Cathay General Bancorp Aktie

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's First Quarter 2026 Earnings Conference Call. My name is Ashia, and I'll be your coordinator for today. [Operator Instructions] 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. Al Wang, 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, 2025, 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 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 first quarter 2026 results. To obtain a copy of our earnings release as well as our earnings presentation, please visit our website at cathaygeneralbancorp.com. After comments on 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. Good afternoon, and thank you for joining us today. I will begin on Slide 3. We delivered solid financial performance in the first quarter. Reporting net income of $86.9 million and diluted earnings per share of $1.29. We also delivered another quarter of net interest margin expansion, driven by disciplined deposit cost management in a competitive environment. Our results reflect 2 noteworthy items that largely offset each other. The first was a $17.3 million valuation gain on equity securities and the other was a $15.7 million impairment on AFS debt securities from balance sheet repositioning.

We sold lower yielding securities and reinvested at current market rates, a move that supports margin expansion and accelerate tangible book value recovery. Excluding these items, diluted EPS would have been $0.02 lower. Credit quality was stable overall this quarter. We saw improvement in nonperforming loans in net charge-offs, while criticized and classified levels remain steady, reflecting continued credit discipline across the portfolio.

We remain focused on maintaining a prudent risk profile given the broader economic and geopolitical backdrop. We continue to generate positive operating leverage. Our efficiency ratio improved to 40.4%, down 100 basis points from the prior quarter, supported by ongoing expense management and steady core performance. On an adjusted basis, our efficiency ratio decreased by 1.5% to 36.9% from last quarter.

Capital management remains a priority. During the quarter, we increased our quarterly cash dividend to $0.38 per share, reflecting an 11.8% increase. We also completed the $150 million share repurchase program announced in June 2025 by repurchasing 244,000 shares at an average cost of $51.31. In addition, our Board approved a new $150 million share repurchase program, subject to regulatory approval, underscoring our commitment to returning capital to shareholders in a balanced and controlled way.

Loan growth was softer than we anticipated, but this reflects our disciplined underwriting approach. Our focus remains on supporting our loyal customers and deepening long-standing relationships rather than pursuing volume that will require taking on additional credit risk in this unpredictable economic environment. This relationship-driven strategy has served us well through many cycles and positions us well going forward.

I will now turn the call over to Mr. Al Wang to walk through our first quarter results in more detail. I'll provide some closing comments before we open the call up to Q&A.

Thank you, Chang. I'll start with our balance sheet on Slide 4. We decreased our on balance sheet cash and short-term investments by $219 million to stay aligned with shifts in our funding profile. Period-end loans of $20.2 billion grew 0.2% linked quarter, reflecting our focus on relationship lending. Period-end deposits of $20.7 billion declined by 1% linked quarter, led by $71 million in broker deposits. Capital levels remained in excess of regulatory well-capitalized thresholds and our internal limits. And we continue to grow book value per share by 2% linked quarter and 9% year-over-year.

Slide 5 breaks down our loan and deposit mix. Average loan balances increased 1% on an annualized basis linked quarter while the composition remains stable and well diversified. CRE concentration of 278% declined by 9 points and continue to stay below regulatory guidelines. In addition, our exposure to private credit is minimal with NDFI loans making up less than 2% of total loans. Average deposits decreased 3% linked quarter on an annualized basis, driven by the decline in brokered deposits. Core deposit outflows were largely seasonal and reflected normal cash management activity by our commercial customers. Our uninsured deposit ratio stayed consistent at 45%.

Slide 6 is a new slide to illustrate the strong liquidity, credit and interest rate risk profile of our available-for-sale investment portfolio. In Q1, we recognized a $15.7 million impairment loss on our AFS securities portfolio as part of a securities repositioning initiative. During the first week of April, we sold $210 million of lower-yielding mortgage-backed securities and reinvested $197 million into similar duration securities at significantly higher yields.

This trade carried an earn back under 3 years while keeping our overall duration and credit profile essentially unchanged. We keep the overall portfolio short and high quality. Duration is just under 2 years, and nearly 2/3 of the cash flows will come back this year. Unrealized losses have been improving as rates move and over 90% of the portfolio is U.S. government backed with the rest in investment-grade securities.

