Cathay (CATY) Q3 2025 Earnings Call Transcript

DATE

Tuesday, October 21, 2025 at 6 p.m. ET

CALL PARTICIPANTS

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

TAKEAWAYS

• Net Income -- $77.7 million, up 0.3% sequentially from $77.5 million, reflecting flat quarterly earnings.
• Diluted Earnings Per Share -- $1.13, representing a 2.7% increase from $1.10 sequentially.
• Share Repurchases -- 1.07 million shares repurchased at a $46.81 average cost per share, totaling $50.1 million, executed under the $150 million June 2025 buyback program.
• Total Gross Loans -- Increased $320 million, or 6.6% annualized, with $122 million growth in commercial real estate (CRE) loans and $123 million in residential loans as main drivers.
• Loans and Deposits Guidance -- Raised to a 3.5%-5% annualized range for both loans and deposits based on year-to-date growth.
• Fixed Rate/Hybrid Loan Mix -- 60% of the loan portfolio is fixed rate or hybrid in a fixed period, excluding 3.1% of loans hedged via fixed-to-float swaps.
• CRE Loan-to-Value -- CRE portfolio average loan-to-value stayed at 49%.
• Retail and Office CRE Exposure -- Retail property loans comprise 24% of CRE loans (13% of all loans), with 90% secured by stores, mixed-use, or strip centers; office loans are 14% of CRE (7% total loans), with only 3% in central business districts.
• Net Charge-Offs -- $15.6 million, compared with $12.7 million sequentially.
• Nonaccrual Loans -- 0.8% of total loans, totaling $165.6 million, down $8.5 million from the previous quarter.
• Classified Loans -- Decreased to $420 million from $432 million, while special mention loans rose to $455 million from $310 million, linked to six downgraded relationships totaling $145 million.
• Provision for Credit Losses -- $28.7 million, up from $11.2 million sequentially; includes $9.1 million for two movie theater loans and $3.8 million from a CECL model change.
• Allowance for Loan and Lease Losses (ALLL) -- Ratio increased to 0.93% from 0.88% quarter over quarter, or 1.16% excluding the residential mortgage portfolio.
• Total Deposits -- Rose by $515 million (10.5% annualized), driven by $508 million increase in core deposits and $7 million in time deposits; uninsured deposits were $9.1 billion (44.3% of total) after deducting $0.9 billion in collateralized deposits.
• Liquidity Position -- Unused borrowing capacity stood at $7.2 billion (Federal Home Loan Bank), $1.5 billion (FRB), and $1.5 billion in unpledged securities; total exceeds all uninsured and uncollateralized deposits.
• Net Interest Margin -- Improved to 3.31% from 3.27% quarter over quarter, aided by interest recoveries and prepayment penalties adding 4 basis points.
• Noninterest Income -- Increased to $21 million from $15.4 million sequentially, largely due to a $4.7 million swing in mark-to-market gains on equity securities.
• Noninterest Expense -- Fell by $1 million to $88.1 million, with a $1.5 million drop in professional expenses and $0.6 million lower data processing costs, partly offset by a $1 million rise in long-term housing and solar tax credit amortization.
• Effective Tax Rate -- Dropped to 17.2% from 19.6% quarter over quarter.
• Capital Ratios -- Tier 1 leverage fell to 10.88% from 11.09%; Tier 1 risk-based decreased to 13.15% from 13.35%; total risk-based declined to 14.76% from 14.92%.
• Bond Portfolio Composition -- 40% in six-month treasuries, with remaining portfolio fixed; rolling down treasuries contributed to a decline in yield.
• Net Interest Margin Sensitivity -- Heng Chen said, "for every 0.25 point drop in Fed funds over 6 months, our NIM should go up 6 or 7 basis points."
• September Metrics -- Average net interest margin was 3.38% for the month; spot rate on interest-bearing deposits was 3.16% at month end.
• Expense Outlook -- Housing tax credit amortization at $11.5 million is described as a one-time catch-up adjustment; core expense run rate is indicated as stable into the fourth quarter.
• Deposit Competition -- Chang Liu said, "the competition on deposits is still very fierce ... particularly in our California and the New York East Coast," while the team is "executing on ... drops in rates pretty quickly."
• Loan Pipeline and Pricing -- Commercial real estate loan pipeline has slowed, with continued competitive pricing pressure to retain client relationships.
• M&A Interest -- Chang Liu said, "M&A is always an interest to us, but I think we're very strategic," and transactions would need to make sense both strategically and financially.

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RISKS

• Special mention loans increased to $455 million from $310 million due to six downgraded relationships totaling $145 million, reflecting increased credit monitoring needs.
• Provision for credit losses rose sharply to $28.7 million from $11.2 million sequentially, driven by reserves for two movie theater loans and adjustments to the CECL model.
• Chang Liu stated, "the competition on deposits is still very fierce out there, Kelly, to be honest, particularly in our California and the New York East Coast," potentially impacting funding costs.
• Chang Liu cited slowing CRE loan pipeline and increased rate competition: "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."

SUMMARY

Management raised loan and deposit growth guidance amid continued growth in both categories, underpinned by outsized quarterly expansion in core deposits and residential and commercial real estate loans. Significant credit deterioration marked by a rise in special mention loans and a sharp increase in credit loss provisions signals elevated credit risk, particularly from legacy and CRE exposures. Operating metrics improved, with higher net interest margin and sequentially lower noninterest and tax expenses, but competitive forces in both lending and deposit gathering contributed to margin pressures and asset sensitivity dynamics. The company's stated ability to raise NIM as rates fall, along with outsized liquidity resources relative to uninsured deposits, offers some offset to these funding and credit risk trends. Elevated caution is warranted given mixed indicators of pipeline strength and credit quality.

