Cathay General Bancorp Q3 2023 Earnings Call Transcript

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October 23, 2023

There are 9 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's Third Quarter of 2023 Earnings Conference Call. My name is Rocco, and I will be your coordinator for today. At this time, all participants are in listen only mode. Following the prepared remarks, there will be a question and answer session. Today's call is being recorded and will be available for replay at www.cathaygeneralbancorp.com.

Operator

I would now like to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp. Please go ahead.

Speaker 1

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.

Speaker 1

These risks and uncertainties are further described in the company's annual report on Form 10 ks for the year ended December 31, 2022, 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 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 up this call for questions. I will now turn the call over to our President and Chief Executive Officer, Mr.

Speaker 1

Chang Liu?

Speaker 2

Thank you, Georgia, and good afternoon, everyone. Welcome to our 2023 Q3 earnings conference call. This afternoon, we reported net income of $82,400,000 for the Q3 of 2023, an 11.6% decrease compared to a net income of $93,200,000 for the Q2 of 2023. Diluted earnings per share decreased 11.8 percent to $1.13 per share for the Q3 of 2023 compared to $1.28 per share for the Q2 of 20 3. In the Q3 of 2023, our gross loans increased $71,000,000 or 1.6 percent Annualized, primarily driven by increases of $218,000,000 or 9.9 percent annualized in commercial real estate loans and $143,000,000 or 10.9 percent annualized in residential mortgage loans, offset by a decrease of $227,000,000 or 27 0.4% annualized in commercial loans.

Speaker 2

The slower loan growth during the Q3 resulted in part from pay down of several large commercial loans originated in the Q2 of 2023. We continue to monitor our commercial real estate loans. Turning to Slide 7 of our earnings As of September 30, 2023, the average loan to value of our commercial real estate loans was 50%. As of September 30, 2023, our retail property loan portfolio at Slide 8 comprises 23% of our total commercial real estate loan portfolio 11% of our total loan portfolio. 89% of the $2,200,000,000 in retail loans is secured by retail store, Building, neighborhood, mixed use or strip centers and only 10% is secured by shopping centers.

Speaker 2

At Slide 9, office property loans represent 16% of our total commercial real estate loan portfolio or 8% of total loan portfolio. Only 34% of the $1,500,000,000 in office property loans are collateralized by pure office buildings and only 4% of the office property loans are in central business districts. Another 25% of office property loans are collateralized by office retail stores, office mixed use and medical offices. The remaining 28% of office property loans are collateralized by office condos. For the Q3 of 2023, We reported net charge offs of $6,600,000 of which $4,300,000 had been reserved for in prior quarters compared to net charge offs of $2,000,000 in the Q2 of 2023.

Speaker 2

Our non accrual loans were 0.41 percent of total loans as of September 30, 2023, which increased by $8,300,000 to $77,300,000 as compared to the end of the Q2 of 2023. Turning to Slide 12, as of September 30, 2023, classified loans increased slightly to $202,000,000 from $193,000,000 as of June 30, 20 And our special mention loans also increased slightly to $278,000,000 from $260,000,000 as of June 30, 2023. We recorded a provision for credit loss of $7,000,000 in the Q3 of 2023 as compared to a $9,200,000 in provision for credit losses for the Q2 of 2023. We are pleased that total deposits increased by $539,000,000 or 11.6% annualized during the Q3 of 2023. As a result, we were able to reduce our borrowings from Federal Home Loan Bank by $800,000,000 during the quarter to $15,000,000 as of September 30, 2023.

Speaker 2

Total uninsured deposits were $9,000,000,000 but excluding $800,000,000 in collateralized deposits, the uninsured and uncolarized deposits were reduced $8,200,000,000 or 41.7 percent of total deposits as of September 30, 2023. Our unused borrowing capacity from the Federal Home Loan Bank as of September 30, 2023. Total time deposits increased $237,000,000 or 31.2 percent Annualized during the Q3 of 2023 compared to the Q2 of 2023, total core deposits increased by $301,000,000 10.5% annualized, primarily due to organic growth and seasonal increases. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Chang, to discuss the Q3 2023 financial results in more detail.

Speaker 3

Thank you, Chang, and good afternoon, everyone. For the Q3 of 2023, net income decreased by $10,800,000 or 11.6 percent to $82,400,000 compared to $93,200,000 for the Q2 of 2023, primarily due to a $6,200,000 unrealized loss on equity securities or $0.06 per share In the Q3 of 2023, as compared to a $10,700,000 unrealized gain on equity securities or $0.10 per share in the Q2 of 2023. Our net interest margin was 3 point 3 8% in the Q3 of 2023 as compared to 3.44% for the 2nd quarter of 2023. In the Q3 of 2023, interest recoveries and prepayment penalties Added 6 basis points to the net interest margin as compared to 2 basis points for the Q2 of 2023. We have revised our net interest margin expectations for 2023 to be between 3.45% at 3.50 percent.

