Cathay General Bancorp (CATY) Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's Second Quarter 2026 earnings conference call. My name is Asha, and I'll be your coordinator for today. [Operator Instructions] Today's call is being recorded and will be available for replay at www.cathaygeneralbancorp.com. Now I would like to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp. 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 Mr. Al 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. These risks 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 of 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 rule 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 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. I will begin on Slide 4. 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 disciplined underwriting. Net charge-offs 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. Loan 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 5. Period-end loans of $20.6 billion grew 2.2% linked quarter, supporting continued growth in interest income. Period-end deposits increased 1.9% linked 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% linked quarter and 10% year-over-year. Slide 6 breaks down our average loan and deposit mix. Average loan balances increased 1% linked quarter on an annualized basis, while the composition remained relatively stable and well diversified. CRE concentration of 277% declined 1 basis point and continues to stay below regulatory guidelines. Average deposits increased 2% linked 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%. The Slide 7 illustrates the strong liquidity, credit and interest rate risk profile of our AFS securities portfolio. In June, we sold $160 million of lower-yielding securities and recognized a $10.6 million loss as part of our ongoing balance sheet optimization efforts. The proceeds were reinvested at significantly higher yields resulted in an earn back of less than 3.5 years, while maintaining substantially the same duration and credit profile. Included in this transaction, year-to-date, we have sold $371.7 million of lower-yielding securities and reinvested $341.8 million into higher-yielding investments. These repositioning activities have an aggregate earn-back period of approximately 3.1 years and were executed with no meaningful change to the portfolio's overall duration or credit profile. The portfolio remains highly liquid and defensively positioned, duration is approximately 2 years, roughly 2/3 of the projected cash flows 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 continued to decline during the quarter, benefiting from our ongoing balance sheet optimization efforts. On Slide 8, net income of $92.2 million increased 6% linked quarter, driven by net interest income and lower provision for credit losses, partially offset by higher noninterest 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 5 basis points to 3.48%, reflecting continued improvement in funding costs, partially offset by narrower loan spreads. Slide 10 highlights noninterest income. Noninterest 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, noninterest 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. Noninterest 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 noncore expenses, adjusted noninterest 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 remained 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 $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 this lower-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 noninterest 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. And with that, I'll turn the call back over to Chang.

Thank you, Al. Overall, we're pleased with our performance for 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. 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.

[Operator Instructions] The first question comes from David Chiaverini with Jefferies.

So I wanted to start on net interest margin. You reiterated the 3.4% to 3.5%. Can you talk about the puts and takes within that range? What could take you to the high end, the low end? You mentioned about how a rate hike is now assumed in there. Any commentary around that?

Yes. So I would say, on the loan side, our loan yield dropped by about 4 basis points linked quarter, but we had some -- an elevated level of interest recoveries and prepayment penalties last quarter, and that was about $3.5 million or about 6 basis points of NIM. This quarter, it was about $2 million or 4 basis points of NIM. So kind of equalizing that out loan yields would have been roughly flat. So we think that there's -- 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're happy that we were able to expand and reduce our deposit cost by 10 basis points linked 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-cost deposits. So our time deposits kind of from a volume perspective were relatively flat, but we're able to grow kind of noninterest-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 that -- we do see pressure coming. We do have about $3.3 billion, $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 a NIM perspective that I think it's probably more months than quarters at this point, but we think we're -- there'll still be some room for expansion as we go forward in the year. Obviously, Dave, the -- 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.

Got it. Now the last part of that, your comments, you mentioned about NIM expansion. I'm assuming that's on a core basis, excluding some of the excess kind of income that you got this quarter. So since we're at 3.48% and you're calling for 3.40% to 3.50%, is it fair to assume we could see a little bit of pressure on the NIM getting back into the middle of that range? Or -- I just want to make sure I'm hearing you correctly.

Yes. We're fortunate that we seem to have some of that -- those recoveries and prepayment penalties every quarter. So on a core basis, we would have been at 3.44% 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 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 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.

Great to hear. And then just one quick one, noninterest-bearing deposit mix. How should we think about that? Could it be stable? It looks like about 17%. How should we think about that going forward?

Yes. I mean I think we're very happy that, that went up. We're not projecting in our numbers and 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 2, 3 weeks on noninterest bearing. So I think it's safe to say what we projected as the mix is about the same as where we left off in Q2.

The next question comes from Matthew Clark with Piper Sandler.

On the securities loss trade that you did, can you give us the pickup in yield that you got?

Yes. So the second quarter trade was $160 million -- about $161 million. Those securities were yielding about 3.15%. And then $152 million we put on at about 5.31% for the $10.6 million loss. So that's about a 3.5-year earn-back, so about 3 -- a little over $3 million of NII a quarter. So that's going to be, let's call it, on a run rate basis, a 1 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 I think that will be more of a 3-basis-point NIM impact lift going forward.

Okay. And the timing of that in the quarter?