Cathay General Bancorp Q3 2024 Earnings Call Transcript

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October 21, 2024

There are 8 speakers on the call.

Operator

afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's Third Quarter of 2024 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.

Speaker 1

Call.

Operator

Today's call is being recorded and will be available for replay at www dotcathaygeneralbancorp.com. Now, I would like to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp.

Speaker 2

Thank you, Rocco, and good afternoon. Here to discuss the financial results today are Mr. Chen Vu, 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 2

These risks and uncertainties are further described in the company's annual report on Form 10 ks for the year ended December 31, 2023, 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's 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 Q3 2024 results. To obtain a copy of our earnings release as well as our earnings presentation, please visit our website at www.cathaygeneralbancorp.com.

Speaker 2

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.

Speaker 3

Thank you, Georgia, and good afternoon. Welcome to our 2024 Q3 earnings conference call. This afternoon, we reported net income of $67,500,000 for Q3 2024, a 1% increase as compared to $66,800,000 in Q2. Diluted earnings per share increased 2.2 percent to $0.94 per share for the Q3 as compared to $0.92 per share in Q2. During the Q3 of 2024, we repurchased 832,400 and 60 shares of our common stock at an average cost of $42 per share with $35,000,000 under our May 2024, 125,000,000 stock buyback program.

Speaker 3

We anticipate continuing to repurchase around $35,000,000 in stock per quarter in Q4 and Q1 2025 depending on the market conditions. In Q3 2024, total gross loans increased $16,000,000 or 0.3 percent annualized primarily driven by increases of $89,000,000 or 4% annualized in CRE loans and $16,000,000 or 2% annualized in C and I loans, offset by decreases of $40,000,000 or 3% annualized in residential mortgages and HELOC and $50,000,000 or 47 percent annualized in construction loans. We expect loan growth for 2024 to be between -1% and 0% based on the loan trends so far in 2024. Slide 6 shows the percentage of loans in each major loan portfolio that are either fixed rate or hybrid loans in their fixed rate period. Our loan portfolio consists of 63% fixed rate and hybrid loans excluding fixed to flow interest rate swaps on 4.5 percent of total loans.

Speaker 3

Fixed rate loans comprised 3% of total loans and hybrid and fixed rate period comprised 33% of total loans. We expect these fixed rate loans to support our loan yields as market rates are expected to decline. We continue to monitor our commercial real estate loans. Turning to Slide 8 of our earnings presentation. As of September 30, 2024, the average loan to value of our CRE loans was 49%.

Speaker 3

As of September 30, 2024, our retail property loan portfolio as shown on Slide 9 comprised of 24% of our total CRE loan portfolio or 12% of our total loan portfolio. 90% of the $2,400,000,000 in retail property loans secured by retail store, building, neighborhood mixed use or strip centers, only 9% secured by shopping centers. On Slide 10, office property loans represent 15% of total CRE loan portfolio or 8% of our total loan portfolio. Only 35 percent of the $1,500,000,000 in office property loans are collateralized by pure office buildings, only 3% are in central business districts. 38% 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.

Speaker 3

For Q3 2024, we reported net charge offs of $4,200,000 as compared to $8,000,000 in Q2. Our non accrual loans were 0.84 percent of total loans as of September 30, 2024, which increased $55,500,000 to $162,800,000 as compared to Q2. The increase in non accrual loans during Q3 2024 came primarily from a $38,000,000 loan relationship that was placed on non accrual due to interest delinquency of more than 90 days on $19,000,000 of those loans. Of this loan relationship, dollars 11,200,000 is a real estate loan where the borrower is looking for another lender. The borrower is also seeking new financing to repay commercial loans in this relationship.

Speaker 3

We expect the loan delinquency to be resolved in the next few months. The other large new non accrual loan is a $12,700,000 real estate loan in Hong Kong secured by 4 rental properties with no projected loss. During the Q3, we also sold our largest non accrual loan, a $23,000,000 construction loan and recover $1,900,000 of back interest. Turning to Slide 12. As of September 30, 2024, classified loans increased to $382,000,000 from $324,000,000 in Q2, mainly due to the placement of the $38,000,000 loan relationship discussed above to non accrual.

Speaker 3

And our special mention loans increased to $203,000,000 from $202,000,000 in Q2. We recorded provision for credit loss of $14,500,000 in Q3 2024 as compared to a $6,600,000 provision for credit losses for Q2. This increased the reserve to loan ratio from 0.79 percent for Q2 0.85% for Q3. However, excluding our residential mortgage portfolio, which has historically have very low loss content, the total reserve to loan ratio would be 1.08%. Total deposits increased by $171,000,000 or 3.5 percent annualized during Q3 2024.