Speaker 3

Non interest income during the Q3 of 2023 decreased by $15,300,000 to $7,800,000 when compared to $23,100,000 in the Q2 of 20.3. The decrease was primarily due to a $16,900,000 decrease in unrealized gains on equity securities, offset in part by $1,500,000 increase in commissions from wealth management when compared to the Q2 of 2023. Non interest expenses increased by $1,200,000 1.2 percent to $94,000,000 in the Q3 of 2023, when compared to 92 $800,000 in the Q2 of 2023. The increase was primarily due to $1,700,000 In higher salaries and benefits and $1,400,000 in higher amortization of new of solar tax credit investments, offset by $1,000,000 in lower professional expenses. As a result of expenses incurred in 2023 to strengthen the bank's information security infrastructure, Enterprise Risk Management and from higher FTIC insurance premiums, We expect core non interest expense excluding tax credit and core deposit intangible amortizations and OREO expense to increase between 8.5% to 9.5% from 2022 to 2023.

Speaker 3

This excludes the impact of any special The IC assessment for bank payers expected to be finalized during the Q4 of 2023. During the 1st 9 months, approximately $3,000,000 in non recurring professional expenses related to informational security, enterprise risk management and internal control processes were incurred. In addition, we're taking a hard look in our other expenses during the Q4 of 2023 To reduce the rate of non interest expense growth in 2024, The effective tax rate for the Q3 of 2023 was 11% as compared to 9.2% for the Q2 of 2023. For full year 2023, we expected effective tax rate of between 12.5% 13%. We expect solar tax credit investment amortization of 12,000,000 in Q4 of 2023.

Speaker 3

As of September 30, 2023, our Tier 1 leverage capital ratio Decreased to 10.44 percent as compared to 10.45% as of June 30, 2023. Our Tier 1 risk based capital ratio increased to 12.7% from 12 point 3 8% as of June 30, 2020 and our total risk based capital ratio increased to 14.21 percent from 13.88% as of June 30, 2023.

Speaker 2

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

Operator

Thank We ask that you please place yourself on mute once your question has been stated. Your first question today comes from Matthew Clark at Piper Sandler. Please go ahead.

Speaker 4

Hey, good afternoon.

Speaker 3

Hi. Just a

Speaker 4

couple of questions around the margin.

Speaker 3

Did you have any I guess I

Speaker 4

was looking to quantify the Prepaid fees and any recoveries in the loan yield, it looked like the loan yield was up a little more, up about 20 basis points This quarter, just wondering if anything was kind of elevated on that front?

Speaker 3

Well, we had about $2,000,000 of interest recoveries. Yes, as I mentioned, it was 6 basis points of NIM, But the rest of it would be just improved pricing for loans.

Speaker 4

Got it. And I think you had about $1,000,000 last quarter, is that right?

Speaker 3

A little less than that, yes.

Speaker 2

Okay.

Speaker 5

I can come back to that later.

Speaker 4

And then if you have the spot rate on deposits, interest bearing or total And the average margin in the month of September?

Speaker 3

Yes. Let me go through So the spot rate at September 30 and total interest bearing deposits At the end of the month was 3.28. What was the next part of the question, Matt?

Speaker 4

If you had the average margin in September, I'd take it.

Speaker 3

Yes. The average it's a little bit noisy because We had interest recoveries throughout the quarter, but it was 3.42.

Speaker 5

Okay, understood.

Speaker 3

For the month of September, yes. Okay,

Speaker 4

great. And then just maybe one more housekeeping item and then I'll get back in the queue. The low income housing amortization for the year, I know you gave solar, but is it still about 41,000,000

Speaker 3

Yes. Okay. Thank you. Thank you.

Operator

Our next question today comes from Gary Tenner at D. A. Davidson. Please go ahead.

Speaker 6

Thanks. Heng, first I had a question on expenses. I may have misheard what you were saying in terms of the expected core Expense run rate, I heard 8.5% to 9.5%, which I thought you were saying for 2023, but you said it excluded Any potential FDIC special assessment? So now I was confused if you're talking about 2023 or 2024?

Speaker 3

We're talking about 2023. As you know, there's a proposal that's not final. And under GAAP, whenever it's finalized, banks are expected to accrue it.

Speaker 6

Okay. All right. Thank you. I just was wanted to clarify that. In terms of The loan pipeline at your guidance still looks like it suggests still a solid level of loan growth for the Q4.

