Cathay General Bancorp - Q3 2024

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's third quarter of twenty twenty-four 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. If you would like to participate in this portion of the call, please press star followed by one at any time during the conference. If assistance is needed at any time during the call, please press star followed by zero, and a coordinator will be happy to assist you. Today's call is being recorded and will be available for replay at www.cathaygeneralbancorp.com. Now I would like to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp.

Georgia Lo (Head of Investor Relations)

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 nineteen ninety-five concerning future results and events, and that these statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are further described in the company's annual report on Form 10-K for the year ended December thirty-first, twenty twenty-three, 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 third quarter twenty twenty-four results. 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. Chang Liu.

Chang Liu (CEO)

Thank you, Georgia, and good afternoon. Welcome to our 2024 third quarter earnings conference call. This afternoon, we reported net income of $67.5 million for Q3 2024, a 1% increase as compared to $66.8 million in Q2. Diluted earnings per share increased 2.2% to $0.94 per share for the third quarter, as compared to $0.92 per share in Q2. During the third quarter of 2024, we repurchased 832,460 shares of our common stock at an average cost of $42 per share, with $35 million under our May 2024 $125 million stock buyback program. We anticipate continuing to repurchase around $35 million in stock per quarter in Q4 and Q1 2025, depending on the market conditions.

In Q3 2024, total gross loans increased $16 million, or 0.3% annualized, primarily driven by increases of $89 million, or 4% annualized, in CRE loans and $16 million, or 2% annualized, in C&I loans, offset by decreases of $40 million, or 3% annualized, in residential mortgages and HELOC, and $50 million, or 47% 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 float interest rate swaps on 4.5% of total loans.

Fixed rate loans comprise 3% of total loans, and hybrid and fixed rate period comprise 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 eight of our earnings presentation, as of September thirtieth, 2024, the average loan-to-value of our CRE loans was 49%. As of September thirtieth, 2024, our retail property loan portfolio, as shown on slide nine, comprised of 24% of our total CRE loan portfolio, or 12% of our total loan portfolio. 90% of the $2.4 billion in retail property loans is secured by a retail store, building, neighborhood, mixed use or strip centers. Only 9% is secured by shopping centers.

On slide ten, office property loans represent 15% of our total CRE loan portfolio or 8% of our total loan portfolio. Only 35% of the $1.5 billion in office property loans are collateralized by pure office buildings. Only 3% are in central business districts. Thirty-eight percent of office property loans are collateralized by office retail stores, office mixed use, and medical offices, and the remainder, 27%, are collateralized by office condos. For Q3 2024, we reported net charge-offs of $4.2 million, as compared to $8 million in Q2. Our nonaccrual loans were 0.84% of total loans as of September thirtieth, 2024, which increased $55.5 million to $162.8 million, as compared to Q2.

The increase in nonaccrual loans during Q3 2024 came primarily from a $38 million loan relationship that was placed on nonaccrual due to interest delinquency of more than ninety days on $19 million of those loans. Of this loan relationship, $11.2 million 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. We expect the loan delinquency to be resolved in the next few months. The other large new nonaccrual loan is a $12.7 million real estate loan in Hong Kong, secured by four rental properties with no projected loss. During the third quarter, we also sold our largest nonaccrual loan, a $23 million construction loan, and recovered $1.9 million of back interest.

Turning to slide twelve, as of September thirtieth, twenty twenty-four, classified loans increased to $382 million from $324 million in Q2, mainly due to the placement of the $38 million loan relationship discussed above to nonaccrual. Our special mention loans increased to $203 million from $202 million in Q2. We recorded provision for credit loss of $14.5 million in Q3 twenty twenty-four, as compared to a six point six million provision for credit losses for Q2. This increased the reserve to loan ratio from 0.79% for Q2 to 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 million, or 3.5% annualized during Q3 2024. Total core deposits increased $195 million, or 7.8% annualized, due to seasonal factors and marketing activities, and total time deposits decreased $24 million, or 1% annualized during Q3 2024. The average number of months of time deposits is five 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 $8.4 billion, net of $0.8 billion in collateralized deposits, or 42.1% of total deposits.

We have an unused borrowing capacity from the Federal Home Loan Bank of $7.2 billion and the Federal Reserve Bank of $438 million, and unpledged securities of $1.5 billion as of September thirtieth, 2024. These sources of available liquidity more than covers 100% of uninsured and uncollateralized deposits as of September thirtieth, 2024. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng W. Chen, to discuss quarterly financial results in more detail.

Heng W. Chen (EVP and CFO)

Thank you, Chang, and good afternoon, everyone. For Q3 2024, net income increased $0.7 million, or 1%, to $67.5 million, compared to $66.8 million for Q2, primarily due to increases of $3.8 million in net interest income and $7.1 million in non-interest income, and $2.5 million decreases in non-interest expense, offset by $7.9 million increase in provision for credit losses and $4.9 million increase in income tax expense. Net income for Q3 2024 was reduced by $2.2 million, or $0.03 per share, from the true-up of low-income housing 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. We anticipate that the net interest margin for 2024 to range between 3.05% and 3.10%. In Q3, interest recoveries and prepayabilities added five basis points to the net interest income, as compared to adding two basis points in net interest margin for Q2. Non-interest income for Q3 2024 increased $7.2 million to $20.4 million, when compared to $13.2 million in Q2 2024. The increase was primarily due to a $5.7 million increase in mark-to-market annualized gain on equity securities. Non-interest expenses decreased by $2.5 million, or 2.5% to $96.9 million in Q3 2024, when compared to $99.4 million in Q2.

