CATY - NASDAQ

Good afternoon, ladies and gentlemen. And welcome to the Cathay General Bancorp's First Quarter 2025 Earnings Conference Call. My name is Renato, and I will be your coordinator for today. At this time, all participants are in listen-only mode. Following the prepared remarks, there will be a question and answer session. If you would like to participate in this portion of the call, if assistance is needed at any time during the call, please press star followed by zero and the coordinator will be happy to assist you. Today's call is being recorded and will be available for replay at www.cathaygeneralbancorp.com. I would now like to turn the call over to Georgia Lo, an Investor Relations of Cathay General Bancorp. Please go ahead.

Thank you, Renato, 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. 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, except as required by law. We undertake no obligation to update or review any forward-looking statements to reflect future circumstances, developments, or events or the occurrence of unanticipated events. This afternoon, Cathay General Bancorp issued an earnings release outlining its first quarter 2025 results. To obtain a copy of our earnings release as well as our earnings presentation, please visit our website at www.cathaygeneralbancorp.com. After comments by management today, we will open this call up for questions. I will now turn the call over to our President and Chief Executive Officer, Mr. Chang Liu.

Thank you, Georgia, and good afternoon. Before we discuss our 2025 first quarter earnings, I want to address the current tariffs between the US and China. Based on our survey, customers have moved their sourcing away from China since 2018 to other countries, including some to Mexico. Our borrowers have told us that for the most part, they can move their sourcing to other countries or pause importing from China until the tariffs are more reasonable. We estimate that about 1.4% of total loans could be adversely impacted by the proposed tariffs. We are closely monitoring the impact of the evolving tariff situation on our borrowers and our loan portfolio. This afternoon, we reported net income of $69.5 million for Q1 2025, a 13.3% decrease as compared to $80.2 million for Q4 2024. The diluted earnings per share decreased 12.5% to $0.98 for Q1 2025, compared to $1.12 in Q4 2024. During Q1 2025, we repurchased 876,906 shares of our common stock at an average cost of $46.83 per share, totaling $41.1 million, completing our May 2024 $125 million stock repurchase program. In Q1 2025, total gross loans decreased $23 million or 0.5% annualized, primarily driven by decreases of $100 million in commercial loans and $65 million in residential loans, offset by increases of $127 million in CRE loans and $13 million in construction loans. Given the uncertainties in the economy, we have widened our 2025 loan growth guidance to 1% to 4% from the previous guidance of 3% 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. The loan portfolio consists of 62% fixed rate and hybrid loans, excluding fixed to float interest rate swaps of 4.1% of total loans. Fixed rate loans comprise 3% of total loans and hybrid and fixed rate period comprise 32% of total loans. We expect these fixed rate loans to support our loan yields as market rates are expected to decline. We continue to monitor our commercial real estate loans. Turning to slide eight of our earnings presentation, as of March 31, 2025, the average loan to value of our CRE loans remained at 49%. As of March 31, 2025, the retail property loan portfolio is shown on slide nine, comprising 25% of our total CRE loan portfolio or 13% of our total loan portfolio. Ninety percent of the $2.5 billion in retail property loans are secured by retail store buildings, mixed-use, or strip centers, and only 9% are secured by shopping centers. On slide ten, our office property loans represent 15% of our total CRE loan portfolio or 8% of our total loan portfolio. Only 35% of the $1.5 billion in office property loans are collateralized by pure office buildings, and only 3.44% are in CBDs. Thirty-eight percent of office property loans are collateralized by office retail stores, office mixed-use, and medical offices. The remainder, 27%, are collateralized by office condos. For Q1 2025, we reported net charge-offs of $2 million as compared to $16.3 million in Q4 2024. Our non-accrual loans were 0.8% of total loans as of March 31, 2025, which decreased $14.5 million to $154.6 million as compared to Q4 2024, primarily due to the transfer of a loan to loans held for sale and pay down in Q1 2025. Turning to slide twelve, as of March 31, 2025, classified loans remain at $380 million, the same as in Q4 2024, and our special mention loans increased slightly to $300 million from $293 million in Q4 2024. We recorded a provision for credit loss of $15.5 million in Q1 2025 as compared to $14.5 million for Q4 2024. Most of the provisions were to cover possible losses from one commercial client. The reserve to loan ratio increased from 0.83% for Q4 2024 to 0.91% for Q1 2025. However, excluding our residential mortgage portfolio, the total reserve to loan ratio would be 1.17%. Total deposits increased by $131 million or 2.7% annualized during Q1 2025, primarily due to a net increase of $67 million in core deposits and an increase of $64 million in time deposits. Total core deposits increased $67 million due to seasonal factors and marketing activities. Total time deposits, excluding broker deposits, increased $41 million during Q1 2025 due to a promotional campaign in the first month of the year. As of March 31, 2025, total uninsured deposits were $8.5 billion, net of $0.8 billion in collateralized deposits, or 42.7% of total deposits. We have an unused borrowing capacity from the Federal Home Loan Bank of $7 billion and the Federal Reserve Bank of $343 million, and unsecured securities of $1.5 billion as of March 31, 2025. These sources of available liquidity more than cover 100% of unsecured and uncollateralized deposits as of March 31, 2025. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Chen, to discuss quarterly financial results in more detail.

