Cathay General Bancorp

Good afternoon, ladies and gentlemen, and welcome to Catherine General Bancorp's fourth quarter and full year 2025 earnings conference call. My name is Asha, 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 wish to participate in this portion of the call, please press star followed by one at any time during the conference. If assistance is needed any time during the call, please press star followed by zero, and our coordinators will be happy to assist you. Today's call is being recorded and will be available for replay at www.kathygeneralbankrup.com. Now, I'd like to turn the call over to Georgia Lowe, Investor Relations of Cathay General Bancorp.

Thank you, Ashya, 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 risks 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 Exchange Commission from time to time. As such, we caution you not to place any new reliance on such forward-looking statements. Any forward-looking statement speaks only as of the date of 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 Journal Bancorp issued an earnings release outlining its fourth quarter and full year 2025 results. To obtain a copy of our earnings release as well as our earnings presentation, please visit our website at CathayJournalBancorp.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. Cheng Liu.

Thank you, Georgia, and good afternoon. This afternoon, we reported a net income of $90.5 million for the fourth quarter of 2025, a 16.5% increase from $77.7 million in Q3. The looted earnings per share increased by 18.3% to $1.33 in Q4, up from $1.13 in Q3. For the full year of 2025, our net income was $315.1 million, a 10.1% increase from net income of $286 million in 2024. In Q4, we repurchased 1.1 million shares of common stocks for $51.9 million at an average cost of $47.15 per share. Under our June 2025 $150 million stock buyback quote, program. There is $12 million remaining under our June 2025 $150 million buyback program, which we expect to complete in early February. We plan to announce a new buyback program after approvals are received. Total gross loans grew by $42 million, driven primarily by increases of $80 million in CRE loans and $17 million in residential loans. We expect loan growth in 2026 to be between 3.5% and 4.5%. Slide seven of our earnings presentation shows the percentage of loans in each major loan portfolio that are either at a fixed rate or hybrid. Hybrid loans account for 60% of the portfolio, excluding fixed to flow interest rate swaps, which represent 3.1% of total loans. Fixed rate loans make up 30% of total loans and hybrid and fixed rate period account for 30% of total loans. We expect these fixed rate loans to support our loan yields as market rates are expected to decline. We continue to monitor our CRE portfolio. Turning to slide nine, the average loan to value of our CRE loans remains steady at 49%. Our retail property loan portfolio represents 24% of our total CRE loan portfolio, or 12% of total loans. As shown on slide 10 of the 2.5 billion in retail property loans, 90% are secured by retail store, neighborhood, mixed use, or strip centers. Only 9% are secured by shopping centers. Turning to slide 11, office private loans represent 13% of our total CRE loan portfolio or 7% of our total loans. Of the 1.4 billion in office loans, 30% are secured by pure office. Only 3% are in central business districts. Another 42% are collateralized by office retail stores, office mixed use, and medical office properties. with the remainder 28% secured by office condos. For Q4, we reported net charge-offs of 5.4 million as compared to 15.6 million the prior quarter. Non-accrual loans were 0.6% of total loans as of December 31st, 2025, down 53.3 million to 112.4 million compared to the prior quarter. The decrease in non-accrual loans during the fourth quarter of 2025 included the sale of a 15.8 million CRE loan at par and a 10.8 million CRE loan brought current and restored to accrual status. Depending on slide 13, classified loans decreased from 420 million to 391 million for Q4. Special mention loans increased from 455 million to 535 million in Q4. The bank downgraded five loan relationships, totaling 92 million to special mention that have not met certain debt covenants and have exhibited short-term financial issues for closer tracking. The bank believes that these credits will resolve within the next 12 months by either credit upgrades or partial or full payoff. We recorded $17.2 million in provisions for credit losses in Q4, compared to $28.7 million in Q3. The ARLL to gross loan ratio increased to 0.97% from 0.93%. In excluding our residential loan portfolio, the total reserve to loan ratio would be 1.22%. Total deposits increased by 373 million or 7.6% on an annualized basis during Q4, driven primarily by 366 million increases in core deposits and 7 million in time deposits. The growth in core deposits reflected seasonal factors and targeted marketing activities. For 2026, we expect deposit growth to range between 4% and 5%. As of December 31st, 2025, Total uninsured deposits were $9.3 billion, net of $0.9 billion in collateralized deposits, representing 44.6% of total deposits. The bank has $7.5 billion of unused borrowing capacity from Federal Homeowners Bank, $1.3 billion from Federal Reserve Bank, and $1.6 billion in unplugged securities. Altogether, these available liquidity sources provide more than 100% of the uninsured and uncollateralized deposits as of December 31, 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 Q4 2025, net income increased $12.8 million, or 16.5%, to $90.5 million, from $77.7 million for Q3, primarily due to 11.5 million lower in provision for credit losses, 5.4 million higher in net interest income, and 6.8 million higher in non-interest income, partially offset by a 4 million increase in non-interest expenses, and 6.8 million higher in provision for income tax. The net interest margin increased to 3.36% in Q4 from 3.31% in the prior quarter. The increase in net interest income was driven by a lower cost of funds. We anticipate further benefit from declining deposit costs supported by the fixed rate proportion of our loan portfolio. based on the Fed Fund features, we project two rate cuts in 2026, one in June and a second cut in September and anticipate that the net interest margin for 2026 to range between 3.4% and 3.5%. In Q4, interest recoveries and repayment penalties added five basis points to the net interest margin compared to adding four basis points to the net interest margin in Q3. Before non-interest income increased 6.8 million to 27.8 million compared to 21 million in Q3, mainly reflecting a 6.4 million change in mark-to-market unrealized gain on equity securities in Q4. Non-interest expense increased by 4.1 million from 88.1 million in Q3 to 92.2 million in Q4, primarily due to a 4.3 million higher bonus accrual in Q4. as a result of the above budget financial performance for 2025. We expect core non-interest expense excluding tax credit and core deposit intangible amortization to increase between 3.5% and 4.5% in 2026. The effective tax rate for Q4 2025 20.23% as compared to 17.18% for Q3. We expect effective tax rate between 20.5% and 21.5% for 2026. As of December 31, 2025, Our Tier 1 leverage capital ratios increased slightly to 10.91% as compared to 10.88% in Q3. Our Tier 1 risk-based capital ratios increased to 13.27% or 13.15% in Q3. And our total risk-based capital ratio increased to 14.93%. from 14.76% in Q3. 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 the star key then 1 on your touchtone telephone. We ask that you please limit yourself to one question and one follow-up question. You may return then to Q. 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. The first question comes from Kelly Motta with KDW. Please go ahead.

