Cathay General Bancorp - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 EPS of $1.10 grew 12% QoQ and 20% YoY; revenue rose to $185.4M, driven by higher net interest income, lower provision, and stronger fee income; net interest margin expanded to 3.27%.
• Versus S&P Global consensus, EPS modestly beat ($1.10 vs $1.088) while revenue missed ($185.4M vs $195.9M); the miss reflects consensus expectations for higher post-provision revenue than realized. Bold catalysts: NIM expansion and active buybacks offsetting credit cost volatility (provision and net charge-offs).
• Guidance: FY loan growth raised back to 3–4% on strong pipelines; effective tax rate lowered to 18.5–19% (one-time ~$3.4M DTA write-off in Q2); management expects further NIM expansion if the Fed cuts rates.
• Balance sheet: Loans +2.23% QoQ to $19.78B; deposits +$189M QoQ to $20.01B; uninsured deposits 43.3% with liquidity sources >100% of uninsured/unsecured deposits.
• Credit: Non-accrual loans increased $19.6M QoQ; net charge-offs rose to $12.7M largely due to an $8.3M charge-off previously reserved; provision fell to $11.2M as macro inputs and specific reserves shifted.

What Went Well and What Went Wrong

What Went Well

• Net interest margin expanded to 3.27% (from 3.25%), supported by lower deposit costs and loan growth; CEO: “We are pleased by the continued increase in the net interest margin”.
• Loan and deposit momentum: Loans +2.23% QoQ to $19.78B; deposits +$188.8M QoQ to $20.01B, with core deposit gains and seasonality.
• Capital return: 804,179 shares repurchased at $44.22 ($35.6M) under the new $150M authorization adopted June 5, 2025.

What Went Wrong

• Asset quality deterioration: Non-accrual loans rose 12.7% QoQ to $174.2M; classified loans increased ~$50M due to one commercial relationship; allowance coverage of NPLs fell to 96.1%.
• Net charge-offs increased to $12.7M (vs $2.0M in Q1), including an $8.3M specific commercial charge-off; provision, while lower QoQ, remained elevated.
• Revenue miss vs consensus (actual $185.4M vs $195.9M) despite EPS beat; fee income improved but not enough to offset consensus expectations for post-provision revenue.

Transcript

Operator (participant)

Afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's second quarter 2025 earnings conference call. My name is Ashia 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'd 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. Now I would like to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp. Please go ahead.

Georgia Lo (VP of Legal and Corporate Affairs)

Thank you, Ashia, 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 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 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.

Chang Liu (CEO and President)

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-float interest rate swaps of 4.9% of total loans. Fixed rate loans comprise 30% of total loans, and hybrid in 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 8 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 9, 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 buildings, 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, and the remainder, 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 an $8.3 million charge-off which had been reserved for in the first quarter on a large commercial loan. Our nonaccrual loans were 0.9% of total loans as of June 30, 2025, which increased $19.6 million to $174.2 million as compared to Q1 2025, primarily due to a $16 million commercial real estate loan which is in the process of foreclosure. Turning to Slide 12, as of June 30, 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 being 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 loans 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 brokered time 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 unpledged securities of $1.5 billion as of June 30, 2025. The sources of available liquidity are more than 100% of the uninsured and uncollateralized deposits as of June 30, 2025. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Chen, to discuss the quarterly financial results in more detail.

Heng Chen (EVP and CFO)

Thank you Chang 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 noninterest income, offset by $3.5 million higher in noninterest expense and $1.7 million higher in provision for income taxes. Net interest margin increased from 3.25% 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 prepayment penalties added 3 basis points to the net interest margin as compared to adding 6 basis points in net interest margin for Q1 2025. Noninterest 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. Noninterest 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 fees. The effective tax rate for Q2 2025 was 19.56% as compared to 19.82% for Q1 2025.

Due to our 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 30, 2025, our Tier 1 leverage capital ratio increased to 11.07% as compared to 11.806% as of March 31, 2025. Our Tier 1 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.

Chang Liu (CEO and President)

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

Operator (participant)

Ladies and gentlemen, if you have a question at this time, please press star then one key on your touchtone 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 D.A. Davidson & Co. Please go ahead.

Gary Tenner (Managing Director and Senior Research Analyst)

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?

Heng Chen (EVP and CFO)

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

Gary Tenner (Managing Director and Senior Research Analyst)

Okay, great. Thank you. On the ACL, I know down 2 basis points quarter over quarter. You did have the charge off that was, I think, specifically reserved for. What kind of drove the refill of that bucket this quarter, of the allowance this quarter?

Heng Chen (EVP and CFO)

There is a lot of noise this quarter, Gary. Let me start with, you know, we use Moody's as an economic forecast variable for our ACL, and Moody's, the unemployment factor increased by 40 basis points compared to March. Since five of our six loan pools, one of the dependent variables is unemployment, that added more. We had loan growth, which added more. Offsetting that, we reduced specific provision for tariffs. We're not seeing any impact on our importers, and we had set up a reserve in Q1 for that. Secondly, we had another credit that was on nonaccrual, and we increased the collateral as part of the bankruptcy settlement. We had a special reserve against that credit, which we now no longer need.

