Cathay General Bancorp

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's Second Quarter 2025 Earnings Conference Call. My name is Ashya, 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.kathaygeneralbankcorp.com. Now, I would like to turn the call over to J.J. Lowe, Investor Relations of Cathay General Bank Corp. Please go ahead.

Thank you, Varsha, and good afternoon. Here to discuss the financial results today are Mr. Chang Liu, our President and Chief Executive Officer, and Mr. Hang Chen, 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, 2024, 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. 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 second quarter 2025 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.

Thank you, Georgia, and good afternoon. This afternoon, we reported a net income of $77.4 million for Q2 2025, an 11.4% increase as compared to $69.5 million for Q1 2025. Diluted earnings per share increased 12.2% to $1.10 for Q2 2025 as compared to $0.98 in Q1 2025. During Q2 2025, we repurchased 804,179 shares of our common stock at an average cost of $44.22 per share for $35.6 million under the June 2025 $150 million stock repurchase program. In Q2 2025, total gross loans increased $432 million, or 8.9% annualized, primarily driven by increases of $196 million in commercial loans, $202 million in commercial real estate loans, and $69 million in residential loans, offset by decreases of $32 million in construction loans. Given the strong Q2 loan growth, we are revising our 2025 loan growth guidance back to 3% to 4% from the previously revised guidance of 1% to 4%. Slide 6 shows the percentage of loans in each major loan portfolio that are either at a fixed rate or hybrid loans in their fixed rate period. Our loan portfolio consists of 62% fixed rate and hybrid loans excluding fixed to flow interest rate swaps of 4.9% of total loans. Fixed rate loans comprise 30% of total loans and hybrid and fixed rate period comprise 32% of total loans. We expect these fixed rate loans to support our loan yields as market rates are expected to decline. We continue to track our commercial real estate loans. Turning to slide eight of our earnings presentation, As of June 30, 2025, the average loan-to-value of our CRE loans remained at 49%. As of June 30, 2025, our retail property loan portfolio, as shown on slide nine, comprises 24% of our total CRE loan portfolio, or 13% of our total loan portfolio. 90% of the 2.5 billion retail property loans are secured by retail store, building, neighborhood mixed use, or strip centers, and only 9% is secured by shopping centers. On slide 10, office property loans represent 14% of our total CRE loan portfolio, or 7% of our total loan portfolio. Only 33% of the 1.5 billion in office property loans are collateralized by pure office buildings, and only 3.3% are in CBDs. 40% of office property loans are collateralized by office retail stores, Office mixed use and medical offices in the remainder 20%, 27%, are collateralized by office condos. For Q2 2025, we reported net charge-offs of $12.7 million as compared to $2 million in Q1 2025. The $12.7 million charge-offs included $8.3 million charge-off, which had been reserved for in the first quarter on a large commercial loan. our non-accrual loans were 0.9% of total loans as of June 30th, 2025, which increased 19.6 million to 174.2 million as compared to Q1 2025, primarily due to a 16 million real estate loan, which is in the process of foreclosure. Turning to slide 12, as of June 30th, 2025, classified loans increased to 432 million from 380 million for Q1 2025 due to downgrade of our large loan relationship to substandard due to delays in interest payments, which are now in the process of incurred. Our special mention loans increased slightly to $310 million from $300 million in Q1 2025. We recorded a provision for credit losses of $11.2 million in Q2 2025 as compared to $15.5 million in Q1 2025. the reserve to loan ratio decreased to 0.88% for Q2 2025 from 0.91% for Q1 2025. However, excluding our residential mortgage portfolios, the total reserve to loan ratio would be 1.1%. Total deposits increased by $189 million or 3.8% annualized during Q2 2025, primarily due to increases of $120 million in core deposits and $68 million in time deposits. Total core deposits increased $120 million due to seasonal factors and marketing activities. Total time deposits, excluding broker deposits, decreased $37 million during Q2 2025. As of June 30, 2025, total uninsured deposits were $8.7 billion, net of $0.8 billion in collateralized deposits or 43.3% of total deposits. We have an unused borrowing capacity from the Federal Home Loan Bank of $7 billion, and the Federal Reserve Bank of 1.5 billion, and Unplugged Securities of 1.5 billion as of June 30th, 2025. The sources of available liquidity are more than 100% of the uninsured and uncollateralized deposits as of June 30th, 2025. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Cheng, to discuss the quarterly financial results in more detail.

