Cathay General Bancorp 2026 Q3 Earnings Call

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 Liu.

Thank you, Georgia. Good afternoon and thank you for joining us today. We'll begin on slide 4. We delivered 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% from the prior quarter. Active balance sheet management, loan growth, and asset repricing helped drive another 4 basis points of net interest margin expansion to 3.52%. Pre-provision net revenue was $151.3 million, up to $21.3 million or 16.4% 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%, 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 have 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 portfolio remains stable and overall credit quality remains sound. The quarter also included several notable items. We recognized a $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 is 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 will provide some closing comments before we open up the call to Q&A.

Thank you, Chang. I will start with our balance sheet on slide 5. Period-end loans, net of fees, were $21.2 billion, increasing approximately $573 million or 2.8% linked quarter, reflecting strong loan growth, particularly in C&I. On the deposit side, period-end balances rose approximately $773 million or 3.7% to $21.8 billion, led by non-interest-bearing 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 6 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 CRE concentration ratio was 283%, remaining below both regulatory thresholds and our internal limits. Slide 7 summarizes our cash and available-for-sale 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%, and reinvested in agency MBS yielding 5.65%. 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 have 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 earn-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 8. Net income increased 3.2% linked 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 will 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 4 basis points to 3.52%, as higher loan yields more than offset the increase in funding costs. Loan yields increased 5 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 4 basis points to 2.43%, and interest-bearing deposit costs rose 5 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 a $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 Chang mentioned earlier.

We committed $8 million to the Cathay Bank Foundation to support those 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 CRE 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 preferred 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 remains 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. Based on our strong year-to-date loan growth, we are raising our full-year outlook to 5%-6% from 3.5%-4.5% previously. We are also increasing our deposit growth outlook to 4%-5%, compared with the prior expectation of 3%-4%. We continue to expect adjusted non-interest expense growth of 3.5%-4.5% for the year. Our full-year NIM outlook remains at 3.40%-3.50%. Our rate outlook now assumes two 25 basis points increases during 2026, including the September increase and another increase in December.