Cathay General Bancorp Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 22, 2024

There are 9 speakers on the call.

Operator

afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp Second Quarter of 2024 Earnings Conference Call. My name is Cole, and I'll be your coordinator for today. At this time, all participants are in a 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.caseaygeneral bancorp.com.

Operator

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

Speaker 1

Thank you, Cole, 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 results and uncertainties are further described in the company's annual report on 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 obligations 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 Q2 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

Thank you, Georgia, and good afternoon. Welcome to our 2024 Q2 earnings conference call. This afternoon, we reported net income of $66,800,000 for Q2 2024, a 6.4% decrease as compared to $71,400,000 in Q1. Diluted earnings per share decreased by 6.1 percent to $0.92 per share for the Q2 of 2024 as compared to $0.98 per share in the prior quarter. During Q2, 2024, we repurchased 689,470 shares of our common stock at an average cost of $36.37 or $25,100,000 under our May 2024, 125,000,000 stock buyback program.

Speaker 2

Under the May 2024 stock repurchase program, we anticipate repurchasing around $35,000,000 in stock per quarter in Q3 and Q4 depending on market conditions. In Q2, twenty twenty four, total gross loans decreased $72,000,000 or 1.5 percent annualized, primarily driven by decreases of $42,000,000 or 5.1 percent annualized in commercial loans $69,000,000 or 4.6 percent annualized in residential mortgages and HELOC, and $25,000,000 or 24.4 percent annualized in construction loans, offset by an increase of $64,000,000 or 2.6 percent annualized in commercial real estate loans. Due to slower than expected loan growth in the first half of twenty twenty four, we have revised our overall loan growth guidance for 2024 to range between 0% 2%. 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 64% fixed rate and hybrid loans excluding fixed to flow interest rate swaps on 4% of total loans.

Speaker 2

Fixed rate loans comprised 30% of total loans and hybrid in fixed rate period comprised 34% of total loans. We continue to monitor our commercial real estate loans. Turning to Slide 8 of our earnings presentation. As of June 30, 2024, the average loan to value of our CRE loans was 50%. As of June 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.

Speaker 2

89% of the $2,400,000,000 in retail property loan is secured by retail building, a neighborhood, mixed use or strip centers and only 10% is secured by shopping centers. On Slide 10, office property loans represent 15% of our total commercial real estate loan portfolio or 8% of our total loan portfolio. Only 35% of the $1,500,000,000 office property loans are collateralized by pure office buildings, only 3% are in central business districts. 37% 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 Q2, 2024, we reported net charge offs of $8,000,000 of which $5,100,000 was reserved as of March 31, 2024 as compared to $1,100,000 in Q1.

Speaker 2

Our non accrual loans were 0.55 percent of total loans as of June 30, 2024, which increased $9,200,000 to $107,300,000 as compared to Q1. The increase in non accrual loans during Q2 2024 came mainly from 1 office CRE loan and 1 retail condo CRE loan totaling $8,300,000 with no projected losses based on recent appraisals. Turning to Slide 12. As of June 30, 2024, classified loans increased to $224,000,000 from $244,000,000 in Q1 and our special mention loans decreased to $201,000,000 from $249,000,000 in Q1. We recorded a provision for credit loss of $6,600,000 in Q2 2024 as compared to a $1,900,000 in provisions for credit losses for Q1.

Speaker 2

Total deposits decreased by 73,000,000 or 1.5 percent annualized during Q2 2024 with NOW deposits decreased $186,000,000 in Q2 due to the runoff of broker NOW deposits. Total core deposits decreased $274,000,000 or 11% annualized and total time deposits increased $201,000,000 or 8.6 percent annualized during Q2 2024 due to a shift from core deposits to time deposit with higher rates. We expect the overall deposit growth to continue at an estimated range between 3% 4%. As of June 30, 2024, total uninsured deposits were $8,200,000,000 net of $800,000,000 in collateralized deposits or 41.5 percent of total deposits. We have an unused borrowing capacity from the Federal Home Loan Bank of $7,100,000,000 and the Federal Reserve Bank of $174,000,000 and unplaced securities of $1,700,000,000 as of June 30, 2024.