Thank you, Cheng, and good afternoon, everyone. For Q2 2025, net income increased $7.9 million or 11.4% to $77.4 million from $69.5 million for Q1 2025, primarily due to $4.6 million in higher net interest income, $4.3 million lower provision for credit losses and $4.2 million higher in non-interest income offset by $3.5 million higher in non-interest expense and $1.7 million higher in provision for income taxes. Net interest margin increased from $3.25 percent for Q1 2025 to 3.27 for Q2 2025. The increase in net interest income was due to the lower cost of funds. In Q2 2025, interest recoveries and prepaid penalties added three basis points to the net interest margin as compared to adding six basis points in net interest margin for Q1 2025. Non-interest income for Q2 2025 increased 4.2 million to 15.4 million when compared to 11.2 million in Q1 2025. The increase was primarily due to a $2.8 million change in mark-to-market unrealized loss on equity securities in Q2 compared to unrealized loss in equity securities in Q1, and a $2.4 million increase in other operating income resulting from higher foreign exchange income and derivative fee income offset by 1.2 million lower in wealth management income. Non-interest expense increased by 3.4 million or 4% to 89.1 million in Q2 2025 from 85.7 million in Q1 2025. This increase was primarily due to a 2.1 million increase in low-income housing amortization and a 1.4 million increase in professional expenses. The effective tax rate for Q2 2025 was 19.56% as compared to 19.82% for Q1 2025. Due to a recent California tax legislation, we are updating our guidance for the effective tax rate to between 18.5% to 19% from the previous guidance between 19.5% to 20.5%. As of June 30th, 2025, our Tier 1 leveraged capital ratio increased to 11.07% as compared to 11.06% as of March 31st, 2025. Our tier one risk-based capital ratio decreased to 13.34% from 13.58% as of March 31, 2025. And our total risk-based capital ratio decreased to 14.9% from 15.19% as of March 31, 2025. Thank you, Heng.

We will now proceed to the question and answer portion of the call.

Ladies and gentlemen, if you have a question at this time, please press star then one key on your touch-tone phone. 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 addressed or 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. The first question comes from Gary Tenner with DA Davidson. Please go ahead.

Thanks. Good afternoon. In terms of the income tax rate for this quarter, was there any direct impact from that California state change that drove the income taxes higher this quarter? And if so, what amount?

Yes. Yes, $3.4 million. That's the result of writing off a portion of our deferred tax asset to reflect a lower state apportionment, lower California state apportionment.

Okay, great. Thank you. And then just on the... the ACL, I know down two basis points, quarter over quarter, but you did have the charge off that was, I think, specifically reserved for. So what kind of drove the refill of that bucket this quarter of the allowance this quarter?

Well, there's a lot of noise this quarter, Gary. We have, let me start with You know, we use Moody's as the economic forecast variable for our ACL. And Moody's, the unemployment factor, increased by 40 basis points compared to March. And since five of our six loan pools, one of the dependent variables is unemployment. That added more. We had loan growth, which added more. And offsetting that, we reduced specific provision for tariffs. We were not seeing any impact on our importers. And we had set up a reserve in Q1 for that. And then secondly, we had... another credit that was non-accrual and we increased the collateral as part of the bankruptcy settlement. We had a special reserve against that credit at which we now no longer need.

So, Heng, the refill of the ACL primarily related, would you say, just to the economic factors in Moody's model more than any of the portfolio specifics?

That's fine. That's fine.

Okay. Okay. That's what I was curious about. Thank you.

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

Hey, good afternoon. Hey, I wanted to ask on just the loan growth and the guidance first. It feels like, you know, after a really strong second quarter that you know, loan growth would need to revert to that low single digits pace for kind of the next two quarters to stay within that, you know, kind of full year guidance that you updated this afternoon. I'm just curious, you know, what you're seeing in terms of pipeline today and kind of the growth outlook for the back half of the year. And maybe just curious what's keeping you from maybe raising the top end of the loan growth guidance.

So, Andrew, I think what we look at is really there's been a balanced growth in both the CNI side and the commercial real estate side. On the CNI side, we're seeing both some increases on existing line and their advances, as well as some new customers that we've been able to bring into the bank. As far as sort of the second half, we believe that we have a strong pipeline for the second half. based on what we're seeing so far. And we're looking forward to getting those deals closed as well. We want to just kind of look at the whole economic landscape, both in terms of just there's still some terrorist noise out there and some of the CPI adjustment and increases. So we just want to be sensitive to that. And if loan demand starts to drop, then we don't want to kind of not hit the top end of the range. That's why we kept the top end of the range at the 4%.

