Operator: Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp Q3 2026 Earnings Conference Call. My name is Ashia, and I will 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 anytime 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.cathaygeneralbancorp.com. Now, I would like to turn the call over to Georgia Lo, investor relations of Cathay General Bancorp. Please go ahead.
Georgia Lo: Thank you, Ashia, 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 31 December 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.
Georgia Lo: 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 Q3 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.
Chang Liu: Thank you, Georgia. Good afternoon, and thank you for joining us today. We will begin on slide four. 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 $21.3 million, or 16.4% from the prior quarter.
Chang Liu: 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.
Chang Liu: 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 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.
Chang Liu: 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 Q3 results in more detail. I will provide some closing comments before we open up the call to Q&A.
Al Wang: 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% link 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%.
Al Wang: 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.
Al Wang: 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.
Al Wang: 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.
Al Wang: 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.
Al Wang: 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 Q3 2025. Classified balances and non-performing assets declined during the quarter, largely reflecting the charge-offs.
Al Wang: 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 will 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% to 6%, from 3.5% to 4.5% previously. We are also increasing our deposit growth outlook to 4% to 5%, compared with the prior expectation of 3% to 4%.
Al Wang: We continue to expect adjusted non-interest expense growth of 3.5% to 4.5% for the year. Our full year NIM outlook remains at 3.40% to 3.50%. Our rate outlook now assumes two 25 basis points increases during 2026, including the September increase and another increase in December. Finally, we now expect our full year effective tax rate to be between 21.5% and 22.5%. With that, I will turn the call back over to Chang.
Chang Liu: Thank you, Al. We are pleased with our performance through the first nine months, including strong balance sheet growth, record net interest income, and continued margin expansion. That momentum is reflected in the higher full year loan and deposit growth outlooks we announced today. During the quarter, we took several proactive steps to support our communities, improve our earnings profile, and optimize our funding and capital structure while continuing to support organic growth. We believe these actions leave us well-positioned as we move forward. Looking ahead, our priorities remain straightforward: disciplined relationship growth, sound credit quality, and prudent capital management. With that, we can now open it up for questions.
Operator: Ladies and gentlemen, if you have a question at this time, please press the star key followed by one on your touch-tone 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 and you wish to remove yourself from the queue, please press star then two. To prevent any background noise, we ask that you please place yourself on mute once your question has been stated. Your first question comes from David Chiaverini with Jefferies. Please go ahead.
David Chiaverini: Hi. Thanks for taking the questions. Wanted to start on the net interest margin. Very nice trend here over the past several quarters. Looking at the guide range being unchanged seems to be conservative, but can you talk about how we should think about the NIM into Q4, and then maybe layer into that your rate sensitivity and how rate hikes could impact the forward look on NIM?
Al Wang: Yeah. I am not ready to call a peak on NIM. I still think there is room for expansion. We do have in the guide a 25 basis point increase in December, which will kind of help us from the asset side. We have, I would say on the asset side, over the next year, we have $8.9 billion of loans repricing. Obviously, we have a billion-plus of cash and a large part of our investment portfolio, half of which are in Treasury, so we will get some tailwind from the asset side. On the deposit side, I would say that we do have some headwinds with we have $3.4 billion of CDs rolling off this quarter at a rate of 3.46%.
Al Wang: As you might know, we ran a summer CD promo, for example, at 3.65% and 3.85% for six and 12 months respectively. Just with those data points, there is going to be some more pressure. You saw some pressure on deposit costs just this quarter. It went up about five basis points. We expect the pressure to continue with competition, and that is not just for us but across the industry. But we feel pretty confident that we still have room to expand. If I look at, for example, the margin in the month of September, ex kind of prepayments and recoveries, I mean, we were just for that month at 3.53%. So I think we will probably be at the upper end of the range. But remember, that is a full-year range.
Al Wang: I think we are pretty confident, at least in the near term, with where we will be in terms of margin.
David Chiaverini: Great. Thanks for that. My follow-up is on the deposit side. Non-interest-bearing deposits up nicely year-over-year. What is driving the strong growth, and how do the pipelines look? Could this momentum continue?
Al Wang: I think the team did a really nice job this quarter. I mean, we grew non-interest bearing $331 million in one quarter. I would probably say that that is not sustainable, so I would not kind of bake that in into the forward guide. It is an area of focus for us in the branch network. Che, if you want to-
Chang Liu: Yeah, so I will add to that a little bit. I think some of the law firm practice that we have, that is adding good sort of much lower cost deposits to our sort of liability side. I think our communication and sort of collaboration with the branches is a lot stronger now, where they know the direction going forward is to really bring in lower cost of funds. The CD campaign, while it is at 3.65%, 3.85%, you know for a fact that is not at the top of the market. While that is a tool for them to kind of defend the CD base, at the same time, they are also using that to bring in other type of deposits that is going to help to contribute that lower cost end of the balance.
