Cathay General Bancorp

Good afternoon, ladies and gentlemen, and welcome to Catholic General Bancorp's first quarter 2026 earnings conference call. My name is Asha 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 at 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.KatharineGeneralBancorp.com. Now, I would like to turn the call over to Georgia Lowe, Investor Relations of Katharine 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 of 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 the 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 Security 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 first 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 on 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 three. We delivered solid financial performance in the first quarter, reporting net income of 86.9 million and delivered earnings per share of the dollar and 29 cents. We also delivered another quarter of net interest margin expansion, driven by disciplined deposit cost management in a competitive environment. Our results reflected two noteworthy items that largely offset each other. The first was a 17.3 million valuation gain on equity securities, and the other was a 15.7 million impairment on AFS debt securities from balance sheet repositioning. We saw lower yielding securities and reinvested at current market rates, a move that supports margin expansion and accelerates tangible book value recovery. Excluding these items, diluted EPS would have been two cents lower. Credit quality was stable overall this quarter. We saw improvement in non-performing loans, and net chart drops, while criticized and classified levels remain steady, reflecting continued credit discipline across the portfolio. We remain focused on maintaining a prudent risk profile given the broader economic and geopolitical backdrop. We continue to generate positive operating leverage. Our efficiency ratio improved to 40.4%, down 100 basis points from the prior quarter, supported by ongoing expense management and steady core performance. On an adjusted basis, our efficiency ratio decreased by 1.5% to 36.9% from last quarter. Capital management remains a priority. During the quarter, we increased our quarterly cash dividend to 38 cents per share, reflecting an 11.8% increase. We also completed the 150 million share repurchase program announced in June 2025 by repurchasing 244,000 shares at an average cost of $51.31. In addition, our board approved the new $150 million share repurchase program, subject to regulatory approval, underscoring our commitment to returning capital to shareholders in a balanced and controlled way. Loan growth was softer than we anticipated, but this reflects our disciplined underwriting approach. Our focus remains on supporting our loyal customers and deepening longstanding relationships. Rather than pursuing volume that would require taking on additional credit risk in this unpredictable unpredictable economic environment. This relationship-driven strategy has served us well through many cycles and positions as well going forward. I will now turn the call over to Mr. Al Wang to walk through our first quarter results in more detail. I'll provide some closing comments before we open the call up to Q&A.

Thank you, Chang. I'll start with our balance sheet on slide four. We decreased our on-balance sheet cash and short-term investments by $219 million to stay aligned with shifts in our funding profile. Period end loans of $20.2 billion grew 0.2 percent linked quarter, reflecting our focus on relationship lending. Period end deposits of $20.7 billion declined by 1 percent linked quarter, led by $71 million in broker deposits. Capital levels remained in excess of regulatory well-capitalized thresholds and our internal limits. And we continued to grow book value per share by 2 percent linked quarter and 9 percent year over year. Slide 5 breaks down our loan and deposit mix. Average loan balances increase 1% on an annualized basis, linked quarter, while the composition remains stable and well diversified. Cree concentration of 278%, declined by 9 points, and continue to stay below regulatory guidelines. In addition, our exposure to private credit is minimal, with NDFI loans making up less than 2% of total loans. Average deposits decreased 3% link quarter on an annualized basis, driven by the decline in broker deposits. Core deposit outflows were largely seasonal and reflected normal cash management activity by our commercial customers. Our uninsured deposit ratio stayed consistent at 45%. Slide 6 is a new slide to illustrate the strong liquidity, credit, and interest rate risk profile of our available for sale investment portfolio. In Q1, we recognized a $15.7 million impairment loss on our AFS securities portfolio as part of a securities repositioning initiative. During the first week of April, we sold $210 million of lower-yielding mortgage-backed securities and reinvested $197 million into similar-duration securities at significantly higher yields. This trade carried an earn-back under three years while keeping our overall duration and credit profile essentially unchanged. We keep the overall portfolio short and high-quality. Duration is just under two years, and nearly two-thirds of the cash flows will come back this year. Unrealized losses have been improving as rates move, and over 90% of the portfolio is U.S. government-backed, with the rest in investment-grade securities. Slide 7 highlights our income statement. Net income of $86.9 million decreased 4% link quarter due to lower non-interest income offset by 2%. lower non-interest expense, which I will discuss in more detail in the following slides. Slide 8 summarizes our yield and funding costs. Net interest income of 194 million declined 0.8 million compared to last quarter due to day count, offset by margin expansion. Net interest margin of 343 grew seven basis points compared to last quarter as deposit costs decreased, offset by a decline in loan yields driven by the Federal Reserve's latest interest rate cuts in the fourth quarter. Slide nine highlights non-interest income. Non-interest income decreased 7.1 million link quarter driven by the notable items Chang mentioned previously. Specifically, we recognize 17.3 million in valuation gains in our equity securities portfolio offset by the 15.7 million AFS securities impairment repositioning loss. Adjusting for these items, including the gain on equity securities in both periods, non-interest income would have been 19.1 million compared to 18.1 million in the prior quarter reflected an increase of 5.52%. Moving to slide 10, non-interest expense decreased from 92.2 million to 86.7 million this quarter. This decline was driven by 4.5 million of lower amortization expense on our low-income housing and alternative energy partnerships, along with lower compensation and benefit costs. It's worth noting that most peer banks record the amortization of tax credit investments in income tax expense under the proportional amortization method rather than in non-interest expense as we do. When adjusting for this difference and other non-core items, adjusted non-interest expense would have been 78.7 million, which is 3.0 million lower than last quarter. On the same basis, our adjusted efficiency ratio improves to 36.9% compared to 38.4% in the prior quarter. On slide 11, you'll see that our asset quality stayed solid. We increased our allowance by $13 million to $209 million, which puts coverage at 1.03% or 1.30% excluding residential mortgages. That increase was driven by model updates, including a slight softening in the macroeconomic outlook. Net charge-offs improved, dropping from $5.4 million last quarter to $2.1 million this quarter. Classified loans were up $39 million, while special mention loans came down $55 million. And importantly, our non-performing asset ratio continued to trend in the right direction, improving from 59 to 51 basis points. Turning to slide 12, capital levels remain strong and well above well-capitalized regulatory thresholds with a modest increase from last quarter. I'll wrap up on slide 13 with our outlook. We continue to expect full-year loan growth in the 3.5% to 4.5% range and deposit growth of 4% to 5%. Adjusted non-interest expense is still expected to increase between 3.5% to 4.5% for the year. Our NIM and NII outlook no longer assumes any rate cuts in 2026. But even with that change, we remain confident in achieving our NIM target of 340% to 350%. We expect an effective tax rate of roughly 21%. And with that, I'll turn the call back over to Chang.