Speaker 6

I just wonder if you could give any Kind of updates in terms of kind of where the pipeline strength is coming from, areas that you'd expect LungRent to kind of continue through the Q4?

Speaker 2

Sure, Gary. I think we're still seeing some strength, surprisingly, in the residential mortgage market. That pipeline is holding up pretty well And about 90% of that organic pipeline is about purchases actually. So, that kind of makes sense given today's market. So, the activity there is still fairly strong across the states that we're in.

Speaker 2

Commercial real estate is that's definitely slowing down, but we're still seeing Continued activity both from mostly from our current client base, some new relationships that we're vetting very carefully. Then on the C and I side, we're looking for kind of really supporting our clients and looking at their credit metrics And make sure they're prepared going forward into 2024 and not a lot of new activity coming out of that or new business coming in, but to the extent that we find Some good prospects. We're definitely continuing on with that path.

Speaker 6

Thanks. I appreciate that. And just one last question. I think in the prepared remarks, There was a note of some larger commercial loans that were originated in the 2nd quarter paid off during the Q3. Were those anticipated payoffs?

Speaker 6

Remi, if you had talked about it previously and I don't recall.

Speaker 2

It were commercial lines of credits that were drawn down during And we got some pay downs, not payoffs, but pay downs during the Q3.

Speaker 3

Yes. And Barnabas borrowers Borrowed again here in October.

Speaker 6

Okay. Thanks very much.

Speaker 7

Thank you.

Operator

Thank you. And our next question comes from Brandon King at Chorus Securities. Please go ahead.

Speaker 2

Hey, good evening.

Speaker 3

Hi, Randy.

Speaker 7

So just wanted to get how you're thinking about deposit growth Near term in the Q4. And also could you give some context around the growth you saw in DDA and how you expect DDA trends, so nice

Speaker 3

We were pleasantly surprised at the amount of deposit growth In the Q3, there may be I mean, there's a small amount that was Temporary, we had a borrower customer that deposited was going The money and pending a real estate purchase and Deposit, it's a money market that will go out in October, late October. But I think the DDH, I mean, it's there's nothing special there. It's really a collective effort,

Speaker 2

I think, Of our kind of network, retail network and they know that bringing in CDs and retaining them, that's part The job, but really the key is driving the DDA deposits and we're getting hit enough as it is on the cost of funds on the CDs, even the money markets, but The DDA growth is really where we need to concentrate into in order to offset some of that cost increase just on our funds.

Speaker 7

Got it. And for that outflow, how much of that are you expecting to outflow in the 4th quarter?

Speaker 3

That one, it was 65,000,000

Speaker 2

Okay. Can you say that was the money market?

Speaker 3

Yes. Okay. It was the money market, yes. It's a long time deposit, yes.

Speaker 2

Okay.

Speaker 7

And then Going back to the question on loan yields, how are you expecting that to trend near term? Are you Kind of a similar sort of increase in the 4th quarter. What are your expectations?

Speaker 3

We think so. I mean, one thing that we see is in residential mortgage. Yes, that's very large. It's our residential mortgage. It's almost 6,000,000,000 And it's been for each of the 3 quarters in 2023 that pool of loans Has gone up 20 basis points every quarter.

Speaker 3

So in the 3rd quarter, residential mortgage was 4.96%. We're banking a couple of 100,000,000 loans every quarter, $2.50 or so in the almost 7% range, so that pulls it up. And we continue to see prepayments from our 3.1 and 5.1 harms. They tend to pay off when they get When they finished the initial fixed rate period. And then, Jan, I mean, on CRE, we're trying to get in the 7s.

Speaker 2

Right. CRE, we're pricing them at about $2.50 plus if we can get them over the 5 year with the 3 year. So that's kind of the rate range that we're looking at. We're still seeing some activity, some purchases, Some refinanced on floating rate, but so we're seeing some steady.

Speaker 7

Got it. And then just kind of some of you expect kind of a similar increase in the Q4. Is that did I hear that correctly?

Speaker 2

Probably pretty close to what we had in the Q3, yes.

Speaker 7

Okay, great. Okay. I'll hop back in the queue.

Speaker 2

Thanks for taking my questions.

Speaker 3

Thank you.

Operator

Thank you. And our next question today comes from Andrew Terrell with Stephens.

Speaker 8

Just maybe just square out the discussion on the loan yields, up 20 basis points this quarter, but that did include The impact from the interest recovery or prepayment, that was 2 basis points to the NIM last quarter, 6 basis This quarter, I guess, are you assuming that the prepay or interest recovery continues at 6 basis points to the margin whenever you talk about loan yields going up A similar amount in 4Q or should that normalize lower going forward?