Speaker 2

These sources of available liquidity more than cover 100 percent of uninsured and un collateral deposits as of June 30, 2024. 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 Q2, twenty twenty four, net income decreased by $4,600,000 or 6.4 percent to $66,800,000 compared to $71,400,000 for Q1, primarily due to a $4,700,000 increase in the provision for credit losses for Q2 2024 and partially due to 4,100,000 dollars or $0.04 per diluted share from accelerated amortization of solar tax credit investments, which were previously forecasted to be amortized in the second half of twenty twenty four. Q2 twenty twenty four net interest margin was 3.01% as compared to 3.05% for Q1. We are seeing signs. Our net interest margin has begun to bottom out since the NIM for the month of June was 3.06%, approximately $7,200,000,000 in high cost CDs which will mature and reprice in the second half of twenty twenty four.

Speaker 3

And this will help lower the cost of deposits as they reprice. Include 2 interest recoveries and prepayment penalties added 2 basis points to the interest income I'm sorry, to the net interest margin as compared to no basis points in net interest margin for Q1. Non interest income for Q2 2024 increased $6,600,000 to $13,200,000 when compared to $6,600,000 in Q1 2024. The increase was primarily due to a $7,600,000 decrease in mark to market unrealized loss on equity securities, offset by $1,100,000 decrease in realized gain on sale of investment securities in Q1 2024. Non interest expense increased by $6,100,000 or 6.5 percent to 99 point $3,000,000 in Q2 2024 when compared to $93,200,000 in Q1.

Speaker 3

This increase was primarily due to $9,000,000 in higher amortization of low income housing and solar tax credit investments, $1,200,000 higher in professional expense and $1,200,000 higher in OREO expense, offset by a decrease of $3,000,000 in salaries and benefits due to a $2,000,000 true up for the 2023 bonuses in Q1 and $1,100,000 seasonally higher payroll expense in Q1. And lastly, a decrease of $2,300,000 in FDIC's assessment expense in Q1 2024. To build up the infrastructure of enterprise risk management and other control functions, we have increased the guidance for core non interest expense, excluding tax credit and core deposit intangible amortization and OREO expense to between 4% to 5% from our previous guidance of 3% to 3.5%. Effective tax rate for Q2 2024 was 7.9% as compared to 10.8% for Q1. We expect effective tax rate between 10.5% and 11.5 for the second half of twenty twenty four.

Speaker 3

We now expect a total 2024 solo tax credit investment amortization of 32,500,000 with $10,000,000 amortization in Q3 $2,000,000 amortization in Q4. As of June 30, 2024, our Tier 1 leverage capital ratio increased to 10.83% as compared to 10.71% as of March 31, 2024. Our Tier 1 risk based capital ratio increased to 13.6% from 13.8% as of March 31, 2024 and our total risk based capital ratio increased to 14.74% from 14.55% as of March 31, 2024.

Speaker 2

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

Operator

Thank you. And our first question today will come from Matthew Clark with Piper Sandler. Please go ahead.

Speaker 4

Hey, good afternoon. Thanks for the questions. Maybe the first one just on your spot rate on deposits at the end of June, you had that number, either interest bearing or total?

Speaker 3

Yes, hold on. We have it here. So the spot rate of deposits, total interest bearing, 3.92.

Speaker 4

Okay. Got it. Thank you. And then just on your updated expense guide on a core basis, it implies that core run rate of $74,200,000 this quarter drops slightly below $72,000,000 in the second half to get to the midpoint of the guide. I guess just trying to get a sense for what's going to drive that reduction in the core expense rate?

Speaker 3

Well, we continue to have some one time expenses in Q2, higher consulting, higher market, higher charitable contributions and things like that. We could be off $1,000,000 a quarter here or there, but we think expenses will moderate in the second half.

Speaker 4

Okay. And can you quantify, I guess, how much of that was unusual, I guess, around consulting, marketing, and charitable?

