CATY — Q2 2026 Financial Report Analysis

Overview

Cathay General Bancorp, the Los Angeles-based parent of Cathay Bank, earned $92.2 million in Q2 2026, up 19.0% from $77.5 million a year earlier, and diluted EPS rose 24.5% to $1.37 from $1.10. The gain came mostly from paying depositors less: the average rate on interest-bearing deposits fell to 2.86% from 3.35%, while the average loan yield slipped only to 5.97% from 6.11%. Net interest income, the bank's main source of revenue, rose 10.9% to $200.9 million. Credit costs did not rise to eat into that: net charge-offs (loans written off as uncollectable, net of recoveries) fell to $1.8 million from $12.7 million, and the provision for credit losses was unchanged at $11.2 million.

At a glance

• Net interest margin 3.48% vs 3.27% a year ago. The bank earns more on each dollar it lends and invests, because its deposit costs have fallen faster than its loan yields.
• Efficiency ratio 41.53% vs 45.34%. It spent about 42 cents to earn each dollar of revenue, down from 45 cents, because revenue grew 13.1% while expenses grew 3.6%.
• Non-performing assets $145.4 million vs $199.5 million a year ago (-27%). The pile of problem loans and foreclosed property is clearly smaller, and the reserve set aside for losses is larger (1.06% of loans vs 0.88%).

Key metrics

"Total revenue" here is net interest income plus non-interest income, the figure banks are usually compared on; the 10-Q does not present a single revenue line. The 10-Q does not give period-end deposits or the CET1 ratio for June 30, 2025, so those rows compare with the year-end balance sheet instead. Cathay does not report a return on tangible common equity in the 10-Q.

Where the extra income came from

Net interest income is the difference between the interest a bank earns on loans and securities and the interest it pays on deposits and borrowings. The net interest margin (NIM) expresses that as a share of the bank's interest-earning assets. At 3.48% it was up 0.21 points from a year ago, and slightly above the 3.45% first-half average, so it was still rising during the quarter.

The 10-Q's rate/volume table splits the $19.7 million increase in net interest income into two parts:

• Volume, +$10.4 million. Average loans grew to $20.30 billion from $19.49 billion, adding $12.2 million of interest income.
• Rates, +$9.3 million. Lower rates cut interest income by $9.0 million, mostly on loans (-$6.8 million) and cash held at other banks (-$2.1 million). They cut interest expense by more: $18.3 million.

Most of the cost saving came from time deposits (CDs). Cathay pays 3.39% on them now, compared with 3.91% a year ago, which cut their interest cost by $14.2 million to $80.2 million. CDs make up 45.4% of Cathay's deposits, an unusually high share. That is why falling market rates have helped this bank more than most: its CDs roll over at lower rates within months, while many of its loans reprice more slowly.

Fee income looks strong but is mixed. Non-interest income rose $6.0 million, but two securities items move in opposite directions:

• a $11.7 million gain on equity securities (a $1.4 million loss a year ago);
• a $10.6 million loss on selling $160.2 million of available-for-sale bonds in June. The 10-Q describes this as a "portfolio repositioning initiative designed to improve yield". It takes a loss now in exchange for higher interest income later.

Excluding both, non-interest income was about $20.3 million, up from $16.8 million. The cleanest piece of that is wealth management fees, which rose to $7.9 million from $4.9 million.

Credit quality

Credit improved on almost every measure over the year:

• Non-accrual loans (loans no longer earning interest because the borrower has fallen behind) fell 36% to $111.7 million from $174.2 million. Commercial (business) non-accruals dropped to $8.4 million from $54.5 million.
• Net charge-offs were $1.8 million in the quarter, an annualized 0.04% of average loans, compared with 0.26% a year ago.
• The allowance for loan losses (money set aside in advance for expected losses) rose to $218.9 million from $173.5 million a year ago. It now covers 196% of non-performing loans, up from 96%.