Speaker 3

Yes, it should. We don't See any big non accruals paying off. So you just subtract Maybe $1,500,000 from the yes, for the one time non accrual gains.

Speaker 8

Understood. Okay. I appreciate it. And then on credit quality, I just want to ask around the construction non accruals went up from 0 to I think right around $17,000,000 or so. Can you just talk about the underlying credit or credits that drove that increase This quarter and then similar question for the OREO, addition this quarter, it looks like about $10,000,000 addition to the OREO asset.

Speaker 2

Sure. On the construction portfolio side, I can talk about that a little bit. One of them was a Southern California, inland empire hospitality. It was an existing asset with a re flag reposition with some significant renovation to the property. We're at plus 90% to completion.

Speaker 2

There's some as a result of some significant delays, There's a partner dispute between the partnership. We're pretty comfortable with the asset. It's got a pretty low LTV. It's well located. It's got a good operating history.

Speaker 2

Unfortunately, that partnership dispute has led us to where we are.

Speaker 3

Yes, because we That loan became 90 days past maturity.

Speaker 2

The other is a NorCal office building. We've got a buyer that's been identified and we've got some reserves that's Set against it and that one was also sort of a reposition play there as well.

Speaker 3

And the OREO, It's a single family house in Pacific Palisades. It came out of nonrecall.

Speaker 8

Okay. Understood. I appreciate all the color there. And then if I could sneak one more in, the The wealth management fee income this quarter was really strong. Can you just talk about what drove the lift this quarter?

Speaker 8

And then is that low $5,000,000 a quarter number a good run rate to think about the wealth management fees moving forward?

Speaker 2

There's still I'll take a stab at it. There's still kind of On budget for this year, I think the first half of the year, Andrew, they were kind of behind budget. So effectively, it was kind of the 3rd quarter catch up some of their business and volume and their backlog of the pipeline. And so I think that's really where we saw that pickup.

Speaker 3

Yes. I think seed volume, there's a lot of deals that close in the 3rd Q4.

Speaker 8

Okay. So maybe a fair way to think about it is more on an annual basis around like an $18,000,000 number?

Speaker 3

Yes.

Speaker 8

Okay. Well, thank you for taking the questions. I appreciate it.

Speaker 3

Thanks.

Operator

Today's next question comes from Chris McGratty at KBW. Please go ahead.

Speaker 5

Hi, this is Nick Butofocus on for Chris.

Speaker 3

Hi, Vic.

Speaker 5

Maybe just on a higher level, just given where capital levels are at and Your stock price, any appetite at all for a buyback in the near term or the next 12 months or so? Absolutely.

Speaker 3

We talked about it briefly in our Q2 conference call. The approval process takes a little bit longer than compared to the past. But In the next few months, we'll get going on it. And once it's approved by the Fed, We'll put out a press release, but it's the way I look at it, it's The capital builds up over there, so we can catch up with buybacks when Thanks. Most certainly.

Speaker 5

Okay. And then maybe just on the tax rate as well, If you look out longer term into 2024, do you think the 12.5% to 13% tax rate next year is a good run rate as well.

Speaker 3

It's probably a little low. We had 2 solar tax credit funds that overlap this year. And then next year, we'll have some runoff from the second fund that we did And I won't go into a new one, but it should go up a little bit. We'll give guidance when we In January for 2024.

Speaker 5

Okay.

Speaker 3

And if you're modeling to the extent that the tax rate is higher, these The solar amortization is lower, almost dollar for dollar.

Speaker 5

Okay. Thank you for taking my questions.

Operator

Thank you. And our next question is a follow-up from Matthew Clark Piper Sandler, please go ahead.

Speaker 4

Hey, thank you. Can you remind us what your SNC exposure is to Shared National Credit?

Speaker 3

It's less than 5% of our total loans, Matthew.

Speaker 4

Okay, And then, I guess an update on office CRE and the related reserve and the amount that might be criticized. I'm assuming the reserve is consistent with the commercial real estate reserve, but not sure if you guys tweak anything this quarter, but again the reserve And the amount criticized?

Speaker 3

Well, our office reserve is we're reserving it at about 85 basis points. What was the other part of your question? We do not have a couple of the amount that's criticized. I don't have that handy. I can tell you in non accruals, we have I think about $10,000,000 in CRD U.

Speaker 3

S. That's office. Okay. Okay. Thank you.

Speaker 3

Thank you.

Operator

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

Speaker 2

I'd like to thank everyone for joining us on and we look forward to speaking with you at our next quarterly earnings release call.

Operator

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

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