Cathay General Bancorp - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 EPS of $0.98 modestly beat S&P Global consensus $0.95*, while “revenue” (S&P definition = NII after provision + non‑interest income) of $172.3M was below $186.2M* as lower non‑interest income and a higher tax rate offset stronger NIM expansion. Values with asterisk (*) retrieved from S&P Global.
• Net interest margin expanded 18 bps q/q to 3.25% as deposit costs declined; efficiency held at 45.6%.
• Asset quality improved: non‑accruals fell 8.6% q/q to $154.6M; net charge-offs dropped to $2.0M from $16.3M in Q4.
• Guidance: 2025 NIM raised to 3.25%–3.35% (from 3.10%–3.20%); loan growth widened to 1%–4% (from 3%–4%); expenses outlook maintained. Dividend of $0.34/share declared on May 15 and a new $150M buyback authorized on June 5 provide capital return visibility.

What Went Well and What Went Wrong

• What Went Well

  • NIM expansion: “Net interest margin increased to 3.25%” q/q; March average margin was 3.39% (3.21% ex recoveries) as deposit costs fell to a 3.36% spot rate at quarter-end.
  • Credit metrics improved: non‑accrual loans decreased $14.5M q/q to $154.6M and coverage (ALLL/NPLs) rose to 112% from 93%.
  • Liquidity and capital strong: Unused FHLB capacity $7.0B, FRB $343M, and $1.5B unpledged securities; Tier 1 leverage 11.06% and risk-based ratios solidly “well-capitalized”.

• What Went Wrong

  • Top-line (S&P “revenue”) miss: $172.3M actual vs $186.2M* consensus as non‑interest income fell $4.3M q/q and the effective tax rate rose to 19.82% (vs 7.57% in Q4). Values with asterisk (*) retrieved from S&P Global.
  • Loan growth headwinds: Gross loans declined slightly q/q to $19.35B, with commercial and residential down, partly offset by CRE growth; management widened 2025 loan growth outlook amid macro/tariff uncertainty.
  • Tariff overhang: Management estimates ~1.4% of loans could be adversely impacted by proposed U.S.-China tariffs; reserve build in Q1 was driven mostly by one domestic C&I borrower, with additional tariff-related reserves added.

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp's first quarter 2025 earnings conference call. My name is Rocco 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 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.cathaygeneralbancorp.com. I would now like to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp. Please go ahead.

Georgia Lo (Assistant Secretary and Investor Relations)

Thank you, Rocco, and good afternoon. Here to discuss the financial results today are Mr. Chang Liu, our President and Chief Executive Officer, and Mr. Heng Chen, our Executive Vice President and Chief Financial Officer. Before we begin, we wish to remind you that the speaker 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 filing 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 of which it is made, 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 first quarter 2025 results. To obtain a copy of our earnings release as well as our earnings presentation, please visit our website at www.cathaygeneralbancorp.com. After comments by management today, we will open this call up for questions. I will now turn the call over to our President and Chief Executive Officer, Mr. Chang Liu.

Chang Liu (President and CEO)

Thank you, Georgia, and good afternoon. Before we discuss our 2025 first quarter earnings, I want to address the current tariffs between the U.S. and China. Based on our survey, customers have moved their sourcing away from China since 2018 to other countries, including some to Mexico. Our borrowers have told us that for the most part, they can move their sourcing to other countries or pause importing from China until the tariffs are more reasonable. We estimate that about 1.4% of total loans could be adversely impacted by the tariffs. We are closely monitoring the impact of the evolving tariff situation on our borrowers and our loan portfolio. This afternoon, we reported net income of $69.5 million for Q1 2025, a 13.3% decrease as compared to $80.2 million for Q4 2024.

The diluted earnings per share decreased 12.5% to $0.98 for Q1 2025 as compared to $1.12 in Q4 2024. During Q1 2025, we repurchased 876,906 shares of our common stock at an average cost of $46.83 per share for $41.1 million, completing our May 2024 $125 million stock repurchase program. In Q1 2025, total gross loans decreased $23 million, or 0.5% annualized, primarily driven by decreases of $100 million in commercial loans and $65 million in residential loans, offset by increases of $127 million in CRE loans and $13 million in construction loans. Given the uncertainties in the economy, we have widened our 2025 loan growth guidance to 1%-4% from the previous guidance of 3%-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-float interest rate swaps of 4.1% 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 monitor our commercial real estate loans. Turning to slide 8 of our earnings presentation, as of March 31, 2025, the average loan-to-value of our CRE loans remained at 49%. As of March 31, 2025, our retail property loan portfolio, as shown on slide 9, comprises 25% of our total CRE loan portfolio, or 13% of our total loan portfolio. 90% of the $2.5 billion in retail property loans are secured by retail store, building, mixed-use, or strip centers, and only 9% secured by shopping centers.