Slide 7 highlights our income statement. Net income of $86.9 million decreased 4% linked quarter due to lower noninterest income, offset by lower noninterest expense, which I will discuss in more detail on the following slides.

Slide 8 summarizes our yield and funding costs. Net interest income of $194 million declined $0.8 million compared to last quarter due to day count, offset by margin expansion. Net interest margin of 3.43% grew 7 basis points compared to last quarter as deposit costs decreased, offset by a decline in loan yields driven by the Federal Reserve's latest interest rate cuts in the fourth quarter.

Slide 9 highlights noninterest income. Noninterest income decreased $7.1 million linked quarter, driven by the notable items Chang mentioned previously. Specifically, we recognized $17.3 million in valuation gains in our equity securities portfolio, offset by the $15.7 million AFS securities impairment repositioning loss. Adjusting for these items, including the gain on equity securities in both periods, noninterest income would have been $19.1 million compared to $18.1 million in the prior quarter reflected an increase of 5.52%.

Moving to Slide 10. Noninterest expense decreased from $92.2 million to $86.7 million this quarter, this decline was driven by $4.5 million of lower amortization expense on our low-income housing and alternative energy partnerships, along with lower compensation and benefit costs. It's worth noting that most peer banks record the amortization of tax credit investments and income tax expense under the proportional amortization method rather than in noninterest expense as we do. When adjusting for this difference and other noncore items, adjusted noninterest expense would have been $78.7 million, which is [ $3 million ] lower than last quarter.

On the same basis, our adjusted efficiency ratio improved to 36.9% compared to 38.4% in the prior quarter. On Slide 11, you'll see that our asset quality stayed solid. We increased our allowance by $13 million to $209 million, which puts coverage at 1.03% or 1.30% excluding residential mortgages. That increase was driven by model updates, including a slight softening in the macroeconomic outlook. Net charge-offs improved dropping from $5.4 million last quarter to $2.1 million this quarter Classified loans were up $39 million, while special mentioned loans came down $55 million.

And importantly, our nonperforming asset ratio continued to trend in the right direction, improving from 59 to 51 basis points. Turning to Slide 12. Capital levels remain strong and well above well-catalyzed regulatory thresholds with a modest increase from last quarter.

I'll wrap up on Slide 13 with our outlook. We continue to expect full year loan growth in the 3.5% to 4.5% range and deposit growth of 4% to 5%. Adjusted noninterest expense is still expected to increase between 3.5% to 4.5% for the year. Our NIM and NII outlook no longer assumes any rate cuts in 2026. But even with that change, we remain confident in achieving our NIM target of 340% to 350%. We expect an effective tax rate of roughly 21%.

And with that, I'll turn the call back over to Chang.

Thank you, Al. Overall, we feel very good about how we started the year, notwithstanding geopolitical tensions and uncertainty in the macro environment. We delivered solid financial performance by growing tangible book value per share to $30.95, expanding NIM by 7 basis points and continuing to manage capital prudently to expand the buyback capacity and dividend increases.

Looking ahead, we are entering the second quarter with good momentum. Similar to last year, we saw a slower start to the first quarter, but activity strengthened meaningfully as the year progressed, and we expect a similar pattern as we move through 2026. Finally, I want to thank our team members for everything they do for our company, our communities and our clients.

With that, we can now open it up for questions.

[Operator Instructions] Your first question comes from David Chiaverini with Jefferies.

I wanted to start on the net interest margin. So it was very strong in the quarter. Can you talk about -- and you reiterated the guide. So I'm curious about the outlook kind of sequentially from here? And then to your point about rate cuts being eliminated from your assumptions, whether that would take us either to the high end or the low end or if you're still kind of thinking the midpoint of that range. Can you talk about that?

Yes. Obviously, the -- without any cuts forecasted in, that's obviously going to put pressure and point us down slightly. But remember, we did the securities reposition, so that should help by a few basis points for the year. And when I look at kind of our loan portfolio, right? So we -- our yield was $6.01 for the quarter. But when I take a look at kind of the origination rates for the commercial real estate book in the first quarter and kind of the origination rates in mortgage. Those came in at like 6.15% and 6.12% respectively. So higher than kind of the NIM.

