Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's Second Quarter 2025 Earnings Conference Call. My name is Ashia, and I will be your coordinator for today. Today's call is being recorded and will be available for replay at www.cathaygeneralbancorp.com. Now I would like to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp. Please go ahead.

Thank you, Ashia, 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 results and uncertainties are further described in the company's annual report on Form 10-K for the year ended December 31, 2024, particularly at Item 1A, 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 speak only as of the date on which they are 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 its 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.

Thank you, Georgia, and good afternoon. This afternoon, we reported a net income of $77.4 million for Q2 2025, an 11.4% increase compared to $69.5 million for Q1 2025. Diluted earnings per share increased 12.2% to $1.10 for Q2 2025 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 for $35.6 million under the June 2025, $150 million stock repurchase program. In Q2 2025, total gross loans increased by $432 million or 8.9% annualized, primarily driven by increases of $196 million in commercial loans, $202 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 6 shows the percentage of loans in each major loan portfolio that are either fixed-rate or hybrid loans in their fixed-rate period. Our loan portfolio consists of 62% fixed-rate and hybrid loans, excluding fixed-to-float interest rate swaps of 4.9% of total loans. Fixed-rate loans comprised 30% of total loans, and hybrid loans in their 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 8 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, 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 stores, 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 or 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 central business districts. 40% of office property loans are collateralized by office retail stores, office mixed-use, and medical offices, and the remaining 27% are collateralized by office condos. For Q2 2025, we reported net charge-offs of $12.7 million compared to $2 million in Q1 2025. The $12.7 million charge-offs included an $8.3 million charge-off, which had been reserved 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 to $174.2 million compared to Q1 2025, primarily due to a $16 million real estate loan, which 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 a 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 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 portfolios, 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 by $120 million due to seasonal factors and marketing activities. Total time deposits, excluding broker deposits, decreased by $37 million during Q2 2025. As of June 30, 2025, total uninsured deposits were $8.7 billion, net of $0.8 billion 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. The 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.

Thank you, Chang, and good afternoon, everyone. For Q2 2025, net income increased by $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 noninterest income, offset by $3.5 million higher noninterest expense and $1.7 million higher 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 3 basis points to the net interest margin as compared to adding 6 basis points to the net interest margin for Q1 2025. Noninterest income for Q2 2025 increased by $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 in equity securities in Q2 compared to unrealized gain 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-term housing amortization and a $1.4 million increase in professional expenses. The effective tax rate for Q2 2025 was 19.56% compared to 19.82% for Q1 2025. Due to a 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 19.5% to 20.5%. As of June 30, 2025, our Tier 1 leverage capital ratio increased to 11.07% compared to 11.06% as of March 31, 2025. Our Tier 1 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.

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

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? And if so, what amount?

Yes, $3.4 million is due to the write-off of a part of our deferred tax asset to account for a lower state apportionment in California.

Okay. And then just on the ACL, I know down 2 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 the allowance this quarter?

There was a lot happening this quarter, Gary. To begin with, we use Moody's as a reference for our economic forecasts related to our Allowance for Credit Losses (ACL). According to Moody's, the unemployment factor rose by 40 basis points since March. Since five of our six loan pools depend on unemployment, this had an additional impact. We also experienced loan growth, which contributed further. However, we offset these factors by reducing specific provisions for tariffs, and we haven't seen any effects on our importers because we established a reserve for that in Q1. Additionally, we dealt with another credit that was on nonaccrual, and we increased the collateral as part of the bankruptcy settlement. We previously had a special reserve for that credit, which is no longer necessary.

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?

That's right. That's right.

I wanted to ask on just the loan growth and the guidance first. It feels like after a really strong second quarter that loan growth would need to revert to that low single-digit pace for kind of the next 2 quarters to stay within that 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.

So, Andrew, we have observed balanced growth in both the commercial and industrial (C&I) sector and the commercial real estate sector. On the C&I side, we are experiencing increases in both existing lines and advances, along with new customers joining the bank. Looking ahead to the second half, we still feel confident about having a strong pipeline. Based on our current observations, we are eager to finalize those deals. However, we are aware of the broader economic environment, including some ongoing tariff issues and adjustments in the Consumer Price Index (CPI). We want to be cautious about these factors. If loan demand decreases, we want to ensure we still meet the upper end of our range, which is why we have set the top end at 4%.

Yes, understood. I wanted to ask a question related to the balance sheet. It appears that during the period, the FHLB borrowing position increased significantly, specifically to $412 million. Can you provide any information on whether these were term borrowings or overnight borrowings, and what the weighted average rate was? Additionally, do you still have a strong cash position? Should we expect you to continue these borrowings into the third quarter?

Most of our loan growth occurred in June, which is why we had to borrow from the Federal Home Loan Bank. These are primarily short-term borrowings, around 4.6%. We're currently working on replacing that with broker CDs, which should be around 4.3% or slightly less. The treasury group was caught off guard by the unexpected surge in loan growth, leaving us little time to increase broker CDs to meet that demand.

Can you just touch on the increase in classified loans? 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? What drove it in terms of the type of credits and kind of what the situation is there?

Chang covered it. It was 1 commercial relationship. They had some cash flow issues. They didn't go 90 days past due. That's why it still stays just only sub. And now they're catching up. So we hope that it will be fully current by the end of the third quarter; we have a program for that borrower to gradually reduce the borrowings.

How large is that credit? Was that the entire increase?

Yes, it's in the high 40s. Almost all of it is secured by real estate, but we want to limit our exposure to that borrower given the delinquency.

Got it. Okay. Great. And then just two kind of minor housekeeping items. The prepay fees in the margin this quarter, interest income, I think there were $3.5 million last quarter.

Yes, it's 3 basis points this quarter compared to 6 basis points in Q1.

Got it. And then the tax credit amortization expectations for Q3 and Q4?

It would be about $11 million per quarter.

I wanted to follow up on loan growth and what you observed specifically on the commercial side. I appreciate the updated guidance and the explanation provided. However, can you share if there were any unusual changes in utilization? How should we interpret that? Is this one of the reasons for the slowdown compared to the strong second quarter as we move into the latter half of the year? Any additional insights would be appreciated.

Yes. 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 purchase or refinance, just our kind of traditional business. And then on the C&I end, we definitely have added new names and new relationships that also helped 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.

Got it. That's helpful. And then on the deposit pricing side, you guys have done an excellent job getting deposit costs down after the first couple of cuts. With your NIM expectations ahead, wondering have we seen most of the improvement we're going to get after the first 100 basis points of cuts? And two, I know the guidance provides 2 cuts in the back half of the year. Wondering how you guys are thinking about your ability to drive betas off the next round of cuts?

Yes, Kelly, we've been analyzing our betas, and for some retail CD balances, the adjustments from the last rate cut occurred in mid-December. Since then, the June CD rates have decreased by more than 25 basis points, likely due to a less competitive environment for CDs. As I mentioned earlier, around 60% of our loans are fixed or hybrid. We're seeing some repricing on loans like our residential mortgages, where the originations in Q2 were approximately 6.25%, and the average portfolio yield on residential mortgages for the second quarter was 5.79%. Additionally, for new commercial real estate originations, we're experiencing some uplift as fixed-rate loans from 3 or 4 years ago are repricing now. This provides us with a slight tailwind, and our net interest margin should expand whenever there’s another Fed rate cut, which we are anticipating.

To address the first part of your question, I believe we have successfully implemented the 100 basis points cut that mainly occurred in the fourth quarter of 2023. This has had a positive impact on us and is evident in our current deposit rates. However, I do not believe there is any additional benefit from that aspect. 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.

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