On slide 10, office property loans represent 15% of our total CRE loan portfolio, or 8% of our total loan portfolio. Only 35% of the $1.5 billion in office property loans are collateralized by pure office buildings, and only 3.4% are in CBDs. 38% of office property loans are collateralized by office retail stores, office mixed-use, and medical offices. The remainder, 27%, are collateralized by office condos. For Q1 2025, we reported net charge-off of $2 million as compared to $16.3 million in Q4 2024. Our non-accrual loans were 0.8% of total loans as of March 31, 2025, which decreased $14.5 million to $154.6 million as compared to Q4 2024, primarily due to the transfer of a loan to Loans Held for Sale and paydown in Q1 2025.

Turning to slide 12, as of March 31, 2025, classified loans remain at $380 million, the same as in Q4 2024, and our special mention loans increased slightly to $300 million from $293 million in Q4 2024. We recorded provision for credit loss of $15.5 million in Q1 2025 as compared to $14.5 million for Q4 2024. Most of the provisions were to cover possible losses from one commercial client. The reserve-to-loan ratio increased from 0.83% for Q4 2024 to 0.91% for Q1 2025. However, excluding our residential mortgage portfolio, the total reserve-to-loan ratio would be 1.17%. Total deposits increased by $131 million, or 2.7% annualized, during Q1 2025, primarily due to a net increase of $67 million in core deposits and an increase of $64 million in time deposits. Total core deposits increased $67 million due to seasonal factors and marketing activities.

Total time deposits, excluding brokered deposits, increased $41 million during Q1 2025 due to promotional campaigns in the first month of the year. As of March 31, 2025, total uninsured deposits were $8.5 billion, net of $0.8 billion in collateralized deposits, or 42.7% of total deposits. We have an unused borrowing capacity from the Federal Home Loan Bank of $7 billion and the Federal Reserve Bank of $343 million, and unpledged securities of $1.5 billion as of March 31, 2025. These sources of available liquidity more than cover 100% of uninsured and uncollateralized deposits as of March 31, 2025. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Chen, to discuss quarterly financial results in more detail.

Heng Chen (EVP and CFO)

Thank you, Chang, and good afternoon, everyone. For Q1 2025, net income decreased $10.7 million, or 13.3%, to $69.5 million compared to $80.2 million for Q4 2024, primarily due to an increase of $10.7 million in provision for income taxes due to an increase in the effective tax rate resulting from no investment in solar tax credit funds in 2025. Net interest margin increased to 3.25% for Q1 2025 from 3.07% for Q4 2024. In Q1 2025, interest recoveries and prepayment penalties added six basis points to the net interest margin as compared to adding four basis points in net interest margin for Q4 2024. Based on the first quarter net interest margin, we have increased our 2025 guidance to 3.25%-3.35% for NIM from the previous 3.10%-3.2%. Non-interest income for Q1 decreased $4.3 million to $11.2 million when compared to $15.5 million in Q4 2024.

The decrease was primarily due to a $2.9 million mark-to-market unrealized loss on equity securities and a $1.5 million decrease in other operating income due to lower foreign exchange income, loan and derivative fees, and an interest rate swap loss. Non-interest expense increased by $0.5 million, or 0.6%, to $85.7 million in Q1 2025 when compared to $85.2 million in Q4 2024. The increase was primarily due to $2.2 million higher FDIC assessment this quarter compared to Q4 2024, which was lower because of the reversal of an overaccrual of FDIC assessment. A $1.1 million increase in computer equipment expense was offset by $1.7 million in lower solar tax credit fund amortization and $1.3 million in lower professional expense. The effective tax rate for Q1 2025 was 19.82% as compared to 7.57% for Q4 2024.

The increase in the effective tax rate was due to a decrease in solar tax credit fund investment because of limitations on tax credits. As of March 31, 2025, our Tier 1 leverage capital ratio increased to 11.06% as compared to 10.97%. As of December 31, 2024, our Tier 1 risk-based capital ratio increased to 13.57% from 13.55% as of December 31, 2024, and our total risk-based capital ratio increased to 15.19% from 15.09% as of December 31, 2024.

