3rd Quarter 2026 Cathay General Bancorp Earnings Conference Call - CATHAY GENERAL BANCORP

Financial Performance:

• Net Interest Income (NII) reached a record $211.9 million, up 5.5% YoY, driven by balance sheet growth, day count, and asset repricing.
• Net Interest Margin (NIM) expanded 4 basis points to 3.52%, with loan yields rising to 6.02% and funding costs increasing to 2.43%.
• Net income was $95.2 million ($1.43 per share), a 3.2% increase quarter-over-quarter.
• Adjusted Pre-Provision Net Revenue (PPNR) grew 9.1% to $140.6 million, excluding notable items in both periods.
• Total non-interest income was $42.8 million, inflated by a $36.1 million unrealized gain on equity securities and $3.1 million from trust preferred redemption, offset by a $15.1 million securities repositioning loss.
• Non-interest expense rose to $103.4 million, primarily due to an $8 million community foundation commitment and $5.4 million in contract termination costs; adjusted expense was $82.9 million.
• Reported efficiency ratio improved to 40.6%, while the adjusted efficiency ratio improved to 35.9%.
• Allowance for Loan Losses (ALLL) increased to $224 million (1.06% of gross loans); Net Charge-offs were $25.3 million (49 bps annualized), concentrated in three previously identified credits.
• Cash and short-term investments increased, reflecting strong deposit inflows; AFS securities portfolio declined slightly due to lower reinvestment rates in a higher rate environment.
• Tangible Book Value per share grew $0.61 to $40.54 despite share repurchases.

Guidance and Future Outlook:

• Full-year loan growth outlook raised to 5–6% (previously 3.5–4.5%); deposit growth outlook raised to 4–5% (previously 3–3.5%).
• Adjusted non-interest expense growth guidance maintained at 2.5–3.0%.
• Full-year NIM guidance remains 3.40–3.50%, though management noted September pre-recovery NIM of 3.53% suggests near-term expansion potential.
• Rate outlook adjusted to assume two 25 basis point rate hikes in 2026 (September and December).
• Effective tax rate expectation increased to 21.5–22.5%.
• Management anticipates $8.9 billion of loans repricing over the next year, with $1 billion+ in cash and investments providing asset-side tailwinds.

Business Segments and Product Lines:

• CNI (Commercial & Industrial): Remains the primary growth driver, with strong performance in manufacturing, distribution, and service providers; demand viewed as need-based despite higher rates.
• Real Estate: CRE concentration ratio held at 283%, below regulatory and internal limits; CRE demand slightly impacted by high rates, though refi and cash-out activity persists within credit parameters.
• Wealth Management: Fees declined slightly due to lower transaction volume but are expected to rebound in the next quarter.
• Technology & Operations: Executed vendor upgrades to strengthen tech platforms; investing in AI for lending efficiency and operational improvements.
• Capital Actions: Completed $54.1 million redemption of Trust Preferred Securities to simplify structure and reduce interest expense; repurchased 801,000 shares for $50.3 million.

Market and Competitive Landscape:

• Strong deposit growth led by non-interest-bearing demand and money market balances ($331 million increase in one quarter).
• Competition for deposits remains intense, with 3.4 billion of CDs rolling off at ~3.46%, putting pressure on funding costs.
• Broader portfolio credit quality remains sound outside of specific borrower-related credits.
• Management views the loan market as resilient, with borrowers utilizing credit lines regardless of the rate environment due to operational needs.

Risks and Challenges:

• Credit Risk: Elevated charge-offs in three specific credits (one construction loan with structural/mold issues and two movie theater loans from Far East Bank acquisition) totaling ~$27 million.
• Interest Rate Risk: Headwinds from rising funding costs as CDs mature; potential compression of NIM if deposit costs rise faster than asset yields, though management sees room for expansion.
• Operational Costs: One-time costs associated with contract terminations and vendor transitions; ongoing investment required for technology and personnel to maintain efficiency.
• Deposit Stability: Large end-of-quarter deposit inflows may not be sustainable, complicating average balance modeling.

Management Commentary and Tone:

• Tone was confident and proactive, emphasizing strong operating performance, margin expansion, and disciplined balance sheet management.
• Management highlighted "record NII" and "strong relationship growth" as key successes.
• CEO Chang Liu and CFO Al Wang expressed confidence in the franchise's positioning and ability to generate organic growth.
• Acknowledged that the $331 million jump in non-interest-bearing deposits was not sustainable for future guidance but confirmed strong execution in the branch network.

Analyst Questions and Answers:

• NIM Sensitivity: Management confirmed no peak in NIM yet; September pre-recovery NIM was 3.53%. Asset repricing ($8.9B) will help, but CD rollovers ($3.4B) will pressure funding costs.
• Deposit Mix: Growth in non-interest-bearing deposits driven by law firm practice relationships and stronger branch collaboration; large inflows at quarter-end noted but not baked into guidance.
• Loan Growth: Q4 expected to be flat to up 3%; strong pipeline in CNI, though Q4 historically tends to be slower.
• Expense Drivers: $5.4M contract termination was a one-time cost for vendor upgrades; future expense growth focused on people and AI/tech investments.
• Charge-offs: Net charge-offs included $18M from two theater loans and ~$9M from a multifamily construction loan; both fully reserved or partially reserved previously.
• Share Repurchases: Board remains comfortable with buybacks given the stock's attractive valuation and acceptable earn-back period.
• LIHTC Amortization: Expected to stabilize at $9–10 million per quarter after timing and true-up variances in Q3.

Other Key Points:

• Securities repositioning sold $89M of Agency MBS yielding 1.83% and reinvested in yields of 5.65%, expected to add $11.4M to annual NII over a 3.6-year earn-back period.
• $8 million donation to the Cathay Bank Foundation committed for community support and tax efficiency.
• CET1 ratio ended at 13.51% and Total Risk-Based Capital at 15.0%, both well above regulatory minimums despite strong loan growth and capital redemptions.
• Effective duration of securities portfolio remains low at 2.1 years, with 61% of cash flows returning by 2027.