Speaker 3

Yes. I'd say it's about $2,500,000

Speaker 5

Okay. Got it. Okay. Thank you.

Speaker 4

And then just a quick one, low income housing amortization expected in 3Q and 4Q?

Speaker 3

It's about $10,000,000 a quarter each for low income housing.

Speaker 2

Okay. Thank you.

Speaker 3

Thank you.

Operator

And our next question will come from Andrew Terrell with Stephens. Please go ahead.

Speaker 6

Hey, good afternoon. I wanted to ask on the I appreciate the $7,200,000,000 I think you said of CDs that mature in the back half of the year. I was curious, are those more heavily weighted to 1 quarter or is it fairly spread out between 3Q and 4Q? And then just overall, can you talk about kind of your expectations for spread pickup there? What kind of deposit cost reduction you're kind of aiming for?

Speaker 3

Yes. It's Q3 is slightly higher than Q4, so it's 3.7 $1,000,000,000 in Q3 and Q4 is about 3,500,000,000 dollars Our 6 month CDs from the Chinese promotion started to renew in July. So the good news is we haven't seen any net runoff so far. And I think in general, that rate was 5.2%. We've tiered the rates this time and I think we're targeting around 5.

Speaker 3

So that would be 20 basis points.

Speaker 6

Okay, perfect. I appreciate it. And I would assume that any of the kind of re pricing benefit there is factored into your margin guidance already?

Speaker 3

Yes, yes, of course, yes.

Speaker 6

Okay. I was looking through the presentation on the classified loans, look like they stepped up a decent amount this quarter, I think from $244,000,000 last quarter up to $324,000,000 this quarter. I was hoping you could maybe just talk about the step up in classifieds a little more this quarter, kind of any common threads you're seeing in terms of what's driving the increase or just any color on the classified increase?

Speaker 2

They're mostly downgrades from the EM class and they're all they're mostly all real estate secure. So we don't think there's any significant risk there.

Speaker 6

Okay, got it. And then, Jane, maybe just quickly, any maybe refresh us on your interest for M and A currently. Just like to get kind of a strategy update on that point.

Speaker 2

Yes, we certainly have talked to you guys all about this and until there's a viable candidate out there or a company out there that makes sense for us, that's within our niche space, that we don't have anything on the boards right now.

Speaker 5

Okay. Thanks for the questions. Of course.

Operator

Our next question will come from Gary Tenner with D. A. Davidson. Please go ahead.

Speaker 7

Thanks. Good afternoon. I just wanted to ask about the updated loan growth guidance. Annualized loans through the first half of the year were down 4%, so pretty solid second half just to get back to even if not above it. So given the change in tone in terms of the full year loan growth, could you talk about kind of how the pipelines look in various loan segments and where you expect kind of the driver of that improvement to come from?

Speaker 2

Gary, most of it probably will come from some of the commercial real estate growth as you saw in the first in the second quarter results. Our residential mortgage application is down 40% -ish from prior year. C and I business is also down as well given the higher rates and because of the higher rates, our clients are using their liquidity to pay down any of the outstanding balances as soon as they can. We're trying to increase our both our loan side and the deposit side and trying to pick up more C and I business. But for the most part, you'll probably see any of the increases, the positive side on the CRE side.

Speaker 7

I appreciate that. And then historically on C and I, you've had kind of some positive 4th quarter seasonality. Do you think that, that is a positive factor this year as well? Or given your comments about customers wanting to pay down those lines, do you think that that's a little bit more tempered this year?

Speaker 2

Probably more tempered this year, Gary. I think given where the rates are, even if there is a potential rate cut in September that I think the balances will still kind of stay on the lower end. Utilization, I think, has been relatively flat around the 51%, 50 percentile. So we're not expecting looking for a 4th quarter positive impact during that period. Thank you.

Speaker 3

Thanks.

Operator

And our next question will come from Chris McGratty with KBW. Please go ahead.

Speaker 8

Hey, how's it going? This is Andrew Leichner on for Chris McGratty. I know you mentioned you're starting to see the NIM stabilize, being to bottom out here. But how should we be thinking about the NII trajectory from here? Thank you.