So I think, obviously, there is more pressure on C&I. But I think with the mortgage and CRE kind of repricing and kind of what we're repricing on, I think that will support. So I think if the loan yield -- I don't -- we don't expect it to drop off very much, if at all. So I think that's going to help support. On the deposit side, we still have room to run also. I mean we had a $2.96 cost for interest-bearing this past quarter. But if you think about it, we've got -- that was -- a lot of the expansion was that I think we said last quarter that we had almost $4 billion of CDs rolling off at a 3.80 weighted average rate. So obviously, that -- those came on favorably this quarter. And if I look at next quarter, for example, we've got close to $3 billion with the 362 handle or kind of weighted average rate -- so we think that there's definitely -- I think, most of the benefits from the lower rate environment and the cuts are kind of behind us.

But we still think there's still some room there to manage those costs down slightly. So between the 2, I think we still feel comfortable with the overall kind of guide for the year. We do acknowledge that if I look at brokered rates, for example, at the beginning of the year, it was like in the $3.60 to $3.70 for CDs for large CDs. Today, that's 4% to 4.05%. So there's definitely a lot more pressure and competition with deposits. But -- but right now, when we look at kind of the profile, we think that there's still a little bit of room for expansion through this year.

Obviously, depending on -- if rates are cut, and there actually are cuts later in the year, that will be beneficial to us. But for now, I think we're good for the year for our guidance.

Very helpful color on that. And on that securities repositioning, held in isolation, can you estimate how much that should contribute to NIM. You gave the sizing of it. Maybe you can help us with how much -- what the yield was that rolled off or was sold and what the yield was that came on?

Yes. It was -- I think about $245 was the yield that we sold, and we put on -- they were -- the coupon was like 5.5% and they were mostly kind of long-dated mortgage-backed securities. I think the effective yield on that is like 5.33 or something around that range. So a little over $5.5 million annually. So if you think about for 2026, we take -- the trade happened early in the quarter. So will take 3 quarters of that amount into this year. So probably about 2 to 3 basis points or 2 to 2.5 basis points to NIM. And then for the year and then maybe $4 million, let's call it, of additional boost to NII.

Next question comes from Matthew Clark with Piper Sandler.

Just want to get the amount of prepay and any interest recoveries in net interest income, I think it was around $3 million last quarter.

Yes. So it was about 3.5% this quarter, which was about 6 basis points. So we -- for the quarter, our reported NIM was $343 million. It would have been $337 million for those items. We also had a small FHLB dividend -- special dividend as well included in that number.

Within that $3.5 million?

Yes.

Okay. Okay. And then the low-income housing tax credit amortization came down more so relative to your guide coming into the year. Just want to get your updated thoughts on that run rate for the balance of the year. .

Yes. It's -- I mean, that's a fluid number. Obviously, it depends on kind of the timing of tax credits and the performance of the projects in the portfolio. We think that it's probably going to be in the $7 million to $8 million range for the next few quarters throughout the year.

Okay. Good. And then just on the loan growth commentary in your prepared remarks and I think in the release that has just been a little more cautious, but sticking to the guide for the year. Is that -- is it because you're seeing the pipeline building? Or is it because you're a little -- you feel like at this point, you're a little more open or not as cautious as maybe you were during the first quarter? Just wanted to get some thoughts there.

Yes. So for us, on the loan growth side, we saw some sort of some increased paydowns in our construction loan portfolio. So some of our customers took advantage of some of the refinancing opportunities with the life companies and the Fannies that have much better competitive longer-term rates than we had. Our originations were healthy, but not enough to offset the timing of the paydowns. But today, our pipelines are still healthy and strong and the customer engagement has improved. So we expect the growth to be sort of more weighted towards the middle and the back end of the half. .

The next question comes from Gary Tenner with D.A. Davidson.

I just wanted to follow up a little bit on the funding side of the equation. I appreciate the color on the second quarter CD maturities. Can you give us an idea of where the first quarter ones that rolled off at 380 where they were renewed?

