Cathay General Bancorp
NASDAQ:CATY
Cathay General Bancorp
Cathay General Bancorp, the parent company of Cathay Bank, was founded in 1962 to serve the growing Chinese-American community in Los Angeles. This strategic focus on a niche demographic, often underserved by mainstream financial institutions, allowed it to establish a loyal customer base. Over the decades, the bank expanded its footprint beyond California to several states across the U.S., and even into Asia. By concentrating initially on commercial banking services such as loans to small and medium-sized businesses within the Asian community, Cathay General Bancorp capitalized on its deep cultural understandings and language skills. This approach enabled them to develop strong client relationships and to provide tailored financial solutions.
The core business model of Cathay General Bancorp is built on the principles of traditional banking, where deposits are taken from individuals and businesses, and these funds are then used to issue loans. The bank earns a significant portion of its revenue from the interest spread—the difference between the interest paid on deposits and the interest earned from loans. Additionally, Cathay generates income through fees for various services like processing loans, foreign exchange, and wealth management. Emphasizing prudent risk management and maintaining robust capital reserves, Cathay navigates the complex market dynamics while staying committed to its community-driven roots. Through these strategies, the bank continues to thrive, adapting to evolving financial landscapes while meeting the unique needs of its diverse clientele.
Earnings Calls
In Q1 2025, Cathay General Bancorp reported a net income of $69.5 million, down 13.3% from Q4 2024. Diluted earnings per share also declined to $0.98. While net interest margin improved from 3.07% to 3.25%, the company revised its loan growth guidance to 1% to 4%. This adjustment reflects economic uncertainties and potential impacts from U.S.-China tariffs, which may affect 1.4% of total loans. During the quarter, total deposits rose by 2.7%, supported by strategic marketing efforts. The capital ratios showed slight increases, indicating a stable financial position amid changing market conditions.
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Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp's First Quarter 2025 Earnings Conference Call. My name is Rocco, and I will be your coordinator for today. [Operator Instructions] 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, Investor Relations of Cathay General Bancorp. Please go ahead.
Thank you, Rocco, 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 statement speaks only as of the date of 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 U.S. 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 pass 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. Diluted earnings per share decreased 12.5% to $0.98 for Q1 '25 as 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 for $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 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 62% fixed rate and hybrid loans, excluding fixed-to-float interest rate swaps of 4.1% of total loans. Fixed rate loans comprised 30% of total loans and hybrid and 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 monitor our commercial real estate loans.
Turning to Slide 8 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, our retail property loan portfolio, as shown on Slide 9, comprises 25% 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, building, mixed-use or strip centers and only 9% is secured by shopping centers.
On Slide 10, 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 3.4% are in CBDs. 38% 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 nonaccrual 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 paydown in Q1 2025.
Turning to Slide 12. 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 1 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 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 unpledged securities of $1.5 billion as of March 31, 2025. These sources of available liquidity more than cover 100% of uninsured 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 to an increase of $10.7 million and 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 6 basis points to the net interest margin as compared to adding 4 basis points in net interest margin for Q4 2024. Based on the first quarter net interest margin, we have increased our 2025 guidance to 3.25% to 3.35% for NIM from the previous 3.10% to 3.2%. Noninterest income for Q1 decreased $4.3 million to $11.2 million when compared to $15.5 million in Q4 of 2024. The decrease was primarily due to $2.9 million mark-to-market unrealized 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 swap, interest rate swap loss.
Noninterest expense increased by $0.5 million or 0.6% to $85.7 million in Q1 2025 when compared to $85.2 million in Q4 of 2024. The increase was primarily due to $2.2 million higher FDIC assessment this quarter compared to Q4 2024, which was lower because of the reversal of an over accrual of [ FDI assessment ] and $1.1 million increase in computer and equipment expense, offset by $1.7 million in lower solar tax credit fund amortization and $1.3 million in 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 1 leverage capital ratio increased to 11.06% as compared to 10.97%. As of December 31, 2024, our Tier 1 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.
[Operator Instructions] Today's first question comes from Chris McGratty at KBW.
This is Andrew Leischner on for Chris McGratty. So just looking at the margin, can you provide what the sensitivity would be to the margin guide and maybe NII levels if we were to get more than the 1 interest rate cut in July?
Well, on a full year basis, it would be about 4 basis points for every rate cut. So if it happens in July, it's only 2.
Okay. Great. And then...
Yes, go ahead. Go ahead.
