Cathay General Bancorp Q2 FY2025 earnings call

• Net income for Q2 2025 was $77.4 million, an 11.4% increase from Q1 2025. Diluted earnings per share increased to $1.10. - Repurchased 804,179 shares under the $150 million stock repurchase program. - Revised 2025 loan growth guidance to 3%-4% from 1%-4% due to strong Q2 loan growth. - Loan portfolio has 62% fixed-rate or hybrid loans. - Average LTV of CRE loans at 49% as of June 30, 2025. - Net interest margin increased to 3.27% from 3.25% in Q1 2025. - Noninterest income increased $4.2 million in Q2 2025, noninterest expense increased $3.4 million. - Effective tax rate guidance updated to 18.5%-19% from previous 19.5%-20.5%.

In Q2 2025, total gross loans increased $432 million or 8.9% annualized. Commercial loans increased $196 million, commercial real estate loans $202 million, and residential loans $69 million, offset by a $32 million decrease in construction loans. The loan portfolio consists of 62% fixed-rate or hybrid loans, with fixed-rate loans at 30% and hybrid in fixed-rate period at 32% of total loans. As of June 30, 2025, the average loan-to-value of CRE loans was 49%. Retail property loans comprised 24% of CRE loans or 13% of total loans, and office property loans represented 14% of CRE loans or 7% of total loans.

• Revised 2025 loan growth guidance to 3% to 4% from 1% to 4%. - Updated effective tax rate guidance to between 18.5% to 19% from the previous range of 19.5% to 20.5%.

• Economic factors like Moody's unemployment factor increase impacting the allowance for credit losses (ACL). - Potential loan demand drops affecting loan growth guidance. - Impact of California tax legislation on income taxes, as seen with a $3.4 million increase in income taxes due to writing off a portion of deferred tax asset.

Q: 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?

A: Yes, $3.4 million that's a result of writing off a portion of our deferred tax asset to reflect a lower state apportionment -- lower California state apportionment.

Q: 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?

A: There's a lot of noise this quarter. We use Moody's as an economic forecast, variable for our ACL. And Moody's, the unemployment factor increased by 40 basis points compared to March. And since 5 of our 6 loan pools, the 1 of the dependent variables is unemployment that added more. We had loan growth, which added more, and offsetting that, we reduced specific provision for tariffs. We're not seeing any impact on our importers. We had set up a reserve in Q1 for that. And then secondly, we had another credit that was on nonaccrual, and we increased the collateral as part of the bankruptcy settlement. We had a special reserve against that credit, which we now no longer need.

Q: 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 kind of 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.

A: So, Andrew, I think what we look at is really there's been a balanced growth in both the C&I side and the commercial real estate side. On the C&I side, we're seeing both some increases on existing line and their advances as well as some new customers that we've been able to bring into the bank. As far as the sort of the second half, we're still -- we believe that we have a strong pipeline for the second half. Based on what we're seeing so far, and we're looking forward to getting those deals closed as well. We want to be a little -- I want to just kind of look at the whole economic landscape, both in terms of just there's still some tariff noise out there and some of the CPI adjustment and increases. So we just want to be sensitive to that. And if loan demand starts to drop, then we don't want to kind of not hit the top end of the range. That's why we kept the top end of the range at the 4%.

Q: 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 kind of 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.

A: So, Andrew, I think what we look at is really there's been a balanced growth in both the C&I side and the commercial real estate side. On the C&I side, we're seeing both some increases on existing line and their advances as well as some new customers that we've been able to bring into the bank. As far as the sort of the second half, we're still -- we believe that we have a strong pipeline for the second half. Based on what we're seeing so far, and we're looking forward to getting those deals closed as well. We want to be a little -- I want to just kind of look at the whole economic landscape, both in terms of just there's still some tariff noise out there and some of the CPI adjustment and increases. So we just want to be sensitive to that. And if loan demand starts to drop, then we don't want to kind of not hit the top end of the range. That's why we kept the top end of the range at the 4%.

Q: 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 kind of 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.

A: So, Andrew, I think what we look at is really there's been a balanced growth in both the C&I side and the commercial real estate side. On the C&I side, we're seeing both some increases on existing line and their advances as well as some new customers that we've been able to bring into the bank. As far as the sort of the second half, we're still -- we believe that we have a strong pipeline for the second half. Based on what we're seeing so far, and we're looking forward to getting those deals closed as well. We want to be a little -- I want to just kind of look at the whole economic landscape, both in terms of just there's still some tariff noise out there and some of the CPI adjustment and increases. So we just want to be sensitive to that. And if loan demand starts to drop, then we don't want to kind of not hit the top end of the range. That's why we kept the top end of the range at the 4%.

Q: Can you just touch on the increase in classifieds. 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?

A: 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's still stay 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.

Q: And was that -- how large is that credit? Was that the entire increase?

A: 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 to the delinquency.

Q: The prepay fees in the margin this quarter, interest income I think there were $3.5 million last quarter.

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

Q: And then the tax credit amortization expectations for 3Q and 4Q?

A: It would be about $11 million per quarter.

Q: I wanted to circle back on loan growth and what you saw specifically on the commercial side. I appreciate the updated guide and the color there. But can you provide -- was there any unusual pulls in utilization? And how we should think about that? Is that part of the reason why we're seeing a kind of slowdown relative to such a strong 2Q in the back half of the year? Just any color would be helpful.

A: 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 relationship 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.

Q: On the deposit pricing side, you guys have done an excellent job getting deposit cost 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 of the next round of cuts?

A: Yes, Kelly, I think for -- we were doing some analysis on our betas and for some CD -- retail CD balances, the adjustments last rate cut was in the middle of December and those -- the CD rates since then, the June CD rates have been down more than 25 basis points because I think we're in slightly less promotional environment for CDs. And then we -- as I mentioned in the script, about 60% of our loans are fixed or hybrid and we were getting some repricing on the loans like our resident to mortgage, the originations in Q2 were at like 6.25% and the average portfolio yield on residential mortgage in the second quarter as 5.79%. And also on new CRE originations, I think we're getting a little bit of uplift as fixed-rate loans that we made 3 or 4 years ago repriced today. So we have a little bit of a backwind and our NIM should expand anytime there's another Fed rate cuts. We're just waiting for that to happen.

Q: And to answer your first part of your question, I think we've pulled through on the 100 basis points cut that, for the most part, happened in the fourth quarter of 2023. So that's kind of -- '24, sorry. And that's pulled through for us I think it's reflected in our current deposit rates. I don't think there's any kind of tailwind on that part of it.