Cathay General Bancorp - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 delivered stable earnings with net income of $77.7M and diluted EPS of $1.13; net interest margin rose to 3.31% as deposit costs eased, while provision for credit losses stepped up materially to $28.7M.
• The company raised full-year loan and deposit growth guidance to 3.5%–5% (from 3%–4%) on strong Q3 loan/deposit trends; management expects NIM to trend higher with further Fed cuts (6–7 bps over six months per 25 bp cut).
• Versus consensus, Q3 EPS modestly missed and “revenue” (net interest income after provision + noninterest income) missed; prior two quarters saw small EPS beats but persistent “revenue” misses, implying estimates likely need revision toward lower provisioning/fee dynamics*.
• Near-term stock narrative hinges on improving NIM and raised growth guidance offset by higher provisioning and an uptick in special mention loans; capital return remains supportive with $50.1M repurchases in Q3 and ongoing dividends.

What Went Well and What Went Wrong

What Went Well

• Net interest margin improved to 3.31% (from 3.27% in Q2), aided by lower cost of funds and deposit repricing; CEO: “We are pleased by the continued increase in the net interest margin compared to the second quarter of 2025.”.
• Strong balance sheet momentum: total loans up $320M (+1.6% QoQ) and deposits up $514.8M (+2.6% QoQ); guidance for loan and deposit growth raised to 3.5%–5%.
• Capital return: repurchased 1.07M shares for $50.1M at $46.81 average in Q3; efficiency ratio improved to 41.84% (from 45.34% in Q2), reflecting disciplined expenses.

What Went Wrong

• Provision for credit losses rose to $28.7M (from $11.2M in Q2), including $9.1M for two movie theater loans and a $3.8M CECL model change; net charge-offs increased to $15.6M.
• Special mention loans increased to $455M (vs $310M), driven by six relationships, including a printing company impacted by tariff uncertainty and properties with tenant loss/slow leasing; management expects resolution over 12 months but near-term risk elevated.
• Investment yield pressure: ~40% of the bond book in six‑month Treasuries rolling down yields; securities income reflected ~30 bps yield decline QoQ, tempering asset yield gains.

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's Third Quarter 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 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. Now, I would like to turn the conference over to Georgia Lo, Investor Relations of Cathay General Bancorp. Please go ahead.

Georgia Lo (Head of Investor Relations)

Thank you, Asha, 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 31st, 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 Third 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 (President and CEO)

Thank you, Georgia, and good afternoon, everyone. This afternoon, we reported a net income of $77.7 million for Q3 2025, a 0.3% increase as compared to $77.5 million for Q2 2025. The earnings per share increased 2.7% to $1.13 for Q3 2025 as compared to $1.10 in Q2 2025. During Q3 2025, we repurchased 1.07 million shares of our common stock at an average cost of $46.81 per share for $50.1 million under the June 2025 $150 million stock buyback program. In Q3 2025, total gross loans increased $320 million, or 6.6% annualized, primarily driven by increases of $122 million in CRE loans and $123 million in residential loans. Due to our strong loan growth through September 30th, 2025, we are increasing our loan and deposit guidance from 3%-4% to 3.5%-5% for both loans and deposits.

Slide six 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 60% fixed rate and hybrid loans, excluding fixed-to-flow interest rate swaps of 3.1% of total loans. fixed rate loans comprise 30% of total loans, and Hybrid and fixed rate period comprises 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 loans. Turning to Slide eight of our earnings presentation, the average loan-to-value of our CRE loans remains at 49%. 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 in retail property loans are secured by retail store, 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. Only 3% are located in central business districts. 40% of office property loans are collateralized by office retail stores, office mixed-use, and medical offices, and the remainder of 27% are collateralized by office condos. For Q3 2025, we reported net charge-offs of $15.6 million as compared to $12.7 million in Q2 2025. Our non-accrual loans were 0.8% of total loans as of September 30th, 2025, which decreased $8.5 million to $165.6 million as compared to Q2 2025.

