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DATE

  • Tuesday, July 22, 2025, at 6 p.m. EDT

CALL PARTICIPANTS

  • President and Chief Executive Officer — Chang Liu
  • Executive Vice President and Chief Financial Officer — Heng Chen

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RISKS

  • Net charge-offs increased to $12.7 million for Q2 2025, up from $2 million in Q1 2025, including an $8.3 million charge-off previously reserved for a large commercial loan.
  • Nonaccrual loans rose to 0.9% of total loans as of Q2 2025, an increase of $19.6 million, mainly related to a $16 million real estate loan in foreclosure.
  • Classified loans increased to $432 million from $380 million, driven by a downgrade of a large commercial relationship to substandard due to delayed interest payments.

TAKEAWAYS

  • Net Income: Net income (GAAP) was $77.4 million for Q2 2025, an 11.4% sequential increase, primarily reflecting higher net interest income and lower provision for credit losses.
  • Diluted Earnings Per Share: $1.10 diluted earnings per share for Q2 2025, up 12.2% from $0.98 in Q1 2025 (GAAP).
  • Share Repurchases: 804,179 shares bought at an average of $44.22 per share during Q2 2025, totaling $35.6 million under the current buyback program.
  • Total Gross Loans: Increased by $432 million in Q2 2025, or 8.9% annualized, with growth from commercial, commercial real estate, and residential loans, partially offset by a $32 million decrease in construction loans.
  • Loan Growth Guidance: Revised loan growth guidance to a range of 3%-4% for 2025, returning to prior guidance after strong loan activity.
  • Loan Portfolio Structure: 62% of loans are fixed rate or in the fixed period of hybrid loans as of June 30, 2025, excluding 4.9% from fixed to floating rate swaps; fixed rate loans comprise 30% of total loans and Hybrid and fixed rate period loans comprised 32% of total loans.
  • Commercial Real Estate (CRE) Loan Profile: Average loan-to-value for CRE loans remained at 49% as of June 30, 2025; Retail property loans represent 24% of the CRE portfolio and office loans represent 14% of the CRE portfolio.
  • Provision for Credit Losses: $11.2 million provision for credit losses for Q2 2025, down from $15.5 million in Q1 2025.
  • Reserve to Loan Ratio: Decreased to 0.88% for Q2 2025 from 0.91% for Q1 2025, or 1.1% when excluding the residential mortgage portfolio.
  • Total Deposits: Increased by $189 million in Q2 2025, or 3.8% annualized, driven by $120 million in core deposit growth and $68 million in time deposit increases (Excluding brokered deposits, time deposits fell $37 million.).
  • Uninsured Deposits: $8.7 billion, net of $800 million in collateralized deposits, making up 43.3% of total deposits.
  • Liquidity Position: Unused borrowing capacity of $7 billion from the FHLB and $1.5 billion from the Federal Reserve, plus $1.5 billion in unpledged securities, providing liquidity exceeding 100% of uninsured and uncollateralized deposits.
  • Net Interest Margin: Increased to 3.27% from 3.25% in the prior quarter, supported by lower funding costs.
  • Noninterest Income: Rose by $4.2 million to $15.4 million for Q2 2025, primarily due to a $2.8 million change in mark-to-market unrealized loss on equity securities and $2.4 million in higher foreign exchange and derivative fee income, partially offset by $1.2 million lower wealth management income.
  • Noninterest Expense: Increased by $3.4 million, or 4%, to $89.1 million, mainly due to long-term compensation housing amortization and professional expenses.
  • Effective Tax Rate: 19.56% for Q2 2025, with future guidance for the effective tax rate lowered to a range of 18.5% to 19% following California tax changes.
  • Capital Ratios: Tier 1 leverage capital ratio was 11.07% as of Q2 2025; tier 1 risk-based capital ratio declined to 13.34%; total risk-based capital ratio decreased to 14.9%.

SUMMARY

Cathay General Bancorp (CATY 1.34%) management attributed most of the allowance for credit losses build to economic forecasts, specifically noting increased unemployment expectations from Moody’s models. Large, short-term borrowings from the Federal Home Loan Bank, mostly at 4.6%, were used to fund concentrated loan growth late in the quarter, with management planning to replace these with lower-rate brokered CDs. Updated loan growth guidance reflects management’s caution regarding potential economic headwinds, including trade tariffs and inflation, while emphasizing a strong loan pipeline. The effective tax rate increase included a $3.4 million write-off of deferred tax assets due to lower California apportionment.

  • Heng Chen said, "Most of our loan growth was in June," resulting in temporary funding needs met by two-week term FHLB borrowings in June.
  • President and Chief Executive Officer Chang Liu noted robust C&I and commercial real estate pipelines but retained conservative loan growth guidance "to be sensitive to [the] economic landscape… [and] loan demand."
  • Heng Chen explained, "We have, 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," which increased modeled reserves.
  • Deferred tax asset write-down and tax rate guidance changes were "a result of writing off a portion of our deferred tax asset to reflect a lower state apportionment, lower California state apportionment."