Yeah, understood. Okay. And then I wanted to ask just a balance sheet related question on the, it looks like end of period, the FHLB borrowing position stepped up quite a lot. Just curious, I think it was $412 million. Any color you can provide on whether those were term borrowings, overnight borrowings, and what the weighted average rate was, and you've still got a good cash position. Should we expect you to keep those borrowings kind of going into the third quarter?

most of our loan growth was in the month of June. So that's why we had to borrow from a federal home loan bank. And those are mainly two-week borrowings. The rate is is probably 4.6. So we're in the process of replacing that with broker CDs, which would be in the 4.3 or maybe a little bit lower. So we were just surprised. This is the treasury group. We were surprised by the... surge in loan growth, so we didn't have time to ramp up broker CDs to match that.

Yep. Okay. Makes sense. Thanks for taking the questions.

Thank you.

The next question comes from Matthew Clark with Piper Sandler. Please go ahead. Hey, good afternoon, everyone.

Can you just touch on the the increase in classifieds. I may have missed it in your prepared remarks, but if you could just give us some color on what drove that $50 million increase. What drove it in terms of the type of credits and kind of what the situation is there?

Chang covered it. It was one commercial relationship. They had some cash flow issues. They didn't go 90 days past due. That's why it's still state just only sub. And now they're catching up. So we hope that they'll be fully current by the end of the third quarter. And we have a program for that borrower to... gradually reduce the borrowings.

And was that, how large is that credit? Was that the entire?

Yeah, it's increased. Yeah, it's in the high 40s. Almost all of it is secured by real estate, but we want to limit our exposure to that borrow given the... given to the delinquency.

Got it. Okay, great. And then just two kind of minor housekeeping items. The prepay fees in the margin this quarter are interest income. I think there were three and a half million last quarter.

Yeah, it's three basis points this quarter compared to six basis points in Q1.

Got it. And then the tax credit amortization expectations for 3Q and 4Q?

Would be about $11 million per quarter.

Okay. Thank you.

Thank you.

Once again, if you have a question, please press star, then 1. The next question comes from Kelly Meuter with KBW. Please go ahead.

Hey, good afternoon. Thanks for the question. I wanted to circle back on loan growth and what you saw specifically on the commercial side. I appreciate the updated guide and the color there, but can you provide, was there any unusual pulls in utilization and how we should think about that? Is that part of the reason why we're seeing a kind of slowdown relative to such a strong 2Q in the back half of the year. Just any color would be helpful. Thank you.

Yeah. So on that end, I think a lot of the growth really was more kind of CRE. It was pretty balanced, but there was a larger proportion on the CRE side, and it was either purchase or refinance, just our kind of traditional business. And then on the CNI end, we definitely have added new names and new relationships that also help to propel the growth. But I would say the advance on the existing lines, there were definitely some, but not as significant of a portion of the growth for Q2.

Got it. That's helpful. And then on the deposit pricing side, you guys have done an excellent job getting deposit costs down after the first couple of cuts. With your NIM expectations ahead, I'm wondering, have we seen most of the improvement we're going to get after the first 100 basis points of cuts? And two, you know, I know the guidance provides, you know, two cuts in the back half of the year. Wondering how you guys are thinking about your ability to drive betas off of the next round of cuts. Thanks.

Yeah, Kelly, I think for... You know, we were doing some analysis on our betas, and for some CD, retail CD balances, the adjustment, the last rate cut was in the middle of December, and the CD rates since then the June CD rates have been down more than 25 basis points because I think we're in a slightly less promotional environment for CDs. And then we, as I mentioned in the script, you know, about 60% of our loans are fixed or hybrid. And we're getting some repricing on the loans, like our residential mortgage, the originations in Q2 were like 6.25%. And the average Portfolio yield on residential mortgage in the second quarter was 5.79. And also on new CRE originations, I think we're getting a little bit of uplift as fixed rate loans that we made three or four years ago repriced today. So we have a little bit of a backwind and Our NIMS should expand any time there's another Fed rate cut. We're just waiting for that to happen.

And to answer your first part of your question, I think we've pulled through on the 100 basis points cut that, for the most part, happened in the fourth quarter of 2023. So that's kind of 24, sorry. And that's pulled through for us. And I think it's reflected in our current deposit rates. I don't think there's any kind of tailwind on that part of it.

Awesome. Thanks for the call, or I'll step back.

Thank you. 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.

I want to thank everyone for joining us on our call, and 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. Good day.