Cathay General Bancorp Q1 2024 Earnings Call Transcript

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April 22, 2024

There are 9 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp's First Quarter of 2024 Earnings Conference Call. My name is Gary, and I'll 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

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

Speaker 1

Thank you, Gary, 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 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, 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 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 Journal Bancorp issued an earnings release outlining its Q1 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 1

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 2

You, Georgia, and good afternoon. Welcome to our 2024 Q1 earnings conference call. This afternoon, we reported net income of 71 $400,000 for Q1 2024, a 13.4% decrease as compared to $82,500,000 the previous quarter. Our net income this quarter included a $9,000,000 or $0.09 per diluted share mark to market loss from equity securities and a $2,900,000 or $0.03 per diluted share accrual for an increase in the FDIC special assessment. Diluted earnings per share decreased by 13.5 percent to $0.98 per share for the Q1 of 2024 as compared to $1.13 per share in the previous quarter.

Speaker 2

In Q1 of 2024, total gross loans decreased 119,000,000 or 2.4 percent annualized, primarily driven by increases of $92,000,000 or 3.8 percent annualized in commercial real estate loans, offset by a decrease of $172,000,000 or 20.9 percent annualized in commercial loans and $40,000,000 or 37.7 percent annualized in construction loans. Due to slower than expected loan growth in Q1 2024, we have revised our overall loan growth guidance for 2024 to range between 3% 4%. We've added Slide 6 to show the percentage of loans in which major loan portfolio that are either fixed rate or hybrid loans in their fixed rate period. Our loan portfolio consists of 64% fixed rate and hybrid loans excluding fixed to float interest rate swaps on 4% of total loans. Fixed rate loans comprised 30% of total loans and hybrid loans in fixed rate period comprised 34% of total loans.

Speaker 2

We continue to monitor our commercial real estate loans. Turning to Slide 8 of our earnings deck. As of 31, 2024, the average loan to value of our CRE loans was 50%. As of March 31, 2024, our retail property loan portfolio, as shown on Slide 9, comprised of 23% of our total commercial real estate loan portfolio or 12% of our total loan portfolio. 90% of the $2,300,000,000 in retail property loan is secured by retail store, building, neighborhood, mixed use or strip centers, only 9% is secured by shopping centers.

Speaker 2

On Slide 10, office property loans represent 15% of our total commercial real estate loan portfolio or 8% of our total loan portfolio. Only 34% 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 28% are collateralized by office condos. For Q1 2024, we reported net charge offs of $1,100,000 as compared to $4,100,000 in the previous quarter. Our non accrual loans were 0.5 percent of total loans as of March 31, 2024, which increased by $31,400,000 to $98,100,000 as compared to the previous quarter.

Speaker 2

The The increase in non accrual loans during the Q1 2024 came mainly from a $23,000,000 low loan to value construction loan in New York, which is past due maturity and 2 theater loans totaling $21,000,000 Turning to Slide 12. As of March 31, 2024, classified loans increased to $244,000,000 dollars from $200,000,000 as of December 31, 2023, and our special mention loans decreased to $249,000,000 from $308,000,000 as of December 31, 2023. So for Q1 2024, there was a small decrease in total special mention and classified loans. We recorded a provision for credit loss of $1,900,000 in the Q1 of 2024 as compared to a 1.7 $1,000,000 in provision for credit losses for the previous quarter. Total deposits increased by $520,800,000 or 10.8 percent annualized during the Q1 of 2024.

Speaker 2

Total core deposits increased $210,900,000 dollars or 8.4 percent annualized and total time deposits increased $731,700,000 or 31.3 percent during the Q1 of 2024, mainly due to our Lunar New Year CD campaign. We expect the overall deposit growth to continue in an estimated range between 4% 5%. As of March 31, 2024, total uninsured deposits were $8,100,000,000 net of $700,000,000 in collateralized deposits or 40.7 percent of total deposits. We have an unused borrowing capacity from the Federal Home Loan Bank of $6,900,000,000 and unplaced securities of $1,700,000,000 as of March 31, 2024. These sources of available liquidity more than cover 100% of uninsured and un collateralized deposits as of March 31, 2024.

Speaker 2

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

Speaker 3

Thank you, Chang, and good afternoon, everyone. For Q1 2024, net income decreased by $11,100,000 or 13.4 percent to $71,400,000 compared to $82,500,000 dollars in the previous quarter, primarily due to a $9,000,000 unrealized loss of equity securities in Q1 2024 versus a $9,000,000 unrealized gain on equity securities in Q4 2023, an additional $2,900,000 accrual in Q1 2024 for the FDIC special assessment. Q1 2024 net interest margin was 3.05% as compared to 3.27 percent for the previous quarter. Interest recoveries and prepayment penalties did not change the net interest margin for Q1 2024 versus an increase of 1 basis point for the previous quarter. We estimate our net interest margin for 2024 to be between 3.05 percent to 3.15 percent based on the expectation for 2 rate cuts in 2024.