Thank you, Al. Overall, we feel very good about how we started the year. notwithstanding geopolitical tensions and uncertainty in the macro environment. We deliver solid financial performance by growing tangible book value per share to $30.95, expanding NIM by seven basis points and continuing to manage capital prudently to expand a buyback capacity and dividend increases. Looking ahead, we are entering a second quarter with good momentum. Similar to last year, we saw a slower start to the first quarter, but activity strengthened meaningfully as the year progressed. and we expect a similar pattern as we move through 2026. Finally, I want to thank our team members for everything they do for our company, our communities, and our clients. 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 and then 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 or you wish to remove yourself from the queue, please press star then 2. To prevent any background noise, we ask that you please place yourself on mute once your question has been stated. The first question comes from David Chiaverini with Jefferies. Please go ahead.

Hi, thanks for taking the question. So I wanted to start On the net interest margin, so it was very strong in the quarter. Can you talk about, and you reiterated the guide, so I'm curious about the outlook kind of sequentially from here and then to your point about rate cuts being eliminated from your assumptions, whether that would take us either to the high end or the low end or if you're still kind of thinking the midpoint of that range. Can you talk about that?

Yeah, obviously, without any cuts forecasted in, that's obviously going to put pressure and point us down slightly. But remember, we did the securities reposition, so that should help by a few basis points for the year. And when I look at our loan portfolio, our yield was 601 for the quarter. But when I take a look at the origination rates for the commercial real estate book in the first quarter and kind of the origination rates in mortgage. Um, those came in at like, uh, six 15 and six 12 respectively. So higher than kind of the NIM. So I think, um, obviously there's more pressure on CNI, but I think with the, uh, the mortgage increase kind of repricing and kind of what we're repricing, I think that'll support. So I think, um, you know, if the loan yield, um, I don't, we don't expect it to, you know, drop off very much, if at all. So I think that's going to help support on the, Deposit side, we still have room to run also. I mean, we had a 296 cost for interest bearing this past quarter. But if you think about it, we've got, you know, that was a lot of the expansion was that I think we said last quarter that we had, you know, almost 4 billion OCDs rolling off at a 380 weighted average rate. So obviously, you know, those came on favorably this quarter. And if I look at next quarter, for example, we've got close to 3 billion with a 362 handle or a kind of weighted average rate. So we think that, you know, there's definitely, I think most of the benefits from the lower rate environment and the cuts are kind of behind us. But we still think there's still some room there to manage those costs down slightly. So between the two, I think we still feel comfortable with the overall kind of guide for the year. We do acknowledge that, you know, if I look at brokered rates, for example, you know, at the beginning of the year, it was like in the 360 to 370 for CDs, for large CDs. Today, that's 4 to 405. So there's definitely a lot more pressure and competition with deposits. But right now, when we look at kind of the profile, we think that there's still a little bit of room for expansion through this year. Obviously, you know, depending on if rates, you know, are cut and there actually are cuts later in the year, that would be beneficial to us. But for now, I think we're good for the year for our guidance.