Two items run the other way. Foreclosed property (OREO) rose to $33.7 million from $19.0 million a year ago, so some of the drop in bad loans reflects properties the bank has taken over, not loans that were repaid. Residential mortgage non-accruals also rose to $33.1 million from $21.6 million. The allowance build included a specific reserve for "a newly completed CRE Multifamily property which sustained damage requiring significant remediation." Management estimates that weighting its loss model fully to the downside economic scenario would add about $72.1 million to the allowance.

What the headline numbers hide

• About a fifth of the EPS growth came from fewer shares. Diluted shares averaged 67.3 million, compared with 70.2 million a year ago (-4.1%). That turns 19% net income growth into 24.5% EPS growth. Cathay bought back 242,148 shares in Q2 at an average $58.00, a total of $14.0 million.
• Taxes worked against the result, not for it. Pre-tax income rose 23.3% to $118.7 million. The effective tax rate rose to 22.4% from 19.6% because there were fewer low-income-housing tax credits than in 2025. At last year's rate, net income would have been roughly $3 million higher.
• The securities items in fee income roughly cancel out (+$11.7 million equity gains, -$10.6 million bond-sale loss). This is the second quarter in a row: first-half figures show $29.0 million of equity gains against $26.2 million of bond-sale losses. Core earnings are not being flattered much, but the equity gains depend on market prices and will not repeat reliably.
• The CET1 improvement includes an accounting change. The CET1 ratio (core capital as a share of risk-weighted assets, the main regulatory capital test) rose to 13.70% from 13.27% at year-end. About 0.20 points of that came from a "risk-weighted asset optimization analysis" on home-equity line commitments, which changes how assets are measured rather than adding capital.
• The provision was flat, but the reserve grew. An $11.2 million provision against $1.8 million of charge-offs means the bank is building its reserve, mostly to cover loan growth (C&I loans +10.7% and CRE loans +2.0% since December).

Takeaway: Cathay's 19% profit growth came mainly from funding costs. Its deposit rates fell more than three times as fast as its loan yields (-0.49 pts vs -0.14 pts), with credit losses near zero on top. That saving depends on its CD book. Almost all of the $9.57 billion in CDs (99.7%) matures within a year, and management now warns some "may reprice at higher rates." The cheap-funding tailwind behind this quarter is likely to shrink from here.

Outlook

The 10-Q does not give earnings guidance. It does say several things about where results are heading:

• Deposit costs may stop falling. Management writes that "given the current competitive environment for certificates of deposit and expectations for a relatively stable interest rate environment," some maturing CDs "may reprice at higher rates," and some may leave the bank. With $3.60 billion of CDs maturing within three months and another $3.39 billion within three to six months, this could affect results within two quarters.
• Lower rates would hurt. The bank's own model projects net interest income 3.3% lower if rates fall 1 point and 6.5% lower if they fall 2 points (and 3.5% / 7.0% higher if rates rise). The balance sheet is "asset-sensitive": loans reprice faster than funding. Further Fed cuts would compress the margin once the CD repricing benefit runs out.
• More buybacks are coming. The board raised the repurchase authorization to $200 million from $150 million on July 16, subject to regulatory approval. That would continue to lift EPS faster than net income. The quarterly dividend is $0.38, up from $0.34.
• Loan growth is coming from business lending. Commercial (C&I) loans grew $340 million (+10.7%) in six months, while construction loans shrank 26.4%. Commercial real estate is still 52% of the book, but its weighted-average loan-to-value is 49%, a sizeable equity cushion.

Our read: the margin gains of the past year are mostly booked. The next quarters depend on whether loan growth of about 4% a year can offset flat-to-higher CD costs and possible rate cuts. Credit is the stronger part of the story. Non-accruals are down a third, charge-offs are minimal and the reserve is bigger, so a sharp rise in provisions does not look likely. Two things to watch: OREO (now $33.7 million and rising) and the damaged multifamily property.