No, sorry, I was going to switch gears there. All right. Can you just provide the spot deposit cost at the end of the quarter and also if you have the average margin for the month of March?
Yes. 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 or spot rates?
Yes. Yes, please.
Okay. So the spot rate for total interest-bearing deposits at March 31, 2025, was 3.36%.
And our question today comes from Gary Tenner at D.A. Davidson.
I appreciate the change you made to your loan growth guide for the year, lowering it from 3% to 4% to 1% to 4%. Can you talk about kind of what you're seeing in your pipeline and customer behavior today compared to 30, 60 days ago that kind of 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 2 years at the same time from a relative perspective. And then I think the guidance is really just to -- given the current uncertainty and what we're seeing on the tariff side, particularly on the C&I clients that were concerned about sort of the growth prospects 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 the Wall Street about how it's now not the seller's market and it's 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 C&I customers talking about just not investing or undertaking any investment in their companies? What are you hearing, I guess, more specifically on the C&I side?
Yes, that's probably the bulk of it is there were some growth plans or expansion plans or anything like that. I think there's some pause to that. I think they're more focused on managing their balance sheet and P&L, both sort of the top line side because the demand is going to slow down and as well as sort of the cost side, right? So their inventory side prices is unpredictable somewhat in the near future. So they're trying to manage the P&L side and the balance sheet rather than thinking about growth?
Yes. Let me add. We also -- the reason we widened it is if there's -- if the tariff situation doesn't improve, we expect some loan paydowns as some importers just stop importing and sell out. A very few of the importers import primarily from China, and they would just pause their imports for whatever, 9 months or whatever until conditions improve. So that's another factor in widening the 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 3 to 9 months. So the line usage on what they need is going to be flat.
And our next question comes from Andrew Terrell with Stephens.
If I could just go back to the question that was asked a minute ago around the margin and the impact of rate cuts specifically on the forward guide, I appreciate the 4 basis points annualized for every cut. Just to clarify, is that 4 -- if we go down 25 on rates, is that 4 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 2 basis points, and our deposits went down by 29. So this year, I think we're going to be helped by the fact that about 60% of our loans are fixed or hybrids in the fixed period. So they're not going to go down that much.
100%. Yes, I get it. I 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 1 specific C&I credit. I'm curious if that 1 specific commercial credit, was that a borrower that fell in that 1.4% of loans that you guys highlighted it could be impacted by tariffs?
And then just more broadly, as you did the work to kind of ring-fence the borrowers and exposure where you could be more impacted by tariffs, have you taken any incremental provisions or built allowances on those specific relationships?
Yes, 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 covers most of the exposure. As I mentioned before, yes, I think 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.
Yes. Do you have what the allowance is on that aggregate 1.4% of loans?
It's probably 2%.
Got it. Okay. And if I could ask just one more on the buyback. It looks like you -- I mean, it was good to see you guys completed the authorization in the quarter. It looks like the price bought back was around -- I think it was 46, 47. Yes, 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. Would expectations be that we get another buyback at some point in the future? And just remind us kind of your interest in repurchasing going forward.
Yes. We're waiting for regulatory approval. Once we get it, we'll announce our new buyback program.
[Operator Instructions] Our next question today comes from Adam Butler of Piper Sandler.
This is Adam on for Matthew Clark. Just my first question is on noninterest expense. I know that your guidance outlook is consistent quarter-over-quarter for 4.5% to 5.5% 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.
Yes. Let me cover that. So -- yes, just on some of the major categories, on the salaries and benefits, we picked up about $2.5 million from excess bonus accruals in 2024. So that offset the annual FICA hit. And we think our consulting expense should be lower in the second half of the year. I think that's -- that's pretty much it looking at the income statement.
Okay. That's helpful. And then just one other one for 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 -- what kind of trends are you seeing from the growth standpoint?
Yes. I think the only seasonality is that our Lunar New Year promotion is in January and February. So we picked up probably about $200 million. And then we had some brokerage CDs run off given our increase in relationship deposits.
Okay. And if I could just follow up on the Lunar New Year deposit specials, what was the rate offered this year? And how does it compare to last year's special?
Yes, it was for the 6 months, it was about 4.10% versus the 4.50% or so for the July renewals. And then the 1 year, we actually did 13 months this year. That was also 4.10%, right?
It's about 4.10% as well.
And that's coming off of, I think, 5.40% or something, 5.30%.
Okay. That's very helpful. And that's all the questions that I had. I appreciate 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.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.