Turning to Slide 12, classified loans decreased from $432 million to $420 million for Q3 2025. Our special mention loans increased from $310 million-$455 million in Q3 2025. The bank conservatively downgraded six loan relationships totaling $145 million to special mention that have not met certain debt covenants and have exhibited short-term financial issues for closer monitoring. The bank believes that these credits will resolve within the next 12 months by either credit upgrades or partial or full payoffs. We recorded a provision for credit losses of $28.7 million in Q3 2025 as compared to $11.2 million in Q2 2025. The $28.7 million provision included $9.1 million for two movie theater loans that we acquired from the acquisition of Far East National Bank and $3.8 million from a change in our CECL model.

The ALLL to gross loan ratio increased from 0.88% for Q2 2025 to 0.93% for Q3 2025. However, excluding our residential mortgage portfolio, the total reserve-to-loan ratio would be 1.16%. Total deposits increased by $515 million, or 10.5% annualized, during Q3 2025, primarily due to increases of $508 million in core deposits and $7 million in time deposits. The increase in core deposits was due to seasonal factors and marketing activities. As of September 30th, 2025, total uninsured deposits were $9.1 billion, net of $0.9 billion in collateralized deposits, or 44.3% of total deposits. The bank has unused borrowing capacity of $7.2 billion from Federal Home Loan Bank and $1.5 billion from FRB and $1.5 billion in unpledged securities. These available liquidity sources are more than 100% of the uninsured and uncollateralized deposits as of September 30th, 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 Q3 2025, net income increased $0.2 million, or 0.3%, to $77.7 million from $77.5 million for Q2 2025, primarily due to $17.5 million in higher provision for credit losses offset by $8.4 million in higher net interest income, $5.6 million in higher non-interest income, and $1 million lower in non-interest expense, and $2.7 million lower in provision for income taxes. Net interest margin increased to 3.31% for Q3 2025 from 3.27% for Q2 2025. The increase in net interest margin income was due to the lower cost of funds. In Q3 2025, interest recoveries and prepayment penalties added four basis points to the net interest margin as compared to adding three basis points in net interest margin for Q2 2025. Non-interest income for Q3 2025 increased $5.6 million-$21 million when compared to $15.4 million in Q2 2025.

The increase was primarily due to a $4.7 million change in mark-to-market unrealized gain on equity securities in Q3 from an unrealized loss on equity securities in Q2. Non-interest expense decreased by $1 million from $89.1 million in Q2 2025 to $88.1 million in Q3 2025. The decrease was primarily due to a $1.5 million increase in professional expense and a $0.6 million decrease in data processing offset by a $1 million higher in low-income housing and solar tax credit amortization. The effective tax rate for Q3 2025 was 17.2% as compared to 19.6% for Q2 2025. As of September 30th, 2025, our Tier 1 leverage capital ratio decreased to 10.88% as compared to 11.09% in the previous quarter. Our Tier 1 risk-based capital ratio decreased to 13.15% from 13.35% in the previous quarter, and our total risk-based capital ratio decreased to 14.76% from 14.92% in the previous quarter.

Chang Liu (President and CEO)

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 the 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 answered or you wish to remove yourself from the queue, please press the star, then 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 Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark (Managing Director and Senior Research Analyst)

Hey, good afternoon. First question just around the increase in classifieds. And I think you mentioned it was driven by six relationships, and I believe it's commercial real estate related. But if any additional color you could provide in terms of the types of commercial real estate and anything chunky in there? I'm just trying to get a sense for if there was a credit that kind of moved the needle within that increase.

Heng Chen (EVP and CFO)

The largest one, Matthew, was about $50 million. This is a national full-service business printing company. They had a weak second quarter due to the uncertainty regarding tariffs, and then they have regained momentum in Q3, and once we get their full-year financial statements, we expect to upgrade that loan to pass, then we have a real estate loan in Arizona, and there was a loss of one tenant, and the LTV is a little higher than our target LTV, and I'll just, I think, and then we have a third one that's in Southern California, this is also the property had slow leasing, but it's expected by the second quarter of 2026 to be fully leased up, so that's just some color out of the six relationships.

Matthew Clark (Managing Director and Senior Research Analyst)

Okay. And then the increase in CRE reserves this quarter, was that related to some of that migration, or was that maybe related to the increase in modifications? Just trying to get a sense for what that might be attributed to.

