Cathay General reports Q3 2025 net income of $77.7 million, increases loan and deposit growth outlook to 3.5%–5% amid strong loan demand.

OPERATOR - (00:00:01)

Thank you, Asia and good afternoon. Here to discuss the financial Results today are Mr. Cheng Liu, our President and Chief Executive Officer, and Mr. Hang 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 10K 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 third quarter 2025 results. To obtain a copy of our earnings release as well as our earnings presentation, please visit our website at Cathay General Bancorp. Cathay General's website. 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. Cheng Liu.

Cheng Liu - President and Chief Executive Officer - (00:01:27)

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, which 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 non accrual 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 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 CISO 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. Hang Cheng to discuss the quarterly financial results in more detail.

Hang Cheng - (00:06:48)

Thank you. Cheng Liu, 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 by 8.4 million in higher net interest income, 5.6 million in higher in 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 4 basis points to the net interest margin as compared to adding 3 basis points in net interest margin for Q2 2025. Non interest 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 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 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 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.

Cheng Liu - President and Chief Executive Officer - (00:10:15)

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

OPERATOR - (00:10:22)

Ladies and gentlemen, if you have a question at this time please press the star then one key on your touchtone phone. We ask that you please limit yourself to one question and one follow up question. You may then return to the queue. If your question has been 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 - Equity Analyst at Piper Sandler - (00:10:57)

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 you know 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.

Cheng Liu - President and Chief Executive Officer - (00:11:33)

The largest 1 Matthew was 15 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 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. 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 that are 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 had Slow leasing, but less expected by the second quarter of 2026 to be fully restocked. So that's just some other out of the 6 relationships.

Matthew Clark - Equity Analyst at Piper Sandler - (00:13:14)

Okay, and then the increase in CRE reserves this quarter, was that related to some of that migration or.

UNKNOWN - (00:13:30)

Was that.

Matthew Clark - Equity Analyst at Piper Sandler - (00:13:31)

Maybe related to the increase in modifications? Just trying to get a sense for what that might be attributed to.

Cheng Liu - President and Chief Executive Officer - (00:13:38)

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's no change in the contractual rate. So we'll be changing our policy later on. But I'm just trying to think of. We. Oh. The reason the CRE reserves went 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 - Equity Analyst at Piper Sandler - (00:14:47)

Okay, perfect. Thank you.

OPERATOR - (00:14:53)

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

Andrew Terrell - Equity Analyst at Stevens - (00:14:59)

Hey, good afternoon. I wanted to start just on the expense guide, you know, 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.

Hang Cheng - (00:15:32)

Yeah, so we think we're happy to see the consulting expense decrease. Yeah, decrease starting here in the third quarter. And then in that loan we've got housing, we had some additional amortization mainly from catching up to the 2024 K1. So the. So Low-income housing is. Yeah, it's. It's about ten and a half million. For. I'm sorry, it's. Yeah, it's eleven and a half million. Sorry for Q3, but once again it's a one time catch up adjustment based on the K1s received from our funds in 2024.

Andrew Terrell - Equity Analyst at Stevens - (00:16:43)

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

Hang Cheng - (00:16:48)

Yes, yes.

Andrew Terrell - Equity Analyst at Stevens - (00:16:50)

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 decre and consulting expense.

Hang Cheng - (00:17:06)

Yes, yes.

Andrew Terrell - Equity Analyst at Stevens - (00:17:09)

Okay. And then on the bond portfolio, can you remind us how much of the investment book is floating rate? And it looks like yield's 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 that came through the securities income line this quarter.

Hang Cheng - (00:17:35)

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. Got it.

Andrew Terrell - Equity Analyst at Stevens - (00:17:54)

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 MA was of interest on either side of the coin for Cathay.

Cheng Liu - President and Chief Executive Officer - (00:18:16)

Sure, Andrew, MA 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 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 - Equity Analyst at Stevens - (00:18:55)

Understood. Okay. Thanks for taking the questions.

Cheng Liu - President and Chief Executive Officer - (00:18:58)

Thanks.

OPERATOR - (00:19:01)

The next question comes from Gary Tenner. That's DA Davidson. Please go ahead.

Gary Tenner - Equity Analyst at DA Davidson - (00:19:06)

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.

Cheng Liu - President and Chief Executive Officer - (00:19:32)

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&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. 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 - Equity Analyst at DA Davidson - (00:20:28)

Thanks, I appreciate the thoughts.

OPERATOR - (00:20:34)

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

Kelly Motor - Equity Analyst at KPW - (00:20:46)

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. 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.

Cheng Liu - President and Chief Executive Officer - (00:21:17)

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 where you know, 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 Motor - Equity Analyst at KPW - (00:22:21)

Got it, thank you. 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 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.

Hang Cheng - (00:22:53)

Our model, which we're still trying to improve, has us basically flat in a down 25 basis point rate shock. And we think, you know, 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 26. We think directionally our NIM will go up or should go up.

Kelly Motor - Equity Analyst at KPW - (00:23:44)

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

Hang Cheng - (00:23:47)

Thank you, Kelly.

OPERATOR - (00:23:50)

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

Matthew Clark - Equity Analyst at Piper Sandler - (00:23:56)

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.

Hang Cheng - (00:24:07)

Basis, either way, yeah. September was three. This is the month is 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 three or four basis points higher.

Matthew Clark - Equity Analyst at Piper Sandler - (00:24:32)

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

UNKNOWN - (00:24:48)

So.

Matthew Clark - Equity Analyst at Piper Sandler - (00:24:51)

We have, I guess, interest bearing deposits. Do you want to buy each component, Matthew, or.

Hang Cheng - (00:25:04)

No, no, no, just the overall interest bearing deposit. That's fine. Yeah, 3.16. That's compared to 3.31 at the end of June.

Matthew Clark - Equity Analyst at Piper Sandler - (00:25:14)

Okay, so that's the end of September, right? Perfect.

OPERATOR - (00:25:20)

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.

Cheng Liu - President and Chief Executive Officer - (00:25:33)

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 - (00:25:42)

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