Gary Tenner (Managing Director and Senior Research Analyst)

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?

Heng Chen (EVP and CFO)

That's fine. That's fine.

Gary Tenner (Managing Director and Senior Research Analyst)

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

Heng Chen (EVP and CFO)

Thank you.

Operator (participant)

The next question comes from Andrew Terrell with Stephens Inc. Please go ahead.

Andrew Terrell (Managing Director and Research Analyst)

Hey, good afternoon.

Operator (participant)

Hey.

Andrew Terrell (Managing Director and Research Analyst)

I wanted to ask on just the loan growth and the guidance first. It feels like after a really strong second quarter, that loan growth would need to revert to that low single digits pace for kind of the next two quarters to stay within that kind of full year guidance that you updated this afternoon. I'm just curious 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?

Chang Liu (CEO and President)

Andrew, I think what we look at is really there's been a balanced growth in both the C&I side and the commercial real estate side. On the C&I 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 the 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 tariff noise out there and some of the CPI adjustment and increases. We just want to be sensitive to that.

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 forefront.

Andrew Terrell (Managing Director and Research Analyst)

Yep, understood. Okay. I wanted to ask just a balance sheet related question. It looks like end of period, the FHLB borrowing position stepped up quite a lot. Just curious. Any. 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? You still got a good cash position. Should we expect you to keep those borrowings kind of going into the quarter?

Heng Chen (EVP and CFO)

Andrew, most of our loan growth was in the month of June. That's why we had to borrow from a Federal Home Loan Bank. Those are mainly two-week borrowings. The rate is probably 4.6%. We're in the process of replacing that with brokered time deposits, which would be in the 4.3% or maybe a little bit lower. We were just surprised. This is the Treasury Group. We were surprised by the surge in loan growth. We didn't have time to ramp up brokered time deposits to match that. Yep.

Andrew Terrell (Managing Director and Research Analyst)

Yeah. Okay, makes sense. Thanks for taking the questions. Thank you.

Operator (participant)

The next question comes from Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark (Managing Director and Senior Research Analyst)

Hey, good afternoon everyone. Could you just touch on the increase in classified loans? 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. You know what drove it in terms of the type of credits and kind of what the situation is there?

Heng Chen (EVP and CFO)

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 still stayed just only sub. Now they're catching up. We hope they'll be fully current by the end of the third quarter. We have a program for that borrower to gradually reduce the borrowings.

Matthew Clark (Managing Director and Senior Research Analyst)

How large is that credit? Was that the entire?

Heng Chen (EVP and CFO)

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

Matthew Clark (Managing Director and Senior Research Analyst)

Got it. Okay, great. Just two kind of minor housekeeping items. The prepay fees in the margin this quarter, interest income. I think there were $3.5 million last quarter.

Heng Chen (EVP and CFO)

Yeah, it's 3 basis points this quarter compared to 6 basis points in Q1.

Matthew Clark (Managing Director and Senior Research Analyst)

Got it. The tax credit amortization expectations for 3Q and 4Q?

Heng Chen (EVP and CFO)

Would be about $11 million per quarter.

Matthew Clark (Managing Director and Senior Research Analyst)

Okay, thank you.

Heng Chen (EVP and CFO)

Thank you.

Operator (participant)

Once again, if you have a question, please press star then one. The next question comes from Kelly Motta with Keefe, Bruyette & Woods. Please go ahead.

Kelly Motta (Director and Equity Research Analyst)

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.

Heng Chen (EVP and CFO)

Yeah. 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. On the C&I end, we definitely have added new names and new relationships that also help to propel the growth. 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.

Kelly Motta (Director and Equity Research Analyst)

Got it. That's helpful. 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, wondering have we seen most of the improvement we're going to get after the first 100 bps of cuts? I know the guidance provides 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.

Heng Chen (EVP and CFO)

Yeah, Kelly, I think for, you know, we were doing some analysis on our betas and like for some retail CD balances, the adjustment last rate cut was in the middle of December, and those CD rates since then, the June CD rates have been down more than 25 basis points because I think we're in the slightly less promotional environment for CDs. And then, as I mentioned in the script, 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 at 6.25% and the average portfolio yield on residential mortgage in the second quarter was 5.79%. Also, on new commercial real estate originations I think we're getting a little bit of uplift as fixed rate loans that we made three or four years ago reprice today. We have a little bit of a backwind and our net interest margin should expand anytime there's another Federal Reserve rate cut. We're just waiting for that to happen.

Chang Liu (CEO and President)

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. That's kind of 2024. Sorry. That's pulled through for us. 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.

Kelly Motta (Director and Equity Research Analyst)

Awesome. Thanks for the color. I'll step back.

Heng Chen (EVP and CFO)

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. Please go ahead.

Chang Liu (CEO and President)

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.

Operator (participant)

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