or credit profile The portfolio remains highly liquid and defensively positioned. Duration is approximately two years. Roughly two-thirds of the projected cash flow is expected to return within the next 12 months, and more than 95% of the portfolio is backed by U. S. government agencies.

Unrealized losses continue to decline during the quarter, benefiting from our ongoing balance sheet optimization efforts. On slide 8, net income of $92.2 million increased 6% in the quarter, driven by net interest income and lower provision for credit losses, partially offset by higher non-interest expense and higher income tax expense. I'll discuss each of these drivers in more detail on the following slides. Slide 9 summarizes our yield and funding costs. Net interest income reached $201 million, increasing $7 million from the prior quarter, driven by higher average earning assets, continued net interest margin expansion, and day count. Net interest margin expanded five basis points to 3.48%, reflecting continued improvement in funding costs, partially offset by narrower loan spreads.

Slide 10 highlights non-interest income. Non-interest income increased $0.7 million from the prior quarter. Results included an $11.7 million gain on equity securities, largely offset by the $10.6 million loss on the available-for-sale securities related to our investment portfolio repositioning activities. Excluding these notable items, non-interest income was $20.3 million compared to $19 million in the prior quarter, reflecting growth of approximately 6%, including continued growth in wealth management.

Moving to slide 11, non-interest expense increased to $92.3 million this quarter from $86.7 million last quarter. The increase was primarily driven by $3.1 million of higher amortization expense on our low-income housing tax partnerships, following the receipt of updated fund financial statements. Excluding this and other non-core expenses, adjusted non-interest expense was $81.9 million. Our adjusted efficiency ratio remained stable at 37% compared to 36.9% last quarter.

Turning to slide 12, credit quality remains strong, with improvement across several key metrics. Net charge-offs declined to $1.8 million, classified loans decreased $10 million, and criticized loans improved by $103 million during the quarter. The allowance for loan loss increased to $10 million to $219 million, or 1.06% of gross loans, primarily reflecting loan growth.

Turning to slide 13, capital levels remain strong and well above regulatory minimum requirements. As part of our ongoing capital and balance sheet optimization efforts, we plan to redeem approximately $54.1 million of the $119.1 million of outstanding trust-preferred securities, representing the redemption of our highest-cost issuances. In addition, we completed a review of certain regulatory capital reporting treatments, resulting in an increase of approximately 20 basis points to our risk-based capital ratios.

I'll wrap up on slide 14 with our outlook. We continue to expect full-year loan growth in the 3.5% to 4.5% range. Given the slower-than-expected deposit growth during the first half of the year, we have revised our full-year deposit growth outlook to 3% to 4%. Our NIM and NII outlook now assumes a 25 basis point rate increase in September. Even with that updated rate outlook, we remain confident in achieving our full year NIM target of 3.4 to 3.5%.

We are maintaining our adjusted non-interest expense growth outlook at 3.5 to 4.5%, and we now expect our effective tax rate to be between 21 and 22% for the year, reflecting our updated earnings outlook.

With that, I will turn the call back over to Chang.

Thank you, Al. Overall, we are pleased with our performance through the first half of the year. We expanded net interest margin, delivered solid earnings, increased shareholder returns through both dividend increases, and expanded share repurchase capacity and continue to maintain strong capital levels.

Looking ahead, we are entering the third quarter with good momentum. The activity accelerated meaningfully during the second quarter, and we remain focused on executing our financial objectives while maintaining our disciplined approach to growth, capital, and expenses.

With that, we can now open it up for questions.

Yeah, so I would say on the loan side, our loan yield dropped by about four basis points in that quarter, but we had an elevated level of interest recoveries and prepayment penalties last quarter, and that was about $3.5 million, or about six basis points of NIM. This quarter, it was about 2 million or four basis points of NIMS. So kind of equalizing that out, loan yields would have been roughly flat. So we think that will continue to flatten out, and as rates rise, hopefully that will go the other direction and begin to expand at some point later in the year. On the deposit side, we're seeing, like everybody else, a lot of competition for deposits.

We happy that we were able to expand and reduce our deposit cost by 10 basis point in the quarter I would say a lot of that had to do with pricing but a lot of that had to do with mix as well We particularly in this last quarter did a great job of growing kind of lower deposits So our time deposits kind of from a volume perspective were relatively flat, but we were able to grow kind of non-interest-bearing and savings and so on. So a lot of that kind of reduction in deposit costs was mixed, but some on the rate side as well. As we kind of look at next quarter and the coming quarters, we do see pressure coming.

We do have about $3.3, $3.4 billion of CDs rolling off at a $3.54 rate. So we think we'll replace those, and it would be probably a slightly higher yield than that. So there's going to be pressure, but I think there's still room from an NIMM perspective that I think it's probably more months than quarters at this point, but we think there will still be some room for expansion as we go forward in the year. Obviously, Dave, a hike in September is going to put a little more pressure, but we still think we're pretty confident that we'll still be in the range.