Speaker 3

With the 1st rate cut in September and the 2nd rate cut in December. Our prior net interest margin guidance was based on 3 rate cuts with the first rate cut being in June. Given that 64% of our loans fixed rate or hybrid loans in their fixed rate period, the lower number of rate cuts negatively impacted our net interest margin guidance. Non interest income during the Q1 of 2024 decreased by $16,500,000 to 6.6 $1,000,000 when compared to $23,100,000 the previous quarter. The decrease was primarily due to $18,000,000 increase in unrealized loss on equity securities between the two quarters.

Speaker 3

Non interest expense decreased by $17,300,000 or 15.6 percent to $93,200,000 in Q1 2024 when compared to $110,500,000 dollars the prior quarter. This decrease was primarily due to a net decrease of $8,300,000 from the FDIC special assessment, dollars 11,700,000 in lower amortization of solo tax credit investments and $1,300,000 lower in professional expense, offset by an increase of $3,500,000 in salary and benefits, which included a $2,000,000 true up for 2023 bonuses and a $1,400,000 seasonally higher payroll expense and acceleration of $1,000,000 of contributions into Q1 2024 as compared to the previous quarter. The effective tax rate for Q1 2024 was 10.76% as compared to 11.28% the previous quarter, with the closing of the new solar tax credit fund investment in Q1 2024, we expect an effective tax rate of between 12% 13% for 2024. We now expect total 2024 solar tax credit investment amortizations of $32,500,000 with $8,000,000 in Q2 of 2024 $9,000,000 each in Q3 and Q4. As of March 31, 2024, our Tier 1 leverage capital ratio increased to 10.71% as compared to 10.55% as of December 31, 2023.

Speaker 3

Our Tier 1 risk based capital ratio increased to 13.08% from 12.83% as of December 31, 2023 and our total risk based capital ratio increased to 14.55 percent from 14.3% as of December 31,

Speaker 2

2023. Thank you, Heng. We will now proceed to the question and answer portion of the call.

Operator

The first question today is from Matthew Clark with Piper Sandler. Please go ahead.

Speaker 4

Hey, good afternoon. Thanks for the questions. Just the first one around the margin. Could you give us the average margin in the month of March and then the spot rate on interest bearing or total deposits at the end of March?

Speaker 3

Yes. The NIM for the month of March was 2.99%. And then the spot rate for interest bearing deposits at the end of March was 3.8%.

Speaker 4

Okay. Got it. Okay. And then just the low income housing tax credit amortization, I think it was $8,200,000 in the Q1. Is that still expected to be $10,500,000 per quarter for the next 3?

Speaker 3

It might be closer to $10,000,000 but it jumps around. Okay.

Speaker 4

And then just the reserve on your office portfolio, is it consistent with the overall CRE reserve or has it changed at all?

Speaker 3

Matthew, since we didn't have any new office non accruals, it's still hold on, let me it's still the same as a general reserve. Okay. Okay. Thank you. Yes.

Operator

The next question is from Brandon King with Truist. Please go ahead.

Speaker 5

Hey, good afternoon. Thanks for taking my questions. So on the NIM guidance, what do you think takes you from the lower end of the range to the higher end of the range? Could you just give us kind of the puts and takes as far as how you're thinking about things?

Speaker 3

Yes. Brandon, one, except the higher rates we paid for the 6 months CDs in the Chinese New Year promotion. We think we're getting less deposit pricing pressure. So as the quarter goes on, the CD pricing is going to be based on the 6 pound for 1 year treasury. So that's going to it's going to decrease compared to where it is now.

Speaker 3

So we'll get less deposit pressure. And then meanwhile, our new loans are at market rates, for example, residential mortgage, new loans are low 7s. So it's going to all our new loan production is going to pull up the average rate on our loans. And then we have rough we have some loans that are repricing during the CRE loans that are re pricing. So that will also improve the rate on the loan.

Speaker 3

So we see the NIM a little bit lower in Q2, maybe flat in Q2 and Q3 and then Q4 will be much better.

Speaker 5

Got it. And that's because of the rate cuts, right? The impact of the rate cuts, is it? Yes. Okay.

Speaker 3

Yes.

Speaker 5

Okay. That makes sense. And then could you update us on the CD repricing or the CD maturities for the rest of the year?

Speaker 3

Yes, let me we have it here. So in the Q2, we have $2,100,000,000 in CDs. They're repricing while the yield of the maturing CDs are 4.57. Dollars Q3 $3,600,000,000 and the yield on those CDs is 4.82. So that reflects our Chinese studio promotion for the 6 month term.

Speaker 3

Q4, dollars 2,000,000,000 CDs are maturing. The yield is 4.67 and then in Q1 2025, we have $1,900,000,000 maturing and the yield there is at 4.18. And there it's some of the lower yield reflects the fact that our Chinese New Year promotion, our 1 year rate was at 4.88%. So that was lower than 6 month rate.