Yes. So as you know, we had a literally a new year promotion at I think 365 for 6 months and 350 for 12. So I think we extended that program by a couple of weeks -- and then like I said in my commentary, we had -- you can see there's been a lot more pressure, especially since kind of February and even since the war started the pressure on rates has been kind of pushing upwards. So we think it's around kind of the mid-350s is kind of in the first quarter of what we kind of put on.

Okay. And so that would suggest that the [ $360 million ] rolling off in the second quarter, even without the specials, probably not too much of a benefit. Is that fair...

Yes, we think there'll be a marginal benefit from that. Again, it's probably around [ $350 million ] with the rate that we put on last quarter.

Okay. Appreciate that. So -- in terms of the -- and you talked about that in a little bit. I appreciate the color there. I guess just to encapsulate it. I mean with no cuts, pretty flat in bias ex the securities repositioning? I mean, is that kind of in a nutshell, what you think about it?

Yes. Yes, that's right. Again, I think the lending side, we shouldn't see much degradation in terms of the yields on that side. Again, we have some -- we have mortgages, for example, that we put on 5 years ago in a lower rate environment, for example, 5-plus years ago. So when those come back and get booked back on, that will help support kind of our NIM.

Okay. Great. If I could ask 1 more. Just on the asset quality front. I mean, the metrics overall were good and you increased the allowance by 6 basis points, and you kind of commented about model recalibration and deterioration and macro conditions. Can you change weightings in your model in terms of building the allowance? Or maybe just kind of give us a sense of how you were thinking about that.

Yes. The biggest move was just kind of a recalibration of 1 of the inputs in the model. And in terms of the weightings, I would say, for the overall book, we kept the weightings the same, but we did change the weightings for certain portfolios within the book that pushed the reserves up for those particular portfolios and obviously, overall as a result.

Can you comment just which portfolios you increased or changed the weightings on.

Yes. So we so basically -- yes, so the way we thought about it is, in our models, we use kind of a national kind of economic forecasts. But obviously, as you know, we're very coastal, right? We've got a lot of motor portfolio in kind of California and New York. So we look specifically at kind of the office portfolio and said, Hey, we have a lot of office kind of on the coast. And I don't know if the national forecast kind of are doing those portfolios justice. So we kind of stress those portfolios a little bit more.

[Operator Instructions] The next question comes from Andrew Terrell with Stephens.

I just wanted to start on the operating expenses. It looks like holding the amortization side relatively flat quarter-on-quarter. We annualize the first quarter kind of tracks to low end of your adjusted expense growth guide for '26. I'm just curious if any seasonality impacts in the first quarter? Do you grow off this operating expense base throughout the year? Just any kind of expectation around expense run rate would be helpful.

Yes. I think the first quarter was slightly lower on the comp and benefit, especially compared to year-end. Year-end, we had a little bit more in kind of the incentive compensation accruals. So that's kind of what's driving the why it's lower versus fourth quarter, for example. So we think kind of where we are now, the run rate is pretty good. We do -- we are projecting in kind of headcount, open positions, things like that. But yes, I think it's -- I think our current kind of where we ended Q3 with the growth rates that we are projecting. That's kind of our expectation right now.

Yes. Okay. And then I wanted to ask around -- I know it's just proposed, but any thoughts behind the Fed's proposed capital rules any kind of benefit that could provide to you guys in terms of CET1 or risk-weighted release?

Yes. I mean we think it's -- it would be a huge win for us, obviously. We've got a decently sized mortgage portfolio with very low LTVs. So I think we'll get an upsized benefit from that. So it could be in the low kind of double-digit in terms of the reduction in risk-weighted assets for us. And anywhere from, let's call it, $150 to $175 million kind of boost to our capital ratios depending on the ratio.

No. Okay. Great. Yes, that's pretty solid. If I could just ask lastly, 1 of your competitors commented maybe around M&A recently. Just would love to hear kind of your thoughts on the M&A landscape today. And how you see it fitting into the puzzle for Cathay?