Very helpful color on that. And on that securities repositioning held in isolation, can you estimate how much that should contribute to NIM? You gave, you know, the sizing of it. Maybe you can help us with how much, what the yield was that rolled off or was sold and what the yield was that came on?

Yeah, it was, I think about 245 was the yield that we sold and We put on, you know, the coupon was like five and a half, and they were mostly kind of long-dated mortgage-backed securities. I think the effective yield on that is like 533 or something around that range. So a little over five, five and a half million annually. So if you think about for 2026, we take, you know, the trade happened early in the quarter. So we'll take, you know, three quarters of that amount into this year. So probably about two to three basis points or two to two and a half basis points to NIMH. and then for the year, and then maybe four million, let's call it, of additional boost to NII.

Very helpful. Thank you.

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

Hey, good afternoon. I just want to get the amount of prepay and any interest recoveries and net interest income? I think it was around $3 million last quarter.

Yeah, so it was about $3.5 this quarter, which was about six basis points. So for the quarter, our reported MIM was $343. It would have been $337, say, for those items. We also had a small FHOB dividend, a special dividend as well, included in that number.

Within that $3.5 million?

Yes.

Okay, okay. And then the low-income housing tax credit amortization came down more so relative to your guys coming into the year. Just want to get your updated thoughts on that run rate for the balance of the year.

Yeah, I mean, that's a fluid number. Obviously, it depends on kind of the timing of tax credits and the performance of the projects in the portfolio. We think that it's probably going to be in the $7 million to $8 million range for the next few quarters throughout the year.

Okay. Good. And then just on the loan growth commentary and your prepared remarks, and I think in the release of that, just being a little more cautious, but sticking to the guide for the year, is that – Is it because you're seeing the pipeline building, or is it because you feel like at this point you're a little more open and not as cautious as maybe you were during the first quarter? Just want to get some thoughts there.

Thanks. For us on the loan growth side, we saw some increased paydowns in our construction loan portfolio. Some of our customers took advantage of some of the refinancing opportunities with the live companies and the fannies that have much better competitive longer-term rates than we had. Our originations were healthy, but not enough to offset the timing of the paydown. But today, our pipelines are still healthy and strong, and the customer engagement has improved. So we expect the growth to be sort of more weighted towards the middle and the back end of the half.

Okay, thanks again.

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

Thanks. Good afternoon. I just wanted to follow up a little bit on the funding side of the equation. Al, I appreciate the color on the second quarter CD maturities. Can you give us an idea of where the first quarter, the ones that rolled off at 380, where they were renewed?

So, as you know, we had a Lunar New Year promotion at 365 for six months and 350 for 12. So, you know, I think, you know, we extended that program by a couple of weeks. And then, like I said in my commentary, we had, you know, you can see there's been a lot more pressure, especially since kind of February and even since the war started that, you know, you know, the pressure on rates has been kind of pushing upwards. So, you know, we think it's around kind of the mid-350s is kind of in the first quarter, what we kind of put on.

Okay. And so that would suggest that the 360 rolling off in the second quarter, even without the specials, probably not too much of a benefit. Is that fair? Yeah, it'll be. I think the

Yeah, we think there'll be a marginal benefit from that. Again, it's probably around 350 is the rate that we put on last quarter.

Okay. Appreciate that. So in terms of the, and you talked about the NIM a little bit, I appreciate the color there. I guess just to encapsulate it, I mean, with no cuts, pretty flat NIM bias X, the securities repositioning.

I mean, is that kind of in a nutshell, the way you think about it?

Yeah. Yeah, that's right. Again, I think the lending side, we shouldn't see much degradation in terms of the yields on that side. Again, we have mortgages, for example, that we put on five years ago in a lower rate environment, for example, five plus years ago. So I think when those come back and get put back on, that'll help support kind of our NIM.

Okay, great. If I could ask one more, just on the asset quality front, I mean, the metrics overall, were good, and yet you increased the allowance by six basis points, and you kind of comment about a model recalibration and deterioration in macro conditions. Did you change weightings in your model in terms of building the allowance, or maybe just kind of give us a sense of how you were thinking about that?