Chang Liu (President and CEO)

Thank you, Heng. We will now proceed to the question-and-answer portion of the call.

Operator (participant)

Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then one key on your touch-tone telephone. We ask that you please limit yourself to one question and one follow-up question. You may then rejoin the queue. If your question has been answered 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. Today's first question comes from Chris McGratty at KBW. Please go ahead.

Andrew Leischner (Assistant VP)

Hey, this is Andrew Leischner on for Chris McGratty. How's it going?

Chang Liu (President and CEO)

Okay.

Andrew Leischner (Assistant VP)

Just looking at the margin, can you provide what the sensitivity would be to the margin guide and maybe NII levels if we were to get more than the one interest rate cut in July?

Heng Chen (EVP and CFO)

On a full-year basis, it'd be about four basis points for every rate cut. Though if it happens in July, it's only two.

Andrew Leischner (Assistant VP)

Okay. Great. Thank you. Then. [crosstalk]

Heng Chen (EVP and CFO)

Yeah, go ahead. Go ahead.

Andrew Leischner (Assistant VP)

Oh, no, sorry. I was going to switch gears there. All right. Thank you, Heng. Can you just provide the spot deposit costs at the end of the quarter and also if you have the average margin for the month of March?

Heng Chen (EVP and CFO)

Yeah. The average margin for the month of March was 3.39%. It had the bulk of the interest recoveries for the first quarter. Excluding the interest recoveries, the net margin was 3.21%. You like the rates on deposits, the spot rates?

Andrew Leischner (Assistant VP)

Yes. Yes, please.

Heng Chen (EVP and CFO)

Okay. The spot rate for total interest-bearing deposits at March 31, 2025 was 3.36%.

Andrew Leischner (Assistant VP)

Okay. Great. Thank you.

Operator (participant)

Thank you. Our next question today comes from Gary Tenner at D.A. Davidson. Please go ahead.

Gary Tenner (Analyst)

Thanks. Good afternoon. I appreciate the change you made to your loan growth guide for the year, lowering it from 3-4% to 1-4%. Can you talk about kind of what you're seeing in your pipelines and customer behavior today compared to 30, 60 days ago that kind of drove that decline?

Chang Liu (President and CEO)

Sure, Gary. I think for us, the pipeline in the commercial real estate side is still relatively strong compared to the last two years at the same time from a relative perspective. I think the guidance is really just to, given the current uncertainty and what we're seeing on the tariff side, particularly on the C&I clients, that we're concerned about sort of the growth prospect in that particular side of the business and even the residential mortgage. While we've seen some slight uptick recently, I think there was a recent article in The Wall Street about how it's now not the seller's market and a little bit shifting a little bit. We're seeing a little bit of pickup there. That's the reason for the sort of revision to the guidance.

Gary Tenner (Analyst)

Just as a follow-up to that, are you seeing projects being delayed or seeing our customers talking about just not investing or undertaking any investment in their companies? What are you hearing, I guess, more specifically on the C&I side?

Chang Liu (President and CEO)

Yeah. That's probably the bulk of it. If there were some growth plans or expansion plans or anything like that, I think there's some pause to that. I think they're more focused on managing their balance sheet and P&L, both sort of the top-line side because the demand is going to slow down, as well as sort of the cost side, right? Their inventory side's prices is unpredictable somewhat in the near future. They're trying to manage the P&L side and the balance sheet rather than thinking about growth.

Heng Chen (EVP and CFO)

Yeah. Let me add, we also reasonably wired it as if there's a tariff situation that doesn't improve, we expect some loan paydowns as some importers just stop importing and sell out. A very few of the importers import primarily from China, and they would just pause their imports for whatever, nine months or whatever, until conditions improve. That is another factor in widening the gap.

Chang Liu (President and CEO)

I'll add one more. Some of our C&I customers have already told us that they've built up some excess inventory anywhere between three to nine months. The line usage on what they need is going to be flat.

Gary Tenner (Analyst)

Great color. Thank you.

Operator (participant)

Thank you. Our next question comes from Andrew Terrell with Stephens. Please go ahead.

Andrew Terrell (Managing Director)

Hey, good afternoon. If I could just go back to the question that was asked a minute ago around the margin and the impact of rate cuts specifically on the forward guide. I appreciate the four basis points annualized for every cut. Just to clarify, if we go down 25 on rates, is that four basis points positive to the NIM on a four-year basis or negative?