Speaker 3

Total core deposits increased $195,000,000 or 7.8 percent annualized due to seasonal factors and marketing activities and total time deposits decreased $24,000,000 or 1 percent annualized during Q3 2024. The average number of months of time deposits is 5 months, which will allow us to lower the cost of time deposits as deposit rates are expected to decline. As of September 30, 2024, total uninsured deposits were $8,400,000,000 net of $800,000,000 in collateralized deposits or 42.1 percent of total deposits. We have an unused borrowing capacity from the Federal Home Loan Bank of $7,200,000,000 and the Federal Reserve Bank of $438,000,000 and unplaced securities of $1,500,000,000 as of September 30, 2024. These sources of available liquidity more than covers 100% of uninsured and uncollateralized deposits as of September 30, 2024.

Speaker 3

I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Chang to discuss quarterly financial results in more detail.

Speaker 4

Thank you, Chang, and good afternoon, everyone. For Q3 2024, net income increased $700,000 or 1 percent to 67,500,000 dollars compared to $66,800,000 for Q2, primarily due to increases of $3,800,000 in net interest income and $7,100,000 in non interest income and $2,500,000 decreases in non interest expense, offset by $7,900,000 increase in provision for credit losses and $4,900,000 increase in income tax expense. Net income for Q3 2024 was reduced by 2,200,000 dollars or $0.03 per share from the true up of loan compounding tax credits recorded for 2023. Q3 2024 net interest margin was 3.04% as compared to 3.01% for Q2. With the Fed starting the rate cutting cycle, our net interest margin appears to have bottomed out and begun to increase.

Speaker 4

We anticipate that the net interest margin for 2024 to range between 3.05% and 3.10%. In Q3, interest recoveries and prepayment penalties added 5 basis points to the net interest income as compared to adding 2 basis points in net interest margin for Q2. Non interest income for Q3 2024 increased $7,200,000 to $20,400,000 when compared to $13,200,000 in Q2 2024. The increase was primarily due to a $5,700,000 increase in mark to market annualized gain on equity securities. Non interest expenses decreased by $2,500,000 or 2.5 percent to $96,900,000 in Q3 2024 when compared to $99,400,000 in Q2.

Speaker 4

This decrease was primarily due to $1,200,000 in lower professional expense and $1,200,000 in lower operating expenses lower other operating expenses. The effective tax rate for Q3 2024 was 13.6% as compared to 7.9% for Q2. We expect an effective tax rate between 10.5% 11.5% for 2024. The solar tax credit investment amortization is expected to be $32,500,000 in 2024 with $1,500,000 in Q4. The true up of low income housing tax credits for 2023 added $2,200,000 to Q3 2024 income tax expense.

Speaker 4

As of September 30, 2024, our Tier 1 leverage capital ratio decreased to 10.2% as compared to 10.83% as of June 30, 2024. Our Tier 1 risk based capital ratio increased to 13.33% from 13.26% as of June 30, 2024 and our total risk based capital ratio increased to 14.88% from 14.74% as of June 30, 2024.

Speaker 3

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

Operator

Thank The first question today comes from Gary Tenner of D. A. Davidson. Please go ahead.

Speaker 5

Thanks. Good afternoon. I wanted to ask first about the increase in the loan loss reserve in the quarter, the $10,000,000 increase. Was that related to the $38,000,000 loan relationship that went on non accrual in the quarter or any other changes that you made to the model or any inputs there?

Speaker 4

Yes, Gary, this is Henk. That $30,000,000 loan, we did not have any specific reserves against it. So we mainly added the extra $10,000,000 out of charge offs just to bolster our reserves. So it's general reserves.

Speaker 5

Okay. Thank you. And then as we look out to 2025, the fixed loans and then the fixed loans that become hybrid loans. Can you give us an idea of the maturity schedule of the fixed loans and then how much of those fixed loans enter a hybrid period next year?

Speaker 4

I don't have a handy. Give me a couple of days and I'll get back to you. But most of those hybrid loans are residential mortgage.

Speaker 5

Okay. All right. Thank you.

Operator

Thank you. And our next question today comes from Andrew Turow with Stephens. Please go ahead.

Speaker 1

Hey, good afternoon.

Speaker 4

Hi, Isaac.