Speaker 2

Well,

Speaker 3

we're going to keep the earning asset number flat to up slightly. So that should go up, particularly with the now expected September rate cut and then second one in December.

Speaker 8

Okay. Thank you. And then just one more if I can. Your CRE reserve is at 79 basis points and your constant your CRE concentration is 2 88% of total RBC. What's your comfortability there?

Speaker 8

And any thoughts on greater reserve build from here? Thank you.

Speaker 3

Well, I think we're we look at the low LTVs, 50% and the fact that almost all of our CRE loans have full personal guarantees. So we just usually what happens with the non accrual loans is that they stay in non accrual for 2 or 3 quarters depending on whether in California or New York. And if the borrower still can't pay, they become OREO. So and then we normally are able to sell OREO close to our book. So we don't think there's a hit in CAFE's history.

Speaker 3

With the economy being so solid, we think we'll be okay. But to have solid quarterly loan loss provisions to make sure that we remain adequately reserved.

Speaker 8

Okay, great. Thank you for the color. I'll step back.

Speaker 3

Thank you. And thank

Operator

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

Speaker 2

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.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a good day. Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp Second Quarter of 2024 Earnings Conference Call. My name is Cole, and I'll be your coordinator for today.

Operator

At this time, all participants are in a 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.caseajegeneralbancorp.com. I would now like to turn the call over to Georgia Loh, Investor Relations of Cathay General Bancorp. Please go ahead.

Speaker 1

Thank you, Cole, 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 results 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 obligations 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 Q2 2024 results. To obtain a copy of our earnings release as well as our earnings presentation, please visit our website at www.cafaygeneralbancorp.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

Thank you, Georgia, and good afternoon. Welcome to our 2024 Q2 earnings conference call. This afternoon, we reported net income of $66,800,000 for Q2 2024, a 6.4% decrease as compared to $71,400,000 in Q1. Diluted earnings per share decreased by 6.1 percent to $0.92 per share for the Q2 of 2024 as compared to $0.98 per share in the prior quarter. During Q2, 2024, we repurchased 689,470 shares of our common stock at an average cost of $36.37 or $25,100,000 under our May 2024, 125,000,000 stock buyback program.

Speaker 2

Under the May 2024 stock repurchase program, we anticipate repurchasing around $35,000,000 in stock per quarter in Q3 and Q4 depending on market conditions. In Q2, twenty twenty four, total gross loans decreased $72,000,000 or 1.5 percent annualized, primarily driven by decreases of $42,000,000 or 5.1 percent annualized in commercial loans $69,000,000 or 4.6 percent annualized in residential mortgages and HELOC, and $25,000,000 or 24.4 percent annualized in construction loans, offset by an increase of $64,000,000 or 2.6 percent annualized in commercial real estate loans. Due to slower than expected loan growth in the first half of twenty twenty four, we have revised our overall loan growth guidance for 2024 to range between 0% 2%. 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 64% fixed rate and hybrid loans excluding fixed to float interest rate swaps on 4% of total loans.

Speaker 2

Fixed rate loans comprised 30% of total loans and hybrid and fixed rate period comprised 34% of total loans. We continue to monitor our commercial real estate loans. Turning to Slide 8 of our earnings presentation. As of June 30, 2024, the average loan to value of our CRE loans was 50%. As of June 30, 2024, our retail property as shown on Slide 9 comprised of 24% of our total CRE loan portfolio or 12% of our total loan portfolio.

Speaker 2

89% of the $2,400,000,000 in retail property loan is secured by retail building, a neighborhood, mixed use or strip centers and only 10% is secured by shopping centers. On Slide 10, office property loans represent 15% of our total commercial real estate loan portfolio or 8% of our total loan portfolio. Only 35% of the $1,500,000,000 in office property loans are collateralized by pure office buildings, only 3% are in central business districts. 37% 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 Q2, twenty twenty four, we reported net charge offs of $8,000,000 of which $5,100,000 was reserved as of March 31, twenty 24 as compared to $1,100,000 in Q1.