INDUSTRY GLOSSARY

  • CRE (Commercial Real Estate): Loans secured by non-residential property, typically including retail, office, and mixed-use buildings.
  • Classified Loans: Loans designated as substandard, doubtful, or loss, indicating heightened credit risk under regulatory definitions.
  • Special Mention Loans: Credits that exhibit potential weaknesses and warrant close observation, but do not meet the threshold for classification as substandard or impaired.
  • FHLB (Federal Home Loan Bank): Government-sponsored enterprise providing liquidity to member banks through secured advances, often to fund loan growth or manage liquidity.
  • Brokered CDs: Certificates of deposit sourced through third parties or brokers, used by banks to manage funding needs at competitive rates.
  • Nonaccrual Loans: Loans on which the bank has stopped accruing interest due to borrower payment default or doubt as to full collection.

Full Conference Call Transcript

Chang Liu, our President and Chief Executive Officer, and Mr. Heng Chen, our 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 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: 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 or $35.6 million under the June $202.55 billion 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, $102 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 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 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 comprised 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 is shown on slide nine, comprising 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, 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 as compared to Q1 2025, primarily due to a $16 million real estate loan that 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 the 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 mortgage portfolio, 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 $800 million 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.

These 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: 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 three basis points to the net interest margin as compared to adding six basis points in net interest margin in 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 long comp 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 recent California tax legislation, we are updating our guidance for the effective tax rate to between 18.5% to 19% from the previous guidance of between 19.5% to 20.5%. As of June 30, 2025, our tier one leverage capital ratio increased to 11.07% as compared to 11.806% as of March 31, 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.

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

Operator: 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 2. To prevent any background noise, we ask that you please place yourselves on mute once your question has been stated. The first question comes from Gary Tenner with D.A. Davidson. Please go ahead.

Gary Tenner: 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? If so, what amount?

Heng Chen: Yes. $3.4 million. That is a result of writing off a portion of our deferred tax asset to reflect a lower state apportionment, lower California state apportionment.

Gary Tenner: Okay. Great. Thank you. And then just on 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, you know, of the allowance this quarter?

Heng Chen: Well, there's a lot of noise this quarter, Gary. We have, 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. 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 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: 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?

Heng Chen: That's right. That's right.

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

Heng Chen: Thank you.

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

Andrew Terrell: Hey. Good afternoon. Hi. Hey. I wanted to ask on just the loan growth and the guidance first. It feels like after a really strong second quarter that, you know, loan growth would need to revert to that low single-digit 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 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: So, Andrew, I think, you know, what we look at is really there's been a balanced growth in both the C&I side and commercial real estate side. On the C&I side, we're seeing both some increases on existing lines 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're still, you know, we believe that, you know, we have a strong pipeline for the second half based on what we're seeing so far. And, you know, we're looking forward to getting those deals closed as well.

We want to be a little, you know, want to just kind of look at the whole economic landscape both in terms of, you know, there's still some tariff 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%.

Andrew Terrell: Yep. Understood. Okay. And then I wanted to ask just a, you know, balance sheet related question on the, it looks like end of period, the FHLB borrowing positions 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 and you still got a good cash position. Should we expect you to keep those borrowings kind of going into the third quarter?

Heng Chen: We, Andrew, we, 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 probably 4.6%. So we're in a process of replacing that with broker CDs, which would be in the, you know, 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.

Andrew Terrell: Yep. Okay. Makes sense. Thanks for taking the questions.

Heng Chen: Yeah. Thank you.

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

Matthew Clark: Hey, good afternoon, everyone. Can you just touch on 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, you know, what drove it in terms of the type of credits and kind of what the situation is there?

Heng Chen: Oh, sure. Yeah. Chang covered it. It was one commercial relationship. They had some cash flow issues. They didn't go ninety days past due. That's why it's still staged, 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.

Matthew Clark: And was that, how large is that credit? Was that the entire...

Heng Chen: Yeah. It's increased. It's not, yeah. It's in the high forties. Almost all of it is secured by real estate, but we want to limit our exposure to that borrower given the delinquency.

Matthew Clark: Got it. Okay. Great. And then just two kind of minor housekeeping items. The prepay fees, the margin this quarter, interest income, I think they were...

Heng Chen: Yeah. Three and a half million last quarter.

Chang Liu: Yeah. It's three basis points this quarter compared to six basis points in Q1.

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

Heng Chen: It would be about $11 million per quarter.

Matthew Clark: Okay. Thank you.

Heng Chen: Thank you.

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

Kelly Motta: 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 should we 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.

Chang Liu: 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 purchased or refinanced. Just our kind of traditional business. And then on the C&I end, you know, 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.

Kelly Motta: Got it. That's helpful. And then on the deposit pricing side, you guys have done an excellent job, you know, getting deposit costs down after, you know, the first couple of cuts. With your NIM expectations ahead, wondering, have we seen most of the improvement we are going to get after the first 100 basis points of cuts? And two, 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: Yeah. Kelly, I think for, you know, we were doing some announcements on our betas, and like, for some CD retail CD balances, the adjustment last rate cut was in December. And those CD rates since then, the two 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, 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, like, 6.25%. And the average portfolio yield on residential mortgage in the second quarter was 5.79%.

And, also, on UCRE, 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 NIM should expand anytime there's another 10 rate cuts. So we're just waiting for that to happen.

Chang Liu: 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 '20, you know, 2023. So that's kind of all '24. Sorry. And that's pulled through for us, and I think it's reflected in our current deposit rates. I think there's any kind of tailwind on that part of it.

Kelly Motta: Awesome. Thanks for the color. I'll step back.

Heng Chen: 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.

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