Yes. So for us, we're always going to kind of think about looking at things more opportunistically just based on what's presented to us. we're always going to focus more on just our organic growth and executing the business plan. If there's a candidate out there that makes sense for us. But it's not the top priority at this point. We want to just make sure we strengthen our franchise and make strategic decisions and meet the financial plan that we laid out to our investors.

The next question comes from Kelly Motta with KBW.

Thanks for the question. Turning to fees, excluding the noise of the securities repositioning and that the other gains Core fee income still came in pretty strong. And I think in your prepared remarks, you hit on that being in part tribute 12th management. Just wondering if you could talk a bit about that business and what you're seeing more broadly on the fee income side is this, call it, $19 million core operating run rate is a good line that could hold or if there's kind of puts and takes there.

Kelly, our core strength in the fee income is really the sort of the wealth business that drives that income. We're obviously trying to find other ancillary fee income as well. There's things such as foreign exchange, international fee some of our swapping fee income, but that kind of sporadic based on the rate environment as well. The treasury management functions also drive some of the fee income as well, but the bulk of it is really from the wealth side of the business. .

Got it. And is this 19 million units that it's a step up. It's an approximate $1 million step up from the back half of last year. Is this a good level to kind of hold here? Or was this particularly strong. Just trying to parse out how to...

Yes. I mean we think so. I mean, we do have some new leadership in Wilton. So we think that with -- we've gotten a decent amount of referrals as well. So we're optimistic that wealth is going to hold in there kind of and how it performed in Q1.

Okay. Great. Most of mine have otherwise been after an answer. So thanks for the time. .

Thank you for your participation. I will now turn the call back over to Cathay Bancorp's management for closing remarks.

I want to thank everyone for joining us and your interest in Cathay. We look forward to speaking with you on 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 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. [Operator Instructions] 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 a 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.

[Operator Instructions] The first question comes from Kelly Motta with KBW.

Maybe kicking it off on deposits. I appreciate the updated margin guidance -- or the new margin guidance for 2026. It looks like you did a pretty nice job lowering interest-bearing deposit costs here. Can you speak more in terms of what you're assuming for deposit betas embedded in that NIM outlook here? And just any market commentary as to the level of competitiveness now at this stage.

Yes. I think we're assuming deposit betas in the 60% range or so. And in terms of market competition, I think it's about the same. Yes, we haven't -- it's pretty rational in Q4.

So Kelly, kind of for me looking forward for 2026, I think the local L.A. and New York landscape is still pretty competitive. I mean we have about nearly $4 billion of maturing CDs in the first quarter with an average yield of about 3.8%. We'll run our -- the Lunar New Year campaign and likely if we can price somewhat below that, that's kind of the goal, but we're going to be sensitive about defending that base that we have, while we try to transition some of that into noninterest-bearing.

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. And then maybe on -- it was nice to see the NPA improvement, and it seems like you had both a payoff and a resolution there. As we kind of look ahead, what are you seeing in terms of credit and any migration into criticized and overall trends?

So maybe some of that I can help with this is some of the migrations into special mention, we don't see any particular trends in particular, 3 of the 5 that we were talking about the top 3, they're different in their own nature. One, for example, is a project in New York. It's a mixed-use project. It's completed. It's fully occupied. The ownership is just waiting for a lower property tax status approval to get through. And once that status approval gets through, then they'll be back up to compliance with sort of the debt coverage with that one.

Another one is a multifamily mixed use, primarily in the Pacific Northwest. They have a new commercial tenant coming in, not quite there yet. And so that's contributing to the -- not being able to meet the covenant requirement and as well as some of the more competition in the area. So it's -- they're finding some more challenges, but they're going to return that back to stabilization and it's got a great guarantor support and they're paying us as agreed. And then lastly, it's a bit of a C&I story, and it's a distributor of exercise equipment and their own warehouse and they got some quarterly -- not being able to meet the quarterly financial requirements. But overall, for the year, they're expecting a full year on a positive note.

So once we get the CPA financials, we hope to be able to upgrade that if they can show a full year profit.

[Operator Instructions] 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 bps 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 bps 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 kind 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.

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's Third Quarter 2025 Earnings Conference Call. My name is Ashia, 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.

