CATHAY GENERAL BANCORP Q1 FY26 earnings call CATY

Cathay General Bancorp executed a strategic balance sheet repositioning in Q1 FY26, selling $210 million of lower-yielding mortgage-backed securities and reinvesting $197 million into similar duration securities at significantly higher yields. This move resulted in a $15.7 million impairment on AFS debt securities, largely offset by a $17.3 million valuation gain on equity securities. The repositioning is expected to support margin expansion and accelerate tangible book value recovery, with an earnback period of under three years.

The company demonstrated a strong commitment to capital management, increasing its quarterly cash dividend by 11.8% to $0.38 per share. Cathay also completed its $150 million share repurchase program, repurchasing 244,000 shares at an average cost of $51.31, and subsequently approved a new $150 million share repurchase program, subject to regulatory approval. These actions underscore a balanced approach to returning capital to shareholders.

Credit quality remained stable overall, with improvements in nonperforming loans and net charge-offs, while criticized and classified levels held steady. The allowance for credit losses increased by $13 million to $209 million, bringing coverage to 1.03% of loans (1.30% excluding residential mortgages). This increase was driven by model updates, including a slight softening in the macroeconomic outlook and increased stress on coastal office portfolios.

Net interest margin expanded by 7 basis points quarter-over-quarter to 3.43%, primarily due to disciplined deposit cost management. This expansion occurred despite a decline in loan yields influenced by prior Federal Reserve interest rate cuts. Management expects continued NIM support from the securities repositioning and ongoing deposit cost optimization, even with the revised outlook assuming no further rate cuts in 2026.

Operating leverage was positive, with the efficiency ratio improving to 40.4%, a 100 basis point decrease from the prior quarter. On an adjusted basis, the efficiency ratio decreased by 1.5% to 36.9%. This improvement was driven by a $4.5 million reduction in amortization expense on low-income housing and alternative energy partnerships, alongside lower compensation and benefit costs, reflecting effective expense management.

Loan growth was softer than anticipated, with period-end loans increasing only 0.2% linked quarter to $20.2 billion, attributed to disciplined underwriting and increased construction loan paydowns. Period-end deposits declined 1% linked quarter to $20.7 billion, primarily due to a $71 million decrease in broker deposits and seasonal core deposit outflows. The uninsured deposit ratio remained consistent at 45%.

The company anticipates a significant benefit from the Fed's proposed capital rules, particularly for its mortgage portfolio with very low loan-to-value ratios. Management projects a potential low double-digit reduction in risk-weighted assets and a 1.50% to 1.75% boost to capital ratios, which would be a 'huge win' for the bank.