Speaker 2

Our non accrual loans were 0.55 percent of total loans as of June 30, 2024, which increased $9,200,000 to $107,300,000 as compared to Q1. The increase in non accrual loans during Q2 2024 came mainly from 1 office CRE loan and 1 retail condo CRE loan totaling $8,300,000 with no projected losses based on recent appraisals. Turning to Slide 12. As of June 30, 2024, classified loans increased to $224,000,000 from $244,000,000 in Q1 and our special mention loans decreased to $201,000,000 from $249,000,000 in Q1. We recorded a provision for credit loss of $6,600,000 in Q2 2024 as compared to a $1,900,000 in provisions for credit losses for Q1.

Speaker 2

Total deposits decreased by $73,000,000 or 1.5 percent annualized during Q2 2024 with NOW deposits decreased $186,000,000 in Q2 due to the runoff of broker NOW deposits. Total core deposits decreased $274,000,000 or 11% annualized and total time deposits increased $201,000,000 or 8.6 percent annualized during Q2 2024 due to a shift from core deposits to time deposit with higher rates. We expect the overall deposit growth to continue at an estimated range between 3% 4%. As of June 30, 2024, total uninsured deposits were $8,200,000,000 net of $800,000,000 in collateralized deposits or 41.5 percent of total deposits. We have an unused borrowing capacity from the Federal Home Loan Bank of $7,100,000,000 and the Federal Reserve Bank of $174,000,000 and unplaced securities of $1,700,000,000 as of June 30, 2024.

Speaker 2

These sources of available liquidity more than cover 100% of uninsured and un collateral deposits as of June 30, 2024. 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 Q2, 2024, net income decreased by $4,600,000 or 6.4 percent to 66 $800,000 compared to $71,400,000 for Q1, primarily due to a $4,700,000 increase in the provision for credit losses for Q2 2024 and partially due to $4,100,000 or $0.04 per diluted share from accelerated amortization of solar tax credit investments, which were previously forecasted to be amortized in the second half of twenty twenty four. Q222etinterestmarginwas3.01percentascomparedto3.05 3.05% for Q1. We are seeing signs. Net interest margin has begun to bottom out since the NIM for the month of June was 3.06%, Approximately $7,200,000,000 in high cost CDs will mature and reprice in the second half of twenty twenty four.

Speaker 3

And this will help lower the cost of deposits as they reprice. Include 2 interest recoveries and prepayment penalties added 2 basis points to the interest income I'm sorry, to the net interest margin as compared to no basis points in net interest margin for Q1. Non interest income for Q2 2024 increased $6,600,000 to $13,200,000 when compared to $6,600,000 in Q1 2024. The increase was primarily due to a $7,600,000 decrease in mark to market unrealized loss on equity securities, offset by $1,100,000 decrease in realized gain on sale of investment securities in Q1 2024. Non interest expense increased by 6,100,000 dollars or 6.5 percent to $99,300,000 in Q2 2024 when compared to $93,200,000 in Q1.

Speaker 3

This increase was primarily due to $9,000,000 in higher amortization of low income housing and solar tax credit investments, dollars 1,200,000 higher in professional expense and $1,200,000 higher in OREO expense, offset by a decrease of $3,000,000 in salaries and benefits due to a $2,000,000 true up for the 2023 bonuses in Q1 and $1,100,000 seasonally higher payroll expense in Q1. And lastly, a decrease of $2,300,000 in FDIC's assessment expense in Q1 2024. To build up the infrastructure of Enterprise Risk Management and other control functions, we have increased the guidance for core non interest expense, excluding tax credit and core deposit intangible amortization and OREO expense to between 4% to 5% from our previous guidance of 3% to 3.5%. Effective tax rate for Q2 2024 was 7.9% as compared to 10.8% for Q1. We expect effective tax rate between 10.5% and 11.5 for the second half of twenty twenty four.

