Cathay General Bancorp Q4 FY2025 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's Fourth Quarter and Full Year 2025 Earnings Conference Call. My name is Ashia, and I'll 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.

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 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 speak 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 its fourth quarter and full year 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 $90.5 million for the fourth quarter of 2025, a 16.5% increase from $77.7 million in Q3. Diluted earnings per share increased by 18.3% to $1.33 in Q4, up from $1.13 in Q3. For the full year 2025, our net income was $315.1 million, a 10.1% increase from net income of $286 million in 2024. In Q4, we repurchased 1.1 million shares of common stock for $51.9 million at an average cost of $47.15 per share under our June 2025, $150 million stock buyback program. There is $12 million remaining under our June 2025, $150 million buyback program, which we expect to complete in early February. We plan to announce a new buyback program after approvals are received. Total gross loans grew by $42 million, driven primarily by increases of $18 million in CRE loans and $17 million in residential loans. We expect loan growth in 2026 to be between 3.5% and 4.5%. Slide 7 of our earnings presentation shows the percentage of loans in each major loan portfolio are either at a fixed rate or hybrid rate. Aggregate fixed rate and hybrid loans account for 60% of the portfolio, excluding fixed to float interest rate swaps, which represent 3.1% of total loans. Fixed rate loans make up 30% of total loans and hybrid in fixed-rate period account for 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 portfolio. Turning to Slide 9. The average loan-to-value of our CRE loans remained steady at 49%. Our retail property loan portfolio represents 24% of our total CRE loan portfolio or 12% of total loans. As shown on Slide 10 of the $2.5 billion in retail property loans, 90% are secured by retail store, neighborhood, mixed use or strip centers, only 9% are secured by shopping centers. Turning to Slide 11. Office private loans represent 13% of our total CRE loan portfolio or 7% of our total loans. Of the $1.4 billion in office loans, 30% secured by a pure office, only 3% are in central business districts. Another 42% are collateralized by office retail stores, office mixed use and medical office properties, with the remainder 28% secured by office condos. For Q4, we reported net charge-offs of $5.4 million as compared to $15.6 million in the prior quarter. Nonaccrual loans were 0.6% of total loans as of December 31, 2025, down $53.3 million to $112.4 million compared to the prior quarter. The decrease in nonaccrual loans during the fourth quarter of 2025 included the sale of a $15.8 million CRE loan at par and a $10.8 million CRE loan brought current and restored to accrual status. Turning to Slide 13. Classified loans decreased from $420 million to $391 million for Q4. Special mention loans increased from $455 million to $535 million in Q4. The bank downgraded 5 loan relationships totaling $92 million to a special mention that have not met certain debt covenants and have exhibited short-term financial issues for closer tracking. The bank believes that these credits will resolve within the next 12 months by either credit upgrades or partial or full payoff. We recorded $17.2 million in provisions for credit losses in Q4 compared to $28.7 million in Q3. The ALLL to gross loan ratio increased to 0.97% from 0.93%. And excluding our residential loan portfolio, the total reserve to loan ratio would be 1.22%. Total deposits increased by $373 million or 7.6% on an annualized basis during Q4, driven primarily by $366 million increases in core deposits and $7 million in time deposits. The growth in core deposits reflected seasonal factors in targeted marketing activities. For 2026, we expect deposit growth to range between 4% and 5%. As of December 31, 2025, total uninsured deposits were $9.3 billion, net of $0.9 billion in collateralized deposits, representing 44.6% of total deposits. The bank has $7.5 billion of unused borrowing capacity from Federal Home Loan Bank, $1.3 billion from Federal Reserve Bank and $1.6 billion in unpledged securities. Altogether, these available liquidity sources provide more than 100% of the uninsured and uncollateralized deposits as of December 31, 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 Q4 2025, net income increased $12.8 million or 16.5% to $90.5 million from $77.7 million for Q3, primarily due to $11.5 million lower in provision for credit losses, $5.4 million higher in net interest income and $6.8 million higher in noninterest income, partially offset by a $4 million increase in noninterest expenses and $6.8 million higher in provision for income taxes. The net interest margin increased to 3.36% in Q4 from 3.31% in the prior quarter. The increase in net interest income was driven by a lower cost of funds. We anticipate further benefits to the NIM from declining deposit costs supported by the fixed rate proportion of our loan portfolio. Based on the Fed fund futures, we project 2 rate cuts in 2026, one in June and a second cut in September and anticipate that the net interest margin for 2026 to range between 3.4% and 3.5%. In Q4, interest recoveries and prepayment penalties added 5 basis points to the net interest margin compared to adding 4 basis points to the net interest margin in Q3. Q4 noninterest income increased $6.8 million to $27.8 million compared to $21 million in Q3, mainly reflecting a $6.4 million change in mark-to-market unrealized gain on equity securities in Q4. Noninterest expense increased by $4.1 million from $88.1 million in Q3 to $92.2 million in Q4, primarily due to a $4.3 million higher bonus accrual in Q4 as a result of the above-budget financial performance for 2025. We expect core noninterest expense, excluding tax credit and a core deposit intangible amortization to increase between 3.5% and 4.5% in 2026. The effective tax rate for Q4 2025 was 20.33% as compared to 17.18% for Q3. We expect effective tax rate between 20.5% and 21.5% for 2026. As of December 31, 2025, our Tier 1 leverage capital ratio increased slightly to 10.91% as compared to 10.88% in Q3. Our Tier 1 risk-based capital ratios increased to 13.27% from 13.15% in Q3 and our total risk-based capital ratio increased to 14.93% from 14.76% in Q3.