Yeah, the biggest move was just kind of a recalibration of one of the inputs in the model. And in terms of the weightings, I would say for the overall book, we kept the weightings the same, but we did change the weightings for certain portfolios within the book that pushed the reserves up for those particular portfolios and obviously overall as a result.

Can you comment just which portfolios you increased or, you know, changed the weightings on?

Yeah, so basically, yeah, so the way we thought about it is, you know, in our models we use kind of national portfolios national kind of economic forecasts. But obviously, as you know, we're very coastal, right? We've got a lot of motor portfolio and kind of California and New York. So we look specifically at kind of the office portfolio and said, hey, we have a lot of office kind of on the coast. And, you know, I don't know if the national forecast kind of are doing those portfolios justice. So we kind of stress those portfolios a little bit more.

Thank you.

Once again, if you have a question, please press star, then one.

The next question comes from Andrew Terrell with Stevens. Please go ahead.

Hey, good afternoon. Hey, I just wanted to start on the operating expenses. Looks like, you know, holding the amortization aside, relatively, you know, flat quarter on quarter. We annualize the first quarter kind of tracks to, low end of your adjusted expense growth guide for 26. I'm just curious if any seasonality impacts in the first quarter. Do you feel like we grow off this operating expense base throughout the year? Just any kind of expectation around expense run rate would be helpful.

Yeah, I think the first quarter was slightly lower on the comp and benefit, especially compared to year end. Year end, we We had a little bit more in kind of the incentive compensation accruals. So that's kind of what's driving why it's lower versus fourth quarter, for example. So we think kind of where we are now, the run rate's pretty good. We are projected in kind of headcount, open position, things like that. But yeah, I think it's... I think our current kind of where we ended Q3 with the growth rates that we were projecting, that's kind of our expectation right now.

Yeah, okay. And then I wanted to ask around, I know it's just proposed, but any thoughts behind the Fed's proposed capital rules? Any kind of benefit that could provide to you guys in terms of CT1 or risk-weighted relief?

Yeah, I mean, we think it would be a huge win for us, obviously. We've got a decently sized mortgage portfolio with very low LTVs, so I think we'll get an outsized benefit from that. So it could be in the low kind of double digit in terms of the reduction in risk-weighted assets for us and anywhere from, let's call it 150 to 175 kind of boost to our capital ratios, depending on the ratio.

Oh, okay, great. Yeah, that's pretty solid. You know, if I could just ask lastly, you know, one of your competitors commented, you know, maybe around M&A recently. Just would love to hear kind of your thoughts on the M&A landscape today, you know, how you see it fitting into the puzzle for Cathay.

Yeah, so for us, you know, we're always going to kind of think about looking at things more opportunistically just based on what's presented to us. We're always going to focus more on just our organic growth and executing the business plan. If there's a candidate out there that makes sense for us, but it's not the top priority at this point. We want to just make sure we strengthen our franchise and make strategic decisions and meet the financial plans that we've laid out to our investors.

Great.

Thank you for taking the questions. Of course.

The next question comes from Kelly Mota with KBW.

Please go ahead.

Hey, good afternoon. Thanks for the question. You know, turning to fees, excluding the noise of, you know, the securities repositioning and the other gains, core fee income still came in pretty strong. And I think In your prepared remarks, you hit on that being in part attributed to wealth management. Just wondering if you could talk a bit about, you know, that business and what you're seeing more broadly on the fee income side that this, call it 19 million core operating run rate is a good line that could hold or if there's kind of puts and takes there. Thanks.

Kelly, our core strength in the fee income is really the sort of the wealth business that drives that income. You know, we're obviously trying to find other ancillary fee income as well. There's things such as foreign exchange, the international fee, some of our swapping fee income, but that kind of sporadic based on the rating environment as well. The treasury management functions also drive some of the fee income as well, but the bulk of it is really from the wealth side of the business.

Got it. And is this $19 million? I mean, it's a step up. It's an approximate million step up from the back half of last year. Is Is this a good level to kind of hold here, or was this particularly strong? Just trying to parse out how to think about it.

Yeah, I mean, we think so. I mean, we do have some new leadership in wealth, and so we think, you know, that with we've gotten a decent amount of referrals as well. So, you know, we're optimistic that wealth is going to hold in there kind of and how it performed in Q1.

Okay, great. Most of mine have otherwise been asked and answered, so thanks for the time.

Thank you for your participation.

I will now turn the call back over to Cathay General Bancorp's management for closing remarks.

I want to thank everyone for joining us and your interest in Cathay. 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.