Speaker 1

If I could just start on the CD repricing, it's good to see the time deposit costs leveled out in the Q3. Just curious as you look to the Q4, how much is coming up for maturity? And then relative to your average costs right now, where what's the kind of back book cost of what's rolling off in the Q4? And where are you pricing new CDs at today?

Speaker 3

So I can start with that. In the Q4, maturing CDs is going to be about $3,490,000,000 The average yield on those maturing CDs is about 4.82%. Depending upon where what kind of tenure the clients choose, whether it's 6 months or 12 months, those rates are going to be in the low to mid-4s.

Speaker 4

Yes. And then we have about $600,000,000 that is maturing in January early February from our Chinese New Year promotion. That's the 1 year CDs. And those were at 4.85% and they'll roll down to hopefully to low 4s, maybe $420,000,000 $430,000,000 And then lastly, we have another $800,000,000 or so, 6 month Chinese promotion CDs that matured in July early August. So they we reprice them down by maybe 20 basis points.

Speaker 4

But when they come up for renewal in January February, there'll be another 60 basis points or so in reduction on those.

Speaker 1

Okay, very good. I appreciate it. If I could just ask one more on the expense side, just making sure I have the guidance correctly. It looks like to get to the stated full year expense growth range on the core expense side, it implies kind of a moderation again by a few $1,000,000 off the core run rate in 4Q 2024, a similar move to what we saw this quarter. Does that sound right?

Speaker 1

Should we expect the core expenses to step down by a few $1,000,000 or so in 4Q?

Speaker 4

I think that'll be close to Q3. But we have this our largest project, which is to improve our deposit opening process and that should be finished in Q3. So we'll save something there. But if we're off, it's just a couple of million, Andrew, from our guidance.

Speaker 1

Okay, very good. Thank you for taking the questions. I'll step back.

Operator

Thank you. And our next question comes from Chris McGratty, KBW. Please go ahead.

Speaker 6

Hi, this is Nick Matosakis on for Chris. Maybe just on the storage real quick on the amortization for low income housing. Is $10,000,000 still a good run rate for the Q4?

Speaker 1

Yes.

Speaker 6

Okay. And then, Mitch, just on the buyback, you said $35,000,000 for this quarter and next, but any reason to deviate as you look into 2025 for a re up in the authorization, just given the capital levels?

Speaker 4

Well, our Board will consider that when we're done with this one.

Speaker 7

But we

Speaker 4

will probably do the same size, maybe we'll increase it $125,000,000 increase it to $150,000,000 from the buyback, but we'll have to see how things are.

Speaker 6

Okay. Thank you for taking my questions.

Speaker 4

Yes. Thanks.

Operator

And our next question today comes from Adam Butler with Piper Sandler. Please go ahead.

Speaker 7

Hey, everyone. This is Adam on for Matthew Clark. If I look at your NIM guide, the low end would assume about a 3 basis point increase from this prior quarter and the upside high end would be even more. You guys happen to have the spot rate on loans, deposits and or the NIM at the end of the quarter for the month of September?

Speaker 3

Yes. So for the quarter, our spot rates on the residential mortgage is about 7% compared to portfolio is about 5.6% in the mid-5s. Our spot rate for commercial real estate is in the mid to mid around the mid-6s compared to our portfolio average yield at right at basically the 6% mark. And for the C and I loans, our spot rate is usually at prime and the portfolio yields is about 8 point

Speaker 7

4. And thank you for that. And then, I was also curious about the deposits and the NIMs you have that.

Speaker 4

Yes. So this deposits, it's I mean, we can get you by categories. So now the period and now account rate is 1.2, savings is 1.83, money market is 3.58, CDs is 4.58, so the total interest bearing is at 9.30 is 3.82. And then the NIM for September, it has quite a bit of interest recovery. So the September NIM was 3.17.

Speaker 7

Okay. That's very helpful. And if I could ask just one more question. It looks like the non performers increased primarily due to that $38,100,000 relationship, but it looks like a little bit more migrated in as well. You guys haven't can you guys provide any color on the remaining migration during the quarter?

Speaker 3

Yes. One of them was the one we were talking about in Hong Kong that has secured by 3 retail center collaterals and that was about $12,700,000

Speaker 7

Okay, okay. Thank you. I appreciate you guys taking the questions.

Speaker 3

Of course, thank you.

Speaker 4

Thank you.

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Earnings Conference Call
Cathay General Bancorp Q3 2024
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