This decrease was primarily due to $1.2 million in lower professional expense and $1.2 million 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% and 11.5% for 2024. The solar tax credit investment amortization is expected to be $32.5 million in 2024, with $1.5 million in Q4. A true-up allowance of low-income housing tax credits for 2023 added $2.2 million to third quarter 2024 income tax expense.

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 14.8% from 14.74% as of June 30, 2024.

Chang Liu (CEO)

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

Operator (participant)

Thank you. Ladies and gentlemen, if you have a question at this time, please press Star then one on your touchtone telephone. We ask that you please limit yourself to one question and one follow-up. You may then return to the queue. If your question has been answered or you wish to remove yourself from the queue, please press Star then two. To prevent any background noise, we ask that you please place yourself on mute once your question has been stated. The first question today comes from Gary Tenner at D.A. Davidson. Please go ahead.

Gary Tenner (Analyst)

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

Heng W. Chen (EVP and CFO)

Yeah, Gary, this is Hank. That $30 million loan, we did not have any specific reserves against it. So we mainly added the extra $10 million in ahead of charge-offs just to bolster our reserves. So it, it go as general reserves.

Gary Tenner (Analyst)

Okay, thank you. And then as we look out to twenty twenty-five, you know, 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?

Heng W. Chen (EVP and CFO)

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

Gary Tenner (Analyst)

Okay. All right, thank you.

Operator (participant)

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

Andrew Terrell (Analyst)

Hey, good afternoon.

Heng W. Chen (EVP and CFO)

Hi.

Andrew Terrell (Analyst)

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

Chang Liu (CEO)

I can start with that. In the fourth quarter, maturing CDs is gonna be about $3.49 billion. The average yield on those maturing CDs is about 4.82%. Depending upon what kind of tenure the clients choose, whether it's six months or 12 months, those rates are gonna be in the low to mid fours.

Heng W. Chen (EVP and CFO)

Right. Yes. And then we have about $600 million that is maturing in January and early February from our Chinese New Year promotion. That's the one-year CDs, and those were at 4.85%, and they'll roll down to hopefully to the low 4s, maybe 4.20, 4.30. And then lastly, we have another $800 million or so of the six-month Chinese promotion CDs that matured in July and early August. So we reprice them down by maybe 20 basis points, but when they come up for renewal in January and February, there'll be another, you know, 60 basis points or so in reduction on those.

Andrew Terrell (Analyst)

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 you know, a few million dollars off the core run rate in four Q twenty-four, a similar move to what we saw this quarter. Does that sound right? Should we expect the core expenses to step down by a few million bucks or so in four Q?

Heng W. Chen (EVP and CFO)

I think they'll be close to Q3. But, yeah, 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, you know, if we're off, it's just a couple, you know, couple million in from our guidance.

Andrew Terrell (Analyst)

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

Operator (participant)

Thank you. And our next question comes from Chris McGraty at KBW. Please go ahead.

Nick Visentic (Analyst)

Hi, this is Nick Vicentic is on for Chris. Maybe just on the start real quick on the amortization for low-income housing. Is $10 million still a good run rate for the fourth quarter?

Heng W. Chen (EVP and CFO)

Yes. Yes.

Nick Visentic (Analyst)

Okay. Then maybe just on the buyback, you know, I, you know, you said $35 million for this quarter and next, but any reason to deviate, you know, as you look into 2025 for, you know, a re-up in the authorization, just given the capital levels?

Heng W. Chen (EVP and CFO)

Well, our board will consider that when we're done with this one. But we will probably do, you know, the same size. Maybe we'll increase it, instead of $125 million, we'll increase it to $150 million from the buyback. But we'll. I'll have to see how things are.

Nick Visentic (Analyst)

Okay. Thank you for taking my questions.

Heng W. Chen (EVP and CFO)

Yeah, thanks.

Operator (participant)

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

Adam Butler (Analyst)

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

Chang Liu (CEO)

Yeah. So, for the quarter, our spot rates on the residential mortgage is about 7, compared to portfolio is about 5.6 in the mid fives. Our spot rate for commercial real estate is in the mid to mid, about around the mid sixes, compared to our portfolio average yield at right, right at basically the 6% mark. And for the C&I loans, our spot rate is usually at prime, and the portfolio yields is about 8.4.

Adam Butler (Analyst)

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

Heng W. Chen (EVP and CFO)

Yeah. So the deposits, it's, I mean, we can get you by categories. So the now 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 nine thirty is, 3.82%. And then the NIM for, September, it has a quite a bit of interest recovery, so the September NIM was 3.17%.

Adam Butler (Analyst)

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 $38.1 million relationship, but it looks like a little bit more migrated in as well. Can you guys provide any color on the remaining migration during the quarter?

Chang Liu (CEO)

Yeah, one of them was the one we were talking about in Hong Kong that has secured by three retail center collaterals, and that was about $12.7 million.

Adam Butler (Analyst)

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

Chang Liu (CEO)

Of course. Thank you.