Hey, good afternoon. Thanks for the question. Maybe kicking it off on deposits, I appreciate the updated margin guide or the new margin guidance for 2026. It looks like you did a pretty nice job lowering interest-bearing deposit costs here. Can you speak more in terms of what you're assuming for deposit betas embedded in that NIM outlook here and just any market commentary as to the level of competitiveness now at this stage? Thank you.

Yeah. we're assuming deposit betas in the 60% range or so. And in terms of market competition, I think it's about the same. Yeah, we haven't, it's pretty rational in Q4.

So, Kelly, kind of for me, looking forward for 2026, I think, The local LA and New York landscape is still pretty competitive. I mean, we have about nearly 4 billion of maturing CDs in the first quarter with an average yield of about 3.8%. We'll run the Lunar New Year campaign and likely, if we can play somewhat below that, that's kind of the goal. But we're going to be sensitive about defending that base that we have while we try to transition some of that into non-transferring.

Got it. That's helpful. And just a point of clarification on that, that beta hang, that 60%, is that for interest-bearing or total deposits?

Interest-bearing, right.

Got it. Thank you for that. And then maybe on, it was nice to see the MPA improvement, and it seems like you had both a payoff and a resolution there. As we kind of look ahead, what are you seeing in terms of credit and any migration into criticized and overall trends?

So maybe some of that I can help with this is, you know, some of the migrations into special mention. We don't see any particular trends in particular. Three of the five that we were talking about, the top three, They're different in their own nature. One, for example, is a project in New York. It's a mixed-use project. It's completed. It's fully occupied. The ownership is just waiting for a lower property tax status approval to get through. And once that status approval gets through, then they'll be back up to compliance with sort of the debt coverage for that one. Another one is a multifamily mixed-use, primarily in the Pacific Northwest. They have a new commercial tenant coming in, not quite there yet, and so that's contributing to the not being able to meet the covenant requirement and as well as some of the more competition in the area. So they're finding some more challenges, but they're going to return that back to stabilization, and it's got a great guarantor support, and they're paying us agreed. And then lastly, it's a bit of a CNI story, and it's a distributor of exercise equipment and and their own warehouse, and they got some quarterly, not being able to meet the quarterly financial requirements, but overall for the year, they're expecting a full year on a positive note. So once we get a CPA financials, we will hope to be able to upgrade that if they can show a full year profit.

Great. That's super helpful. That's my cue, so I'll step back. Thanks a lot.

Thank you. Thank you.

Once again, if you have a question, please press star then one. The next question comes from Andrew Terrell with Steven. Please go ahead.

Hey, good afternoon. Maybe just on the margin quickly, the low-yield performance this quarter was also a decent amount better than I was expecting. Was there any level of – interest recovery in the loan yields this quarter, just looking at, you know, some of the NPL reduction.

It was five basis points to the NIM versus four basis points in Q3.

Got it. Okay, so relatively close to the baseline amount. Right, right. Okay. I appreciate all the color on the deposit and cost dynamics in the market right now. What about on the lending side? Have you seen an elevated level of competition for incremental loan growth? What's the status of the market on the lending side?

Surprisingly, I looked at those numbers for three segments. On the residential mortgage, believe it or not, we had a pretty strong growth last year in 2025 and the rates of the entire portfolio actually held up pretty nicely. As a matter of fact, I think improved by a couple of bips there. On the CRE side, I think there's still pretty strong competition for the right type of assets and loans. So that declined by, don't quote me on this, about 15, 20 bips on the entire portfolio there. I think the most amount of competition we saw probably was on the CNI side. I think the CNI side was still trying to push for growth and find some new lenders, new relationship kind of teams and those kind of things, but our existing portfolio on the CNI side, that we saw probably the most amount of competition there, and that rate declined steeper than the other two segments.

Got it. Okay. If I could just sneak one more in. Do you have the amount of the expected amortization in 2026?

For long-term housing? It's probably $11 million and a quarter, Andrew.

Perfect. Okay. Thank you very much. Thank you.

Thank you for your participation. I will now turn the call back over to Kathy, General Bankers Management, for closing remarks. Please go ahead.

I want to thank everyone for joining us in our call, and we look forward to speaking with you at our next quarterly earnings release call.

Oh, there's one more.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.