Thank you, Chang, and good afternoon, everyone. For Q1 2025, net income decreased $10.7 million or 13.3% to $69.5 million compared to $80.2 million for Q4 2024, primarily due to an increase of $10.7 million in provision for income taxes due to an increase in the effective tax rate resulting from no investment in solar tax credit funds in 2025. Net interest margin increased to 3.25% for Q1 2025 from 3.07% for Q4 2024. In Q1 2025, interest recoveries and prepayment penalties added six basis points to the net interest margin as compared to adding four basis points to the net interest margin for Q4 2024. Based on the first quarter net interest margin, we have increased our 2025 NIM guidance to 3.35% from the previous 3.10% to 3.20%. Non-interest income for Q1 decreased $4.3 million to $11.2 million when compared to $15.5 million in Q4 2024. The decrease was primarily due to a $2.9 million mark-to-market and realized loss on equity securities and a $1.5 million decrease in other operating income due to lower foreign exchange income, loan and derivative fees, and an interest rate swap loss. Non-interest expense increased by $0.5 million or 0.6% to $85.7 million in Q1 2025 when compared to $85.2 million in Q4 2024. The increase was primarily due to a $2.2 million higher FDIC assessment this quarter compared to Q4 2024, which was lower because of the reversal of an over-accrual of FDIC assessment, and a $1.1 million increase in computer equipment expense offset by a $1.7 million lower solar tax credit fund amortization and a $1.3 million lower professional expense. The effective tax rate for Q1 2025 was 19.82% as compared to 7.57% for Q4 2024. The increase in the effective tax rate was due to a decrease in solar tax credit fund investment because of limitations on tax credits. As of March 31, 2025, our tier one leverage capital ratio increased to 11.06% as compared to 10.97% as of December 31, 2024. Our Q1 risk-based capital ratio increased to 13.57% from 13.55% as of December 31, 2024, and our total risk-based capital ratio increased to 15.19% from 15.09% as of December 31, 2024.

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

Thank you. You may then rejoin the queue. Your question has been answered or you wish to remove yourself to prevent any background noise, we ask that you please place yourself on mute once your question has been stated. Today's first question comes from Christopher McGratty at KBW. Please go ahead.

Hey. This is Angel Heissner on for Christopher McGratty.

How is it going?

Good.

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

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

Okay. Great. Thank you. And then I've seen...

Yeah. Go ahead. Go ahead. No. Sorry. I was gonna...

Switch gears there. Alright. Nick, can you just provide the spot deposit costs at the end of the quarter and also if you have the average margin for the month of March.

Yeah.

The average margin for the month of March was 3.39%. It had the bulk of the interest recoveries. For the first quarter. So excluding the interest recoveries, the net margin was 3.21. And then you like the rates on deposits, the spot rates?

Yes. Yes, please.

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

Okay. Great. Thank you.

Thank you. And our next question today comes from Gary Tenner with D.A. Davidson. Please go ahead.

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

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

So just as a follow-up to that, are you seeing projects being delayed or seeing our customers talking about just, you know, not investing or, you know, undertaking any investment in their companies? What's what do you hear I guess, more specifically on the C&I set?

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

Yeah. Let me add. We also recently wired it at this Yes. There is a s p s if there's a charge situation doesn't improve, We expect some loan paydowns as some importers just stopped importing and fell out. Yours. A very few of the importers import primarily from China. And they would just imports for whatever, nine months or whenever. Until conditions improved. So let let's that's another factor in why we have a gap.

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

Great color. Thank you.

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

Hey. Good afternoon.

Good.

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

Positive. Positive. So you can see in the first quarter, our loans only decreased by two basis points, and our deposits went down by twenty-nine. So this year, I think we're gonna be helped by the fact that about sixty percent of our loans are fixed or hybrids in a fixed period, so they're not gonna go down that much.

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

Yeah. That reserve which was the majority of the Q1 reserve, was for a domestic company. So they're not trade finance related at all. And then we did the rest of the buildup in the reserve was tariff related. We're hopeful that that covers most of the exposure. As I mentioned before, I take our importers they'll just they should be able to pass on the cost of tariffs if they're reasonable. If not, they'll stop importing that particular line of imports.

Yep. Do you have what the allowance is on that aggregate? One point four percent of loans?

It's probably two percent.

Got it.

Okay.

And if I could ask just one more on the buyback. It looks like you I mean, it's good to see you guys completed the buyback the price bought back was around I think it was forty-six forty-seven. Yeah. I didn't see I might have missed it, but I didn't see a new authorization in place. I would assume you've given you've still got pretty strong capital, it seems like the growth could maybe be a little bit slower balance sheet wise. You know, would expectations be that we get another buyback at some point in the future and just remind us kinda your interest in repurchase and going forward?

Yeah. We were waiting for regulatory approval once we get it. We'll announce our new buyback program.

Very good. Thank you for taking the questions.

Yeah. Thank you.

And as a reminder, ladies and gentlemen, if you'd like to ask Our next question today comes from Adam Butler at Piper Sandler. Please go ahead.

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

Yeah. Let me cover that. So on the just on some of the major categories, on the salaries and benefits, we picked up about two and a half million from excess bonus approvals in 2024. So that offset the annual FICA yet. And we think our consulting expense should be lower in the second half of the year. I think that's pretty much it. Looking at the income statement.

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

Yeah. I think the only seasonality is that our lunar new year promotion is in January and February, so we picked up probably a year of about two hundred million. And then we left some broker CDs run off. Given our increase in relationship deposits.

Okay. And if I could just follow-up on the lunar new Lunar New Year deposit specials. What was the rate offered this year and how does it compare to last year's special?

Yeah. It was for the six months It was about four ten. Versus the fourth four fifty or so for the July renewals. And then the one year, we actually did thirteen months this year. That was also four ten. Right? It's about four ten as well. Yeah. And that's coming off of I think, five forty or something. Five five thirty.

Okay. That's very helpful.

And that's all the questions that I had. I appreciate it, and congrats on the quarter.

Thank you. Thank you.

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

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