Heng Chen (EVP and CFO)

The modifications, we're going to relook at that. If we renew a substandard loan for 90 days, we're treating that as a modification, a troubled modification. Our understanding is that other banks regard those as insignificant changes, especially when there's no change in the contractual rate. We'll be changing our policy later on. I'm just trying to think of the reason the CRE reserve is brought up is because of this $9.2 million additional reserve on the two movie theater loans that we inherited from our acquisition of Far East National Bank.

Matthew Clark (Managing Director and Senior Research Analyst)

Okay. Perfect. Thank you.

Operator (participant)

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

Andrew Terrell (Managing Director and Research Analyst)

Hey, good afternoon. I wanted to start just on the expense guide. As reiterated, I guess when I look at it, it kind of implies what looks like a pretty decent step up in the fourth quarter. So I just kind of want to take your temperature on the core expenses in fourth quarter, if you could maybe share kind of a range of what you're expecting for core expenses. And then if you had the low-income housing tax credit amortization, you're expecting as well?

Heng Chen (EVP and CFO)

Yeah. So we think we're happy to see the consulting expense decrease starting here in the third quarter. And then in the low-income housing, we had some additional amortization, mainly from catching up to the 2024 K-1. So low-income housing is, it's about $10.5 million for, I'm sorry, it's $11.5 million, sorry, for Q3. But once again, it's a one-time catch-up adjustment based on the K-1s that we received from our funds in 04/2024.

Andrew Terrell (Managing Director and Research Analyst)

Got it. Okay. So you'd expect it to remain stable to that $11.5?

Heng Chen (EVP and CFO)

Yes. Yes.

Andrew Terrell (Managing Director and Research Analyst)

And then outside of the amortization, do you feel like core expense run rate for 3Q is kind of a good starting point for the fourth quarter? I know you noted some of the decrease in consulting expense.

Heng Chen (EVP and CFO)

Yes. Yes.

Andrew Terrell (Managing Director and Research Analyst)

Okay. And then on the bond portfolio, can you remind us how much of the investment book is floating rate? And it looks like yields down 30 basis points or so this quarter. Is that just reflective of the floating rate piece of that book and the move in SOFR we saw this quarter, or anything else we should appreciate that came through the securities income line this quarter?

Heng Chen (EVP and CFO)

Yeah. So, Matthew, about 40% of our bond portfolio is in six-month Treasuries. So as they're rolling down, we're losing the yield. The rest of our portfolio is fixed.

Andrew Terrell (Managing Director and Research Analyst)

Got it. Okay. And then last thing I wanted to ask, your capital position is still very strong. We've got what feels like a more amicable regulatory environment. Just wanted to get your updated thoughts on whether M&A was of interest either on either side of the coin for Cathay?

Chang Liu (President and CEO)

Sure, Andrew. M&A is always an interest to us, but I think we're very strategic. We're very focused on our organic growth and executing our business plan. If there's a candidate out there that surfaces that makes sense to us, whether it's strategically or financially, then we would absolutely look at it. But, of course, that depends on what the ask is, right, and the exchange ratio on that. So I think we would want to make sure we execute something that makes sense. But sometimes if it's just purely financial or an asset play without any other strategic reasons, that might not make a ton of sense. But we're always open to that.

Andrew Terrell (Managing Director and Research Analyst)

Understood. Okay. Thanks for taking the questions.

Chang Liu (President and CEO)

Thanks.

Operator (participant)

The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

Gary Tenner (Managing Director and Senior Research Analyst)

Hi, good afternoon. I wanted to ask about the loan growth side of the equation here. Obviously, you did change the guide, but I'm curious about what you're seeing in the commercial mortgage segment. There's not a lot of banks out there that have put up real solid commercial mortgage growth this year. So I'm curious what you're seeing in terms of demand and what kind of pricing you're getting on new loans in that segment.