Heng Chen (EVP and CFO)

Positive. Positive. You can see in the first quarter, our loans only decreased by two basis points, and our deposits went down by 29. This year, I think we're going to be helped by the fact that about 60% of our loans are fixed or hybrids in the fixed period. They're not going to go down that much.

Andrew Terrell (Managing Director)

100%. Yep. I get it. Just wanted to clarify that. Shifting over to just the ACL, I think you called out that the provision this quarter, the allowance build, was one specific C&I credit. I'm curious if that one specific commercial credit, was that a borrower that fell in that 1.4% of loans that you guys highlighted as could be impacted by tariffs? Just more broadly, as you did the work to kind of ring-fence the borrowers and exposure where it could be more impacted by tariffs, have you taken any incremental provisions or built allowances on those specific relationships?

Heng Chen (EVP and CFO)

Yeah. That reserve, which was the majority of the Q1 reserve, was for a domestic company. They are not trade finance-related at all. The rest of the build-up in the reserve was tariff-related. We are hopeful that that covers most of the exposure. As I mentioned before, I think our importers, they should be able to pass on the cost of tariffs if they are reasonable. If not, they will stop importing that particular line of imports.

Andrew Terrell (Managing Director)

Yep. Do you have what the allowance is on that aggregate, 1.4% of loans?

Heng Chen (EVP and CFO)

It's probably 2%.

Andrew Terrell (Managing Director)

Got it. Okay. If I could ask just one more on the buyback, it looks like you—I mean, it was good to see you guys completed the authorization in the quarter. It looks like the price bought back was around, I think it was $46, $47. Yeah, I didn't see—I might have missed it, but I didn't see a new authorization in place. I would assume you, given you've still got pretty strong capital, it seems like the growth could maybe be a little bit slower balance sheet-wise. Would expectations be that we get another buyback at some point in the future? Just remind us kind of your interest in repurchasing going forward.

Heng Chen (EVP and CFO)

Yeah. We're waiting for regulatory approval. Once we get it, we'll announce our new buyback program.

Andrew Terrell (Managing Director)

Very good. Thank you for taking the questions.

Heng Chen (EVP and CFO)

Yeah. Thank you.

Operator (participant)

As a reminder, ladies and gentlemen, if you'd like to ask a question, please press star then one. Our next question today comes from Adam Butler at Piper Sandler. Please go ahead.

Adam Butler (Equity Research Analyst)

Good afternoon, everybody. This is Adam on for Matthew Clark. Just my first question is on non-interest expense. I know that your guys' outlook is consistent quarter over quarter for 4.5%-5.5% growth year-over-year. I just noticed that there were some puts and takes within some of the expense lines. I was just curious if you could walk through some of the major expense lines and just kind of talk about how you expect them to grow or decline throughout the year. Thanks.

Heng Chen (EVP and CFO)

Yeah. Let me cover that. Yeah, just on some of the major categories. On the salaries and benefits, we picked up about $2.5 million from excess bonus accruals in 2024. That offset the annual FICA hit. We think our consulting expense should be lower in the second half of the year. I think that's pretty much it looking at the income statement.

Adam Butler (Equity Research Analyst)

Okay. That's helpful. Just one other one for me. Most of my questions have been asked and answered. Just on the deposit growth during the quarter, it was robust. I was just curious, to what degree is there seasonality involved in the deposit flows this quarter? Do you kind of—what kind of trends are you seeing from the growth standpoint?

Heng Chen (EVP and CFO)

Yeah. I think the only seasonality is that our Lunar New Year promotion is in January and February. We picked up probably a net of about $200 million. We let some broker CDs run off given our increase in relationship deposits.

Adam Butler (Equity Research Analyst)

Okay. If I could just follow up on the Lunar New Year deposit specials, what was the rate offered this year, and how did it compare to last year's special?

Heng Chen (EVP and CFO)

Yeah. For the six months, it was about 4.10 versus the 4.50 or so for the July renewals. And then the one year, we actually did 13 months this year. That was also 4.10, right?

Chang Liu (President and CEO)

It's about 4.10 as well.

Heng Chen (EVP and CFO)

That's coming off of, I think, 5.40 or something, 5.30.

Adam Butler (Equity Research Analyst)

Okay. That's very helpful. That's all the questions that I had. I appreciate it and congrats on the quarter.

Heng Chen (EVP and CFO)

Yep. Thank you.

Chang Liu (President and CEO)

Thank you.

Operator (participant)

Thank you for your participation. I will now turn the call back over to Cathay General Bancorp's management for closing remarks.

Chang Liu (President and CEO)

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

Operator (participant)

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