• The composition of the CRE portfolio is weighted toward diversified retail and limited central business district office exposure, potentially moderating risk concentrations.
• Capital ratios showed modest sequential declines but remained well above regulatory minimums, sustaining balance sheet flexibility for potential M&A or capital actions.
• One-time housing tax credit amortization affected expense patterns, but management indicated stability in the underlying cost trajectory heading into the next quarter.
• September's net interest margin was above quarterly average, reflecting benefit from residential mortgage portfolio dynamics.
• Liquidity from borrowing lines and unpledged securities greatly exceeded exposure to uninsured and uncollateralized deposits, underpinning the bank's funding stability statement.

INDUSTRY GLOSSARY

• CRE: Commercial Real Estate loans, a portfolio category including income-producing property loans such as office, retail, mixed-use, and specialty property types.
• Special Mention Loans: Credits that exhibit potential weaknesses which warrant close attention by management, not yet impaired but pose increased credit risk.
• CECL: Current Expected Credit Loss; an accounting standard requiring banks to estimate future loan losses over the lifetime of assets.
• ALLL: Allowance for Loan and Lease Losses, a reserve reflecting management's best estimate of credit losses in the loan portfolio.
• Tier 1 Leverage/Risk-Based Capital Ratios: Key bank regulatory capital measures expressing capital as a percentage of asset or risk-weighted asset bases, critical for solvency and regulatory compliance.

Full Conference Call Transcript

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 statements 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: 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. Diluted 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 or $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 30, 2025, we are increasing our loan and deposit guidance from 3% to 4% to 3.5% to 5% for both loans and deposits. 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 60% fixed rate and hybrid loans, excluding fixed to float interest rate swaps of 3.1% of total loans. Fixed rate loans comprise 30% of total loans and hybrid in 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 8 of our earnings presentation. The average loan-to-value of our CRE loans remained at 49%. 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 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 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 nonaccrual loans were 0.8% of total loans as of September 30, 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 to $455 million in Q3 2025. The bank conservatively downgraded 6 loan relationships totaling $145 million to special mention that have not met certain debt -- debt covenants and have established -- 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 2 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 30, 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 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 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 noninterest income and $1 million lower in noninterest 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 4 basis points to the net interest margin as compared to adding 3 basis points in net interest margin for Q2 2025. Noninterest income for Q3 2025 increased $5.6 million to $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 unrealized loss on equity securities in Q2. Noninterest 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 decrease in professional expense and $0.6 million decrease in data processing, offset by a $1 million higher in long-term 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 30, 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: Thank you, Heng. We will now proceed to the question-and-answer portion of the call.

Operator: [Operator Instructions] The first question comes from Matthew Clark with Piper Sandler.

Matthew Clark: First question, just around the increase in classifieds. And I think you mentioned it was driven by 6 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 to kind of move the needle within that increase?

Heng Chen: No. 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 the past. 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 was [indiscernible] for leasing, but it is expected by the second quarter of 2026 to be fully leased up. So that's just some color out of the 6 relationships.

Matthew Clark: Okay. And then the increase in CRE reserves this quarter, was that related to some of that migration or -- 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: Well, the modification, we're going to relook at that. We have -- if we renew a substandard loan for 90 days, we're treating that as a modification, trouble modification. Our understanding is that other banks regard those as insignificant changes, especially when there is no change in the contractual rate. So we'll be changing our policy later on. But I'm just trying to think of the -- the reason the CRE reserve up is because of this $9.2 million additional reserve on the 2 movie theater loans that we inherited from our acquisition of Far East National Bank.

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

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

Andrew Terrell: Got it. Okay. So you'd expect it to remain stable to that 11.5%?

Heng Chen: Yes, yes.

Andrew Terrell: 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: Yes, yes.

Andrew Terrell: 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 they came through the securities income line this quarter?

Heng Chen: Yes. so [indiscernible], about 40% of our bond portfolio is 6-month treasuries. So as they're rolling down, we're losing the yield. The rest of our portfolio is fixed.

Andrew Terrell: 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: 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 will 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 -- we 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. So -- but we're always open to that.

Operator: Our next question comes from Gary Tenner with D.A. Davidson.

Gary Tenner: 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: So Gary, some of the increase is really pull 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 pull 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. So -- 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.

Operator: [Operator Instructions] Our next question comes from Kelly Motta with KBW.

Kelly Motta: 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?

Chang Liu: 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 any time there's a rate cut -- potential rate cut coming and whether it's the acceptance 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 noninterest-bearing and low interest-bearing deposits continues where 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: Got it. And can you refresh us on your asset sensitivity here in terms of like 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 -- on the asset side, I appreciate the NIM guidance, but you're kind of in the middle of it. So I was wondering if you could provide additional color as to how we should be thinking about the near-term trajectory?

Heng Chen: Our model, which we're still trying to improve has basically flat in a down 25 basis point rate shock. And we think just based on what happened in 2025 that for every 0.25 point drop in Fed funds over 6 months, our NIM should go up 6 or 7 basis points. So with another rate cut possible here in October or certainly for sure in December and then probably 1 or 2 more in '26, we think directionally our NIM will go up or should go up.

Operator: We have a follow-up question from Matthew Clark with Piper Sandler.

Matthew Clark: 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, either way?

Heng Chen: Yes. September was -- this is a month, it's 3.38% for the month of September. That's a 30-day month. So it's generally, when we have so much in the way of residential mortgages, it's up 3 or 4 basis points higher.

Matthew Clark: 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: Yes. So we have, I guess, interest-bearing deposits. Do you want it by each component, Matthew or.

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

Heng Chen: Yes. 3.16%. That's compared to 3.31% at the end of June.

Matthew Clark: Okay. So that's the end of September?

Heng Chen: Right.

Operator: 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 in 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.

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