David Chiaverini: Very helpful. Thank you.
Al Wang: Okay.
Operator: The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Gary Tenner: Thanks. Good afternoon. I wanted to ask about loan growth. The guide was increased to 5% to 6%, but the full-year guide seems to suggest Q4 growth could be anywhere from flat to up 3%. Could you talk about that a little bit? Are you seeing any specific slowdown? Is it just where the pipelines are, any impact of interest rates, et cetera, that maybe is having you lean conservative for Q4?
Chang Liu: Yeah, Gary, the way we're thinking about it is I think we saw the biggest growth in Q2 and Q3. Our Q1 was pretty flat. Q4 historically has been flat based on my experience. Although we're seeing some pretty good pipelines so far. C&I's been the driver of that growth, and we see that in just a broad base different type of industries, whether it's the manufacturing, distribution, and the service providers. We're continuing to expect some of that to pull through, but it's harder for us to say how much of that is really going to be a significant growth event for Q4. I think we're comfortable with the revised guide that we issued today.
Gary Tenner: Okay. I appreciate that. Then, just in terms of the LIHTC amortization Q4, what do you expect that number to be?
Al Wang: Yeah. This quarter obviously came in a little bit below expectations and kind of what I was guided to. It was mainly due to timing and updates to prior estimates. Q3 had some true-ups that came in during the quarter, and we also got a small amount of solar investment distributions on investments where our basis was zero or fully amortized. So those were recorded against amortization expense. I am expecting more of the $9 million to $10 million per quarter. Obviously, as you know, that can vary quarter to quarter, and it depends on the financials that we get relative to project performance and tax credit recognition.
Gary Tenner: Got it. Thank you.
Operator: Once again, if you have a question, please press star, then 1. The next question comes from Andrew Terrell with Stephens. Please go ahead.
Andrew Terrell: Hey, good afternoon.
Al Wang: Andrew.
Andrew Terrell: Could you talk a little bit more about just the contract termination that took place this quarter, just how that plays into operating expenses moving forward. Then just more broadly, any kind of areas you are looking to get efficiency out of, and how does that play into just kind of how you think about expense growth from here?
Al Wang: Yeah. I would say that that contract termination fee, we noted it as kind of a notable item because it is kind of more of a one-time type of charge. It really wasn't an expense savings play per se. It was really more a vendor agreement for one of our lines of business that we plan to upgrade because another vendor we are looking at we think has a stronger platform and tech platform. So we are hoping that obviously is going to generate revenue growth for us in the future. I do not know, Chang, if you want to weigh in.
Andrew Terrell: Yeah.
Chang Liu: That's it.
Andrew Terrell: No, that's great.
Al Wang: Go ahead.
Andrew Terrell: If I could just follow up on the margin quickly as well. I might have missed it. Do you have the dollar amount or the basis point impact of the interest recovery in loan yields this quarter?
Al Wang: Well, most of it was recoveries and not prepayment penalties, but it was about $3.7 million, $3.8 million of recoveries. It was about 6 basis points for the quarter. So core NIM would've been around 3.46%.
Andrew Terrell: Got it. Okay. That's it for me. Thank you.
Operator: The next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Matthew Clark: Hey, good afternoon. Thanks for the questions. On the net charge-offs this quarter, can you just isolate how much of the net charge-offs were tied to those three credits that were previously reserved against?
Al Wang: Sure.
Matthew Clark: I guess I'm just trying to get a-
Al Wang: So-
Matthew Clark: I'm trying to. Yeah, go ahead.
Al Wang: Yeah. Sorry. So those 2 theater loans from the Far East National Bank acquisition, those 2 totaled about 18. And we had one particular construction loan that had problems with water damage and mold contamination leading to structural issues. So that's also something that's kind of unforeseen for us. It was a multifamily product. It was here in SoCal, and that's about almost a $9 million exposure.
Matthew Clark: Okay. Got it. Thank you. And then just on. Maybe I can do a combo here. Do you have the spot rate on deposits at the end of September and then your appetite to continue to buy back stock here, a nice step up here in Q3?