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

The first question comes from Kelly Motta with KBW.

I would like to start with deposits. I appreciate the updated margin guidance for 2026. It seems you have effectively reduced interest-bearing deposit costs. Could you provide more details on the deposit betas you are assuming in your NIM outlook? Additionally, could you share your thoughts on the current level of competitiveness in the market?

Yes, we are assuming deposit betas in the 60% range. Regarding market competition, it seems to be about the same. Overall, it's been quite rational in the fourth quarter.

So Kelly, looking ahead to 2026, I believe the local Los Angeles and New York markets remain quite competitive. We have nearly $4 billion of maturing CDs in the first quarter with an average yield around 3.8%. We'll be running our Lunar New Year campaign and if we can price slightly below that, that would be the objective. However, we will remain cautious about maintaining our existing base while attempting to convert some of that into noninterest-bearing deposits.

Got it. That's helpful. And just a point of clarification on that beta hang that 60%, is that for interest-bearing or total deposits?

Interest-bearing.

Got it. It was encouraging to see the improvement in non-performing assets, and it appears you had both a payoff and a resolution in that area. Looking ahead, what are your observations regarding credit trends and any shifts into criticized assets?

Some of the migrations into special mention do not show any specific trends. Three of the five projects we discussed are unique. One is a completed mixed-use project in New York that is fully occupied, but the owners are waiting for lower property tax status approval. Once that is obtained, they will be back in compliance with their debt coverage. Another project is a multifamily mixed-use development in the Pacific Northwest that is awaiting a new commercial tenant, which is affecting its ability to meet covenant requirements due to increased competition in the area. They are facing challenges but are expected to return to stabilization, backed by solid guarantor support, and they are making payments as agreed. Lastly, there's a story related to a distributor of exercise equipment in their own warehouse that is struggling to meet quarterly financial requirements. However, they anticipate a positive full-year outcome and we hope to upgrade their status once we receive the CPA financials showing a full-year profit.

The next question comes from Andrew Terrell with Stephens.

Maybe just on the margin quickly. The loan yield performance this quarter was also a decent amount better than I kind of was expecting. Was there any level of interest recovery in the loan yields this quarter, just looking at some of the NPL reduction?

Yes. It was 5 basis points to the NIM versus 4 basis points in Q3.

Got it. Okay. So relatively close to the baseline amount?

Right, yes.

Okay. And I appreciate all the color on the deposit and kind of cost dynamics in the market right now. What about on the lending side? Have you seen an elevated level of competition for incremental loan growth? And just what's the kind of status of the market on the lending side?

Yes. So surprisingly, I looked at those numbers for 3 segments. On the residential mortgage, believe it or not, we had a pretty strong growth last year in '25 and the rates of the entire portfolio actually held up pretty nicely. As a matter of fact, I think improved by a couple of basis points there. On the CRE side, I think there's still pretty strong competition for the right type of assets and loans. So that declined by, don't quote me on this, about 15, 20 basis points on the entire portfolio there. I think the most amount of competition we saw probably was on the C&I side. I think the C&I side, we're still trying to push for growth and find some new lenders, new relationship kind of teams and those kinds of things. But our existing portfolio on the C&I side, that we saw probably the most amount of competition there, and that rate declined steeper than the other 2 segments.

Got it. Okay. If I could just sneak one more in. Do you have the amount of the expected amortization in 2026?

For low income housing, it's probably $11 million a quarter, Andrew.

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.

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.