Speaker 3

We now expect a total 2024 solo tax credit investment amortization of 32,500,000 with $10,000,000 amortization in Q3 $2,000,000 amortization in Q4. As of June 30, 2024, our Tier 1 leverage capital ratio increased to 10.83% as compared to 10.71% as of March 31, 2024. Our Tier 1 risk based capital ratio increased to 13.6% from 13.8 percent as of March 31, 2024. And our total risk based capital ratio increased 14.74% from 14.55% as of March 31, 2024.

Speaker 2

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

Operator

you. And our first question today will come from Matthew Clark with Piper Sandler. Please go ahead.

Speaker 4

Hey, good afternoon. Thanks for the questions. Maybe the first one just on your spot rate on deposits at the end of June, if you had that number, either interest bearing or total?

Speaker 3

Yes. Hold on. Well, We have it here. So the spot rate of deposits, total interest bearing, 3 point 92.

Speaker 5

Okay. Got it. Thank you.

Speaker 4

And then just on your updated expense guide on a core basis, it implies that core run rate of $74,200,000 this quarter drops slightly below $72,000,000 in the second half to get to the midpoint of the guide. I guess just trying to get a sense of what's going to drive that reduction in the core expense rate?

Speaker 3

Well, we continue to have some one time expenses in Q2, higher consulting, higher marketing, higher charitable contributions and things like that. We could be off $1,000,000 a quarter here or there, but we think expenses will moderate in the second half.

Speaker 4

Okay. And can you quantify, I guess, how much of that was unusual, I guess, around consulting, marketing and charitable?

Speaker 3

Yes. I'd say it's about 2,500,000

Speaker 5

dollars Okay. Got it. Okay. Thank you. And then just

Speaker 2

a quick

Speaker 4

one, low income housing amortization expected in 3Q and 4Q?

Speaker 3

It's about $10,000,000 a quarter each for low income housing.

Speaker 2

Okay. Thank you.

Speaker 3

Thank you.

Operator

And our next question will come from Andrew Terrell with Stephens. Please go ahead.

Speaker 6

Hey, good afternoon. Hi. I wanted to ask on the I appreciate the $7,200,000,000 I think you said of CDs that mature in the back half of the year. I was curious, are those more heavily weighted to 1 quarter or is it fairly spread out between 3Q and 4Q? And then just overall, can you talk about kind of your expectations for spread pickup there?

Speaker 6

What kind of deposit cost reduction you're kind of aiming for?

Speaker 3

Yes. It's Q3 is slightly higher than Q4. So it's 3.7 $1,000,000,000 in Q3 and Q4 is about 3,500,000,000

Speaker 5

dollars

Speaker 3

Our 6 month CDs from the Chinese promotion started to renew in July. So the good news is we haven't seen any net runoff so far. And I think in general, that rate was 5.2%. We've cured the rates this time and I think we're targeting around 5. So that would be 20 basis points.

Speaker 6

Okay, perfect. I appreciate it. And I would assume that any of the repricing benefit there is factored into your margin guidance already?

Speaker 3

Yes, of course. Yes.

Speaker 5

Okay.

Speaker 6

I was looking through the presentation on the classified loans, look like they stepped up a decent amount this quarter. I think from $244,000,000 last quarter up to $324,000,000 this quarter. I was hoping you could maybe just talk about the step up in classifieds a little more this quarter, kind of any common threads you're seeing in terms of what's driving the increase or just any color on the classified increase?

Speaker 2

They're mostly downgrades from the EM class and they're mostly all real estate secure. So we don't think there's any significant risk there.

Speaker 6

Okay, got it. And then, Jamie, just quickly, any can you maybe refresh us on your interest for M and A currently. Just like to get kind of a strategy update on that point.

Speaker 2

Yes, we certainly have talked to you guys all about this and until there's a viable candidate out there or a company out there that makes sense for us, that's within our niche space, that we don't have anything on the boards right now.

Speaker 5

Okay. Thanks for the questions. Of course.

Operator

Our next question will come from Gary Tenner with D. A. Davidson. Please go ahead.

Speaker 7

Thanks. Good afternoon. I just wanted to ask about the updated loan growth guidance. Annualized loans through the first half of the year were down 4%, tone in terms of the full year loan growth, could you talk about kind of how the pipelines look in various loan segments and where you expect kind of the driver of that improvement to come from?