Chang Liu (President and CEO)

So, Gary, some of the increase is really pulled through some of the pull-through from second quarter. I think we had strong CRE portfolio pipeline in the second half of first Q, and 2Q was also pretty strong as well. So a lot of those numbers kind of pulled through for the third quarter for us. Right now, even in the past few weeks, as we're sitting on our committee calls, the pipeline is definitely slowing down a bit. I think people are kind of waiting for seeing if there's going to be any more rate cuts for perhaps October and maybe even one more in December. But that's been kind of the activities for us. Even on the pricing end, Gary, I think we're competing on pricing for sure.

Just recently, we were looking at a transaction where strong deposits, and we have to kind of bear down a little bit on the margins just to make sure we keep the relationship. So the price competition is still there for sure.

Gary Tenner (Managing Director and Senior Research Analyst)

Thanks. I appreciate the thoughts.

Operator (participant)

Once again, if you have a question, please press star then one on your telephone keypad. The next question comes from Kelly Motta with KBW. Please go ahead.

Kelly Motta (Director and Equity Research Analyst)

Hey, good afternoon. Thanks for the question. Maybe looking at the funding side, it looks like on the average balance sheet, other borrowed funds went up. I'm wondering, I know you have your loan and deposit guidance, but as we look ahead, if there's any increased competition you're seeing on deposits and how that comes into play now if we get another cut or two here? Thanks.

Chang Liu (President and CEO)

So the competition on deposits is still very fierce out there, Kelly, to be honest, particularly in our California and the New York, East Coast. We are seeing even outside of our niche market, the mainstream players kind of offering rates that are pretty substantial. Our group and our team, and I make sure they're focusing on this, that anytime there's a rate cut, potential rate cut coming, and whether it's the exception rates on money market, high balance accounts, and those kind of things, so we're executing on those kind of drops in rates pretty quickly. In addition, we're also adjusting our exception rates on any of the CD deposits and those kind of things, and the drive for non-interest-bearing and low-interest-bearing deposits continues. We've built the specialty deposit side in one particular segment, and we're trying to add more to it.

And it's going to take some time to really have that impact the liability side of the balance sheet, but that's the objective. So we're going to continue to try to drive down the cost of funds.

Kelly Motta (Director and Equity Research Analyst)

Got it. Thank you. And can you refresh us on your asset sensitivity here in terms of do you think you're going to be able to lower deposit costs again with future rate cuts in order to offset any impact on the asset side? I appreciate the NIM guidance, but you're kind of in the middle of it. So I'm wondering if you could provide additional color as to how we should be thinking about the near-term trajectory.

Heng Chen (EVP and CFO)

Our model, which we're still trying to improve, has basically flat. It's down 25 basis points rate shock, and we think just based on what happened in 2025, that for every quarter-point drop in Fed funds over six months, our NIM should go up six or seven basis points, so with another rate cut possible here in October or certainly for sure in December, and then probably one or two more in 2026, we think directionally our NIM will go up or should go up.

Kelly Motta (Director and Equity Research Analyst)

That's helpful. Thank you, Heng. I will step back.

Heng Chen (EVP and CFO)

Thank you, Kelly.

Operator (participant)

We have a follow-up question from Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark (Managing Director and Senior Research Analyst)

Hey, you may have missed it, but just if you had the average net interest margin in the month of September, either on a core basis or reported basis, by the way?

Heng Chen (EVP and CFO)

Yeah. September was three—this is the month—is 3.38% for the month of September. And so that's a 30-day month. So it's generally when we have so much in the way of residential mortgages, it's up three or four basis points higher.

Matthew Clark (Managing Director and Senior Research Analyst)

Okay. And then the spot rate on deposits, either at the end of the month or just the average for the month, the cost?

Heng Chen (EVP and CFO)

Yeah. Hold on, so we have, I guess, interest-bearing deposits. Do you want to by each component, Matthew, or?

Matthew Clark (Managing Director and Senior Research Analyst)

No, no, no. Just the overall interest-bearing deposit is fine.

Heng Chen (EVP and CFO)

Yeah. 3.16. That's compared to 3.31 at the end of June.

Matthew Clark (Managing Director and Senior Research Analyst)

Okay. So that's the end of September?

Heng Chen (EVP and CFO)

Right.

Matthew Clark (Managing Director and Senior Research Analyst)

Perfect. 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 (President and CEO)

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.

Operator (participant)

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