Yeah, we're fortunate that, you know, we seem to have some of that, those recoveries and prepayment penalties every quarter. So on a core basis, we would have been at 344 this past quarter. So, again, I still think in the coming quarter, there's probably, we still think even on a core basis, there's some room for improvement. But, again, it's going to become smaller and smaller as we go forward. And I think, you know, depending on how well we can manage spreads and manage our deposit costs, we'll see even more pressure, obviously, in the fourth quarter. So, you know, I'm not sure at this point whether we'll see an expansion in the fourth quarter, but certainly we're pretty confident we'll be in the range either way.

Yeah, I mean, I think we're very happy that that went up. We're not projecting in our numbers and in our NIM projections that we're going to grow on a relative basis of that. But I can tell you that through the first 21 days of July, we've grown deposits $240 million. We're very happy about that. Although most of that is kind of equally distributed between money market, savings, and time. So, again, we didn't – not big a growth in the last two, three weeks on non-interest bearing. So, I think it's safe to say what we projected is the mix is about the same as where we left off in Q2.

Yeah, so the second quarter trade was about $161 million. Those securities were yielding about $315, and then $152 we put on at about $531 for the $10.6 million loss. So that's about three and a half year IRM back, so a little over $3 million of NII a quarter. So that's going to be, let's call it, on a run rate basis, one basis point for margin. But if I take a step back and I combine both loss trades from this year, it's about $8.5 million of annual income lift going forward at a $3.1 million with the combined $26 million loss. So that will be more of a three basis point NIM impact lift going forward.

So the first quarter impairment loss was traded in early April. So we didn't see a full, you know, so we saw the full quarter from the first trade, or most of it. The second trade was in the second half of June, so we didn't see much in the way of benefit from this last trade. So we'll see the full effects for both going into next quarter.

Yeah, I think, like I said, on an apples-to-apples basics, X the interest recoveries and prepayment penalties, it's about flat on the loan side. I would say that there was a little more pressure on CNI and on construction, which those balances fell also. So, but I can tell you that the, you know, our origination rates for Cree and mortgage kind of are higher than kind of our spot rates. So, you know, we feel like that's going to give us some tailwind, and obviously the overall rate environment should help as well. So, again, we're pretty much flat. We're projecting to be flattish.

Hopefully there an inflection point kind of later in the year in that we actually expand on the loan side Obviously over time a hike could help depending on what happens to the long end of the curve On the deposit side, again, it's when we look at kind of the CDs that are rolling off, the current pricing on CDs, as you know, is higher. It's fairly high. There's a lot of competition out there. So there'll be some pressure on the CDs as they roll over.

Yeah, so we got updated statements, and it implied a little bit higher. So I think next quarter we're looking around $8 million of expense based on the schedules we have in our tax credits, and probably settling into around maybe a little under $10 million after that going forward.

A quarter.

Sure, Gary. So I think we were surprised as well on the first quarter being a little bit flat, but I think honestly it's just kind of pulling all of that stuff through in the second quarter. And I think Q2 numbers were certainly better. We saw a little bit more C&I activity. Residential mortgage was up slightly, but still a little flat. And then the CRI side kind of came up, even though construction went down a little bit. So I think just kind of pulling that through, I think it was just a little more challenging the first quarter, and we saw the bulk of it in the second quarter.

Looking ahead in Q3, you know, honestly, I think we see pretty strong numbers so far. For the first three weeks of July, we've seen $200 million in bookings for the loans, so that's a huge bust for us. And I think the bulk of that is actually more Cree business pulling through, and some of that is, you know, perhaps refi-ing some apartment deals and the multifamily stuff and some retail. And so we're seeing some of that activity that's kind of becoming more frequent to our coming into the portfolio. And so that's where the bulk of the growth is.

Yeah, no, we kept the economic scenarios kind of intact. You know, just from a geopolitical perspective, it's still pretty uncertain out there. So that stayed intact. It was really, I would say, about of the $10 million, roughly $5.5 million was due to loan growth. There was about $3 million due to just specific reserves. We had a Cree property that we were specifically reserving for that came off. There's actually a sale agreement for that property where we'll have zero losses. So that was a favorable pickup, and it was offset by a Cree multifamily that we put up some incremental reserves for. So net-net, that was $3 million for the incremental reserves. And then we did a little bit of housekeeping on one of the Q factors, which contributed another $1.5 million.

So the $10 is $5.5 for growth, $3 for specific reserves, and another $1.5 for Q factors.

Yeah, part of the lightness was that we didn't get the formal nod from the regulatory approvals until kind of later. It was, I think, the very end of April type of time frame, so that partially contributed to that. So we expect to pick up kind of the purchase activity as we go through the rest of the year. Now, the upsizing of the $50 million is really the way that we've structured the program the last several years is that we've had like the $150 the last couple of years have been planned and approved as kind of $135 for $26 and then $15 million for $27. And it was similar last year as well. So what that meant is that we didn't really have much dry powder when we got into the first quarter.

And for whatever it's worth, like, you know, bank stops have been generally have been kind of in stocks in general, you know, there's kind of opportunity in kind of the first quarter in March in particular. So we wanted to make sure we had dry powder going into year end. So I wouldn't expect – I'd probably expect a similar pace to last year through the duration of this year, but also to, you know, be in the market in the first quarter as well, more so than we've been in the past.

I want to thank everyone for joining us and for your interest in CATHAY. We look forward to speaking with you at our next quarterly earnings release call.