Speaker 2

Gary, most of it probably will come from some of the commercial real estate growth as you saw in the first in the second quarter results. Our residential mortgage application is down 40% -ish from prior year. C and I business is also down as well given the higher rates and because of the higher rates, our clients are using their liquidity to pay down any of the outstanding balances as soon as they can. We're trying to increase our both our loan side and the deposit side and trying to pick up more C and I business. But for the most part, you'll probably see any of the increases, the positive side on the CRE side.

Speaker 7

I appreciate that. And then historically on C and I, you've had kind of some positive 4th quarter seasonality. Do you think that, that is a positive factor this year as well? Or given your comments about customers wanting to pay down those lines, do you think that that's a little bit more tempered this year?

Speaker 2

Probably more tempered this year, Gary. I think given where the rates are, even if there is a potential rate cutting September that I think the balances will still kind of stay on the lower end. Utilization, I think, has been relatively flat around the 51%, 50 percentile. So we're not expecting looking for a 4th quarter positive impact during that period. Thank you.

Speaker 5

Thanks.

Operator

And our next question will come from Chris McGratty with KBW. Please go ahead.

Speaker 8

Hey, how's it going? This is Andrew Leichner on for Chris McGratty. I know you mentioned you're starting to see the NIM stabilize being the bottom out here. But how should we be thinking about the NII trajectory from here? Thank you.

Speaker 8

Well,

Speaker 3

we're going to keep the earning asset number flat to up slightly. So that should go up particularly with the now expected September rate cut and then the second one in December.

Speaker 8

Okay. Thank you. And then just one more if I can. Your CRE reserve is at 79 basis points and your constant your CRE concentration is 288% of total RBC. What's your comfortability there and any thoughts on greater reserve build from here?

Speaker 8

Thank you.

Speaker 3

Well, I think we're we look at the low LTVs, 50% and the fact that almost all of our CRE loans have full personal guarantees. So we just usually what happens with the non accrual loans is that they stay in non accrual for 2 or 3 quarters depending on whether in California or New York. And if the borrower still can't pay, they become OREO. So and then we normally are able to sell OREO close to our book. So we don't think there's a hit in CAFE's history.

Speaker 3

With the economy being so solid, we think we'll be okay. But we would want to have solid quarterly loan loss provisions to make sure that we remain adequately reserved.

Speaker 8

Okay, great. Thank you for the color. I'll step back.

Speaker 3

Thank you.

Operator

And thank you for your participation. I will now turn the call back over to Kissei General Bancorp's management for any closing remarks.

Speaker 2

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.

Operator

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

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Key Takeaways

  • Q2 Net Income Decline: Reported net income of $66.8 M, down 6.4% quarter-over-quarter, and diluted EPS fell to $0.92, while repurchases of 689,470 shares ($25.1 M) were made under a $125 M buyback program with ~ $35 M expected per quarter in H2.
  • Revised Loan Growth Guidance: Total gross loans decreased 1.5% annualized in Q2—commercial loans down 5.1%, residential mortgages down 4.6%, and construction loans down 24.4%, offset by a 2.6% rise in CRE loans—leading to a lowered 2024 loan growth outlook of 0–2%.
  • Asset Quality Metrics: Q2 net charge-offs rose to $8 M, non-accrual loans increased to 0.55% of total loans, and the average LTV on CRE loans remained at 50%, with high collateralization in retail and office portfolios.
  • Deposit Dynamics & Liquidity: Deposits declined 1.5% annualized in Q2 as clients shifted from core to higher-rate time deposits, but core deposits are expected to grow 3–4%, and available liquidity covers 100% of uninsured balances.
  • Margin & Expense Outlook: NIM held at 3.01% with June at 3.06%, and $7.2 B of high-cost CDs repricing in H2 is expected to lower funding costs; non-interest expense guidance was raised to 4–5% growth to bolster risk-management infrastructure.
AI Generated. May Contain Errors.
Earnings Conference Call
Cathay General Bancorp Q2 2024
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