Now I would like to turn the conference 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 and 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, and 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 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, 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 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 comprised 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% 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 nonaccrual 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 6 loan relationships totaling $145 million to special mission. I have not met certain debt covenants and have established -- have exhibited short-term financial issues for closer monitoring.

The bank believes that these credits will resolved 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. A $28.7 million provision included $9.1 million for 2 movie theater loans that we acquired from the acquisition of Far East National Bank and $3.8 million from a change in our CECL model.

The AAA gross loan ratio increased from 0.88% for Q2 2025 and 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 earnings are 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. Heng Chen, to discuss the quarterly financial results in more detail.

Thank you, Chang, and good afternoon, everyone. For Q3 2025 net income increased $0.2 million or 0.3%, $77.7 million from $77.5 million from Q2 2025, primarily due to $17.5 million and higher provision for federal losses offset by $8.4 million in higher net interest income, $5.6 million in higher noninterest income and $1 million lower in noninterest 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. Noninterest 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 [indiscernible] securities in Q3 from an unrealized loss of equity securities in Q2.

Noninterest 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 long-term 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 is 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.

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

[Operator Instructions] The first question comes from Matthew Clark with Piper Sandler.

First question, just around the increase in classifieds. And I think you mentioned it was driven by 6 relationships. And I believe it's commercial real estate related, but any additional color you could provide in terms of the types of commercial real estate and anything chunky in there? I'm just trying to get a sense for if there was a credit to kind of move the needle within that increase?

No. The largest one, Matthew was about [indiscernible]. This is a national full-service business printing company. They had a weak second quarter due to the uncertainty regarding tariff and then they have regained momentum in Q3. And once we get their full year financial statements, we expect to upgrade that well to the past. Then we have -- we have a real estate loan in Arizona and there was a loss of one tenant, then the LTV is a little higher than our there are target LTV. And I'll just -- I think then we have the third one that's in Southern California. This is also the property was that had slow leasing, but is expected by the second quarter to be fully leased up. So that's just some color out of the [indiscernible].

Okay. And then the increase in theory reserves this quarter, was that related to some of that migration or -- or was that maybe related to the increase in modifications? Just trying to get a sense for what that might be attributed to?

Well, the modification, we're going to look at that. We have -- if we renew substandard loan for 90 days, we're treating that as a modification from a [indiscernible]. Our understanding is that other banks regard those significant 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 the [indiscernible] the reason the CRE reserve [indiscernible] is because of this 9.2 million additional reserve on the to movie theater loans that we inherited from our acquisition [indiscernible]. .

The next question comes from Andrew Terrell with Stephens.

I wanted to start just on the expense guide. Reiterated, I guess when I look at it, it kind of implies it 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 the 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?

Yes. So we think we're happy to see the consulting expense decrease or yes, decrease. Starting here in the third quarter. And then in that loan, we put housing. We had some additional amortization mainly from catching up to the 2024 K1. So the -- so long housing is -- yes, it's -- it's about $10.5 million. For -- I'm sorry, it's -- yes, it's $11.5 million, sorry, for Q3. But once -- it's a onetime catch-up adjustment based on the K1 that we see from our funds for 2024.

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

Yes, yes. .

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 decrease in consulting expense .

Yes, yes.

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

Yes. so Matthew, about 40% of our bond portfolio is 6-month treasuries. So as they're rolling down, we're leasing the yield. The rest of our portfolio is the same.

Got it. 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 M&A was of interest either on the other side of the coin for Cathay.

Sure, Andrew. M&A 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 will absolutely look at it. But of course, that depends on what the ask is, right, in the exchange ratio on that. So I think we would -- 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. So -- but we're always open to that.

Our next question comes from Gary Tenner with D.A. Davidson. .

I wanted to ask about the loan growth side of the equation here. Obviously, you had 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?

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 and and 2Q was also pretty strong as well. So a lot of those numbers kind of pull through for 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. So -- 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.

[Operator Instructions] Our next question comes from Kelly Motta with KBW.

Maybe looking at the funding side, it looks like on the average balance sheet, other Bard 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.