Al Wang: Yeah. The September kind of interest rate deposit cost for interest-bearing was like 2.92%. All in, it was 2.43%, obviously helping with the growth in non-interest bearing. In terms of buybacks, obviously the same caveats always apply relative to kind of the market loan growth and kind of the outlook. But we're pretty comfortable with kind of how the buybacks from this past quarter. We think the stock is still attractively priced, and the earn back is very acceptable to us. So that's kind of where we are with the buybacks. Hopefully, that helps answer your question.
Matthew Clark: Yep. That's great. Thank you.
Operator: The next question comes from Kelly Motta with KBW. Please go ahead.
Kelly Motta: Hi. Thank you so much for the question. I would like to take it back to loan growth. Commercial in particular has been incredibly strong all year and especially in Q3. Just wondering if you could provide additional color as to the drivers of that and if you are seeing. It sounds like there is still a decent outlook here, but if higher rates are impacting borrower behavior at this point. Thank you.
Chang Liu: Sure, Kelly. We are still seeing just the stronger loan growth on the C&I side. The industries that we serve in the manufacturing side, the distribution side, some of them there are sort of the wholesalers in the food business. Their business is doing well. In terms of the sort of the rate higher for longer, I talked to my C&I folks in the lender side. That is really a need base and a value proposition. If they need the loan and they need the lines, they are going to continue to use it regardless of the rate environment. I think the higher rate environment may hit the CRE demand a little bit more. Even on the CRE side, that is going to hit maybe the purchases side a little bit more.
Chang Liu: On the refi, in the last few months of the quarter, we saw a little bit of activity in sort of cash-out refi and still within our credit parameters. When there is a cash-out refi or maturity refi, then they still have to do those.
Chang Liu: For the C&I side, I think it is really just on a need basis and what kind of value we can provide to the new prospects and the new clients that come into our bank as well.
Kelly Motta: Got it. That is helpful. Somebody touched on this earlier, but just to close the loop on the non-interest-bearing deposit growth. Clearly you are working very hard at that, and the results are showing through. If I look at a spot basis, they were up much more meaningfully than where the average balances are. I am just wondering, as I am thinking about just near term modeling, if there was any kind of larger, chunkier flows in Q3 that I should be cognizant of when thinking through a jumping off point for average balances. Thanks.
Al Wang: Yeah, I think generally it was broad based across the board, but I think at the end of the quarter there were some larger deposit inflows at the end in September. I would have to go back and look at kind of the month-over-months.
Kelly Motta: Got it. That is helpful. Maybe last question for me is just on the expenses. You have done a really nice job with holding and growing margin while growing the balance sheet. I know it is a little early to start thinking about next year, but as you think ahead, what are the strategic priorities in terms of investments and your ability to continue to drive what has been really nice positive operating leverage now for the past couple of years? Thanks.
Chang Liu: So maybe I will start and Al can certainly chime in. I think strategically we have got to think about where we need to invest, right? I think we need to invest in our people on some of the front line, whether it is the lending side or the deposit side. That is where you can kind of see the investment and sort of a return on that investment. Additionally, sort of the technology front and any tech that is kind of client facing, including anything that is operationally with AI and efficiencies we can gain out of AI. Some of the things we are using here with, for example, some of the AI-based platforms that is available to us, we are already seeing some increases in how the lending teams are either running their product or their book and their loan reviews and those kind of things. So we are seeing some efficiencies there.
Chang Liu: That is where really our focus should be. And long term, some of the expenses, we are not prepared to give you the guide for 2027, but still going to be sort of the salaries and the tech investment side that you are going to see the bulk of it.
Kelly Motta: I will step back. Thank you so much.
Chang Liu: Thanks.
Al Wang: Thanks.
Operator: Once again, if you have a question, please press star then 1. The next question comes from Andrew Liesch with StoneX. Please go ahead.
Andrew Liesch: Everyone, good afternoon. Most of my questions have been answered, but just wanted to circle back to the fee income side, non-interest income. The decline in wealth management revenue, just curious what might have been driving that.
Al Wang: Yeah, it was transaction based volume. There was nothing kind of significant or unusual. I'd say you can see over the trend over the last several quarters, particularly since our new leader came in for that business, revenues have been very strong. So we're expecting kind of a tick up, maybe not back to the Q2 level, but we think that there'll be a tick up next quarter.
Andrew Liesch: Got it. Yep, just looking through the rest of it. You've covered everything else. I'll step back. Thanks.
Al Wang: Yeah, thanks.
Operator: Thank you for your participation. I will now turn the call back over to Cathay General Bancorp's management for closing remarks. Please go ahead.
Chang Liu: I want to thank everyone for joining us and for your interest in Cathay Bank. We look forward to speaking with you at our next quarterly earnings release call.
Operator: Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.
