Margin keeps expanding, but funding cost questions loom
- Net interest margin rose to 3.48% in Q2 2026, marking the eighth consecutive quarter of expansion.
- The board approved a larger $200 million share repurchase program to support per-share value.
- Management reduced full-year deposit growth guidance to 3% to 4% after a sluggish first half.
- Over $3.3 billion of certificates of deposit are rolling over at higher rates, which could pressure future margins.
- Credit quality improved in Q2 2026, with criticized loans falling by $103 million.
Margin gains continue, but deposit costs are the next test
Cathay continues to push its margin higher. Net interest margin, which is the gap between what the bank earns on assets and pays on funding, rose to 3.48% in Q2 2026. This was the eighth consecutive quarter of margin expansion. The bank also increased its share repurchase plan to $200 million and saw criticized loans drop by $103 million, easing some of the credit concerns from late 2025.
The bull case relies on execution. Cathay is maintaining loan growth targets of 3.5% to 4.5% for the year, and earlier moves to reset part of its securities book are helping yield. If the bank can navigate its deposit funding costs without hurting the margin, earnings per share can keep improving.
The bear case centers on funding and deposits. The bank lowered its full-year deposit growth outlook to 3% to 4% because the first half of the year was sluggish. Even more importantly, $3.3 billion to $3.4 billion of certificates of deposit will roll over soon, likely at higher yields. That could pressure funding costs and stop the margin expansion streak.
Finn's overall view remains balanced. Cathay is managing its balance sheet well and credit metrics improved recently, but it is not a high-growth story. The stock works best if the bank successfully reprices its deposits without taking a major hit to net interest margin.
A spread lender relying on deposit discipline
Cathay makes most of its money the classic bank way. It gathers deposits, lends that money out, and keeps the spread. Its loan book is centered on commercial real estate, business lending, residential mortgages, and construction loans.
The bank leans heavily on fixed-rate and hybrid loan structures, which make up 64% of the portfolio. That can support predictable income, but it also slows how fast loan yields reset when rates move.
Deposit pricing is the main lever right now. Net interest margin has expanded for eight straight quarters, aided by disciplined deposit cost management. However, replacing maturing certificates of deposit at higher current rates will test that discipline.
Fee income is still secondary, but wealth management is becoming a more central part of the bank's plan. It matters because growing fee income can help reduce dependence on lending spreads in a tough rate environment.
Loans first, fees second
Commercial real estate loans
CRE is the core of Cathay's lending model. The internal view says the CRE book is underwritten with an average loan-to-value of 50%, focused on neighborhood retail and non-CBD office properties.
Commercial and industrial loans
C&I loans tie the bank to operating businesses and customer relationships. They can grow with the local economy, but single-name credit problems have created noise in the past.
Residential mortgages
Residential mortgages add another real estate-backed lending line. They help diversify the loan book, but still leave the bank exposed to property values and borrower income.
Construction loans
Construction lending can add yield and growth when demand is strong. It also carries more timing and collateral risk if projects slow or costs rise.
Deposits
Deposits are the fuel for the bank. Cathay's current margin story depends on keeping deposit costs under control while retaining customers, especially as old certificates mature.
Wealth management
Wealth management is becoming a bigger part of the fee income plan. It matters because fee income can help reduce dependence on lending spreads.
Investment securities
The securities portfolio supports liquidity and income. Earlier in 2026, Cathay restructured part of this portfolio to improve long-term yield.
Earning assets show the mix
Cathay reports as a single operating segment, so this mix uses Q1 2026 average interest-earning assets to show where funds are deployed. Loans dominate the earning asset base.
What could go wrong
Deposit costs start to bite
High impact · High oddsCathay has over $3.3 billion of certificates of deposit rolling off soon. If they reprice at higher rates, the bank will pay more for its funding. That would directly pressure the net interest margin and could end the recent streak of expansion.
CRE stress hits single borrowers
High impact · Medium oddsCathay has meaningful exposure to commercial real estate and named borrower relationships. Management says CRE underwriting is conservative, but a few large weak borrowers can still move credit metrics fast.
Deposit growth misses the mark
Medium impact · Medium oddsManagement lowered the 2026 deposit growth outlook to 3% to 4% after a sluggish start to the year. If deposit growth stays weak, the bank may struggle to fund its loan growth target without paying up for expensive wholesale funding.
Credit quality deteriorates again
High impact · Low oddsCriticized loans improved by $103 million in Q2 2026, which is good news. However, late 2025 saw significant increases in special mention loans. If economic conditions worsen, those loans could become non-accrual loans and force higher credit loss provisions.
Buybacks do not offset rising costs
Medium impact · Low oddsThe upsized $200 million repurchase plan can improve per-share results if capital remains strong. But buybacks are less helpful if funding costs rise or the bank needs to preserve capital for unexpected loan losses.
In one breath
What does Cathay General Bancorp do?
Cathay General Bancorp owns Cathay Bank. It gathers deposits and makes loans, with a heavy focus on commercial real estate, business loans, residential mortgages, and construction lending.
Why did Cathay's margin improve recently?
The bank managed its deposit costs carefully and repositioned part of its securities portfolio. Net interest margin rose to 3.48% in Q2 2026, the eighth straight quarter of improvement.
What is the biggest risk for CATY stock right now?
Funding costs are a major concern. The bank has over $3.3 billion of certificates of deposit that need to be renewed, likely at higher interest rates, which could squeeze profit margins.
Is Cathay trying to grow fast in 2026?
Management expects 3.5% to 4.5% loan growth in 2026. However, deposit growth guidance was lowered to 3% to 4%, meaning the bank is not growing funding as fast as it originally hoped.