Speaker 5

Got it. Got it. Very helpful. I will hop back in the queue.

Speaker 3

Thank you. Thank you.

Operator

The next question is from Gary Tenner with D. A. Davidson. Please go ahead.

Speaker 6

Thanks. Good afternoon. A little bit of a follow-up on the deposit and NIM question. I mean, just in a year where you don't have a need for massive deposit growth, given what the loan growth outlook looks like, how aggressive can you be on deposit pricing maybe outside the CD portfolio? Is that just going to roll lower anyway?

Speaker 3

Well, Gary, I'm the final stop for rate concessions and at CAFE and we're seeing much less. So when we So we're facing less pressure to raise new deposits because we expect our loan growth to be slower. And so we're so the mindset, particularly later on in the year is to be a little bit more aggressive pushing down the rates. And again, the fact that the treasuries at some point, the 1 year treasury is going to start declining, that will help us.

Speaker 6

Right. I guess what I was trying to ask, perhaps I didn't ask you well enough is outside of the CD book, do you have the ability, do you think to be to push down or nibble on kind of deposit pricing to push it a little bit or even ahead of the Fed cut? Or do you not think you have the ability to do that?

Speaker 3

A good proportion of our money market book is effectively tied to Fed funds. So as soon as there's a Fed rate cut on those depositors, we're going to cut the rate by 25 basis points. And then we plan on for other money market depositors, maybe we'll reduce those by 10 or 15 basis points. So and then we have some now accounts that are also tied to Fed funds.

Speaker 6

Got it. Thank you.

Speaker 3

It's just not the CDs that won't be able to reprice, right? Yes. Thank you.

Operator

The next question is from Andrew Terrell with Stephens. Please go ahead.

Speaker 7

Hey, good afternoon. Just a quick follow-up on the margin. Just on the discussion around the cadence throughout the year, it sounded like flattish in 2Q and 3Q and then lifts into 4Q, kind of commensurate with your Fed cut assumptions. I'm just curious is the flattish commentary, is that off of the spot margin you referenced or the March margin of 2.99 percent or do you think that the 2Q margin is flat to the 3.05 percent reported in the Q1?

Speaker 3

No, it will be down a couple of basis points. There's 2 30 day months, so that helps us because we have so many residential mortgages.

Speaker 7

Okay. So maybe down just a couple of basis points in the Q2 and then flattish in 3Q and then starts to lift?

Speaker 3

Yes.

Speaker 7

Okay. And then if I was looking at the core operating expense lift in the Q1 and it was maybe a little more than what I was expecting. And if I'm doing the math right, kind of tracking a few $1,000,000 ahead of where your full year expense growth guidance implies. So I guess my question is just how much of the kind of 1Q lift in core operating expenses was more seasonality driven? And then just curious as we move throughout the year, where you're going to see quarterly expense reductions in the core OpEx to land in that 3% to 3.5% growth guidance?

Speaker 3

Yes. In my comments, I tried to cover the FICA here at the bonus catch up, the fact that we accelerated our some charitable contributions from April to March. We also because our loan growth was negative, we also had less loan origination cost capitalized. So based on kind of our looking at the flow of expenses, we think we'll be close to that 3.5%

Speaker 4

upper

Speaker 7

range. Okay. Understood. I appreciate it.

Speaker 3

Yes. Thank you.

Operator

The next question is from Chris McGratty with KBW. Please go ahead.

Speaker 7

Great. Thanks. Last quarter

Speaker 8

you talked about a key to your guide for the margin was I think stability in non interest bearing, which fell again this quarter. What's have you revised that assumption for the back half of the year in your guide?

Speaker 3

We spent a lot of time looking at the DDA by branch And we think some of it is seasonal because of the Chinese New Year, the payment of taxes. So it's been stable in March and so far in April in terms of the DTA balance. And then Chang, I think hence it builds up later in the year. As the customers kind of business flow and

Speaker 2

the volume continues, some of the DDA balance should pick back up.

Speaker 8

Okay. Okay, great. And then the follow-up, I guess, is 2 part. 1, it would seem like net interest income dollars would have a little bit more downward pressure in Q2, stability Q3 and then growth in Q4. And then I just want to make sure I heard Matt's question on the amortization.

Speaker 8

So Q2 should be somewhere like $18,000,000 combined solar and low income, right, 8 +10?

Speaker 3

Yes.

Speaker 8

Okay. And then you agree with my logic on the net interest income cadence on a quarterly basis?

Speaker 3

Yes. It will be down a little bit more in Q2. We benefit from 2 30 day months in Q2. And then in Q3, we have half a month of the Fed cut that will happen in September. And hopefully some repricing from our Chinese New Year deposits.

Operator

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

Speaker 2

I would like to thank everyone for joining us on our call, 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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Earnings Conference Call
Cathay General Bancorp Q1 2024
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