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 are pretty substantial. Our group and our team, and I make sure they're focusing on this that any time there's rate potential rate cut coming and whether it's the exceptional 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 noninterest-bearing and low interest-bearing deposits continues, we're we've built the specialty deposit side in one particular segment, and we're trying to add more to it. And and it is 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.

Got it. 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 on the asset side. I appreciate the NIM guidance, but you're kind of in the middle of it. So I was wondering if you could provide additional color as to how we should be thinking about the near-term trajectory?

Our model, which we're still trying to improve has us basically flat in a down 25 basis point rate shock -- and we think just based on what happened in 2025 that for every 0.25 point drop in fifth funds over 6 months, our NIM should go up now 6 or 7 basis points. So would another rate cut possible or here in October or certainly for sure in December and probably 1 or 2 more in '26. We think directionally, our NIM will go up or should go up. .

We have a follow-up question from Matthew Clark with Piper Sandler.

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 basis, either way.

Yes. September was -- this is a 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 3 or 4 basis points higher.

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

Yes. We have, I guess, interest-bearing deposits -- do you want to buy component at or [indiscernible].

No, no, no. Just the overall interest-bearing deposit is.

3.16. That's compared to 3.31 at the end of June.

Okay. So that's the end of September? .

Right.

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.

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. [Operator Instructions] 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, 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 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 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 as compared to $69.5 million for Q1 2025. Diluted earnings per share increased 12.2% to $1.10 for Q2 2025 as 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 $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 at a fixed-rate or hybrid loans in their fixed-rate period. Our loan portfolio consists of 62% fixed-rate in 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 in 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 store, building, 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 CBDs. 40% of office property loans are collateralized by office retail stores, office mixed use and medical offices and the remainder 20% -- 27% are collateralized by office condos.

For Q2 2025, we reported net charge-offs of $12.7 million as compared to $2 million in Q1 2025. The $12.7 million charge-offs included $8.3 million charge-off, which have been reserved for 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 as 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 downgrade of our large loan relationship to substandard due to delays in interest payments, which are now in the process of 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 as 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 $120 million due to seasonal factors and marketing activities. Total time deposits, excluding broker deposits, decreased $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 $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 in noninterest expense -- sorry, in noninterest income offset by $3.5 million higher in noninterest expense and $1.7 million higher in provision for income taxes.

Net interest margin increased from 3.25% for Q1 2025 to 3.27% for Q2 2025. 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 in net interest margin for Q1 2025. Noninterest income for Q2 2025 increased $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 plus 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% as 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 between 19.5% to 20.5%. As of June 30, 2025, our Tier 1 leverage capital ratio increased to 11.07% as 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.

[Operator Instructions] The first question comes from Gary Tenner with D.A. Davidson.

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 that's a result of writing off a portion of our deferred tax asset to reflect a lower state apportionment -- lower California state apportionment.

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?

Well, there's a lot of noise this quarter, Gary. We have -- let me start with -- 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.

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.

The next question comes from Andrew Terrell with Stephens.

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.

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%.

Yes, understood. Okay. And then I wanted to ask just a balance sheet related question on the -- it looks like in the period, the FHLB borrowing position stepped up quite a lot. Just curious any -- I think it was $412 million. Any color you can provide on whether those were term borrowings, overnight borrowings and what the weighted average rate was and you still got a good cash position. Should we expect you to keep those borrowings kind of going into the third quarter?

Andrew, we -- most of our loan growth was in the month of June. So that's why we had to borrow from the Federal Home Loan Bank. And those are mainly 2-week borrowings. The rate is probably 4.6%. So we're in a process of replacing that with broker CDs, which would be in the 4.3% or maybe a little bit lower. So we were just surprised, this is the treasury group. We were surprised by the surge in loan growth. So we didn't have time to ramp up broker CDs to match that.

The next question comes from Matthew Clark with Piper Sandler.

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?

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.

And was that -- 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 to the delinquency.

Got it. Okay. Great. And then just 2 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 3Q and 4Q?

It would be about $11 million per quarter.

[Operator Instructions] The next question comes from Kelly Motta with KBW.

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.

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.

Got it. That's helpful. And then 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?

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.

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.

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.