Cathay General Bancorp Q2 FY2024 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp Second Quarter 2024 Earnings Conference Call. My name is Cole, and I'll be your coordinator for today. Today's call is being recorded and will be available for replay at www.cathaygeneralbancorp.com. I would now like to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp. Please go ahead.

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 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 results and uncertainties are further described in the company's annual report on Form 10-K 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 statements speak only as of the date on which they are 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 second quarter 2024 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.

Thank you, Georgia, and good afternoon. Welcome to our 2024 second quarter earnings conference call. This afternoon, we reported net income of $66.8 million for Q2 2024, a 6.4% decrease as compared to $71.4 million in Q1. Diluted earnings per share decreased by 6.1% to $0.92 per share for the second quarter 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 $25.1 million under our May 2024 $125 million stock buyback program. Under the May 2024 stock repurchase program, we anticipate repurchasing around $35 million in stock per quarter in Q3 and Q4, depending on market conditions. In Q2 2024, total gross loans decreased $72 million or 1.5% annualized, primarily driven by decreases of $42 million or 5.1% annualized in commercial loans, $69 million or 4.6% annualized in residential mortgages and HELOC, and $25 million or 24.4% annualized in construction loans, offset by an increase of $64 million or 2.6% annualized in commercial real estate loans. Due to slower-than-expected loan growth in the first half of 2024, we have revised our overall loan growth guidance for 2024 to range between 0% and 2%. 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 comprise 30% of total loans, and hybrid and fixed-rate period comprise 34% of total loans. We continue to monitor our commercial real estate loans. As of June 30, 2024, the average loan-to-value of our CRE loans was 50%. Our retail property loan portfolio comprised 24% of our total CRE loan portfolio or 12% of our total loan portfolio. 89% of the $2.4 billion in retail property loans is secured by retail buildings, neighborhood, mixed-use or strip centers, and only 10% is secured by shopping centers. On office property loans representing 15% of our total commercial real estate loan portfolio, only 35% of the $1.5 billion in loans are collateralized by pure office buildings. Our non-accrual loans were 0.55% of total loans as of June 30, 2024, which increased $9.2 million to $107.3 million as compared to Q1. The increase in non-accrual loans during Q2 2024 came mainly from one office CRE loan and one retail condo CRE loan totaling $8.3 million with no projected losses based on recent appraisals. As of June 30, 2024, classified loans increased to $324 million from $244 million in Q1, and our special mention loans decreased to $201 million from $249 million in Q1. We recorded a provision for credit loss of $6.6 million in Q2 2024 compared to $1.9 million in Q1. Total deposits decreased by $73 million or 1.5% annualized during Q2 2024, with NOW deposits decreasing by $186 million in Q2 due to the runoff of brokered NOW deposits.

Thank you, Chang, and good afternoon, everyone. For Q2 2024, net income decreased by $4.6 million or 6.4% to $66.8 million compared to $71.4 million for Q1, primarily due to a $4.7 million increase in the provision for credit losses and partially due to $4.1 million 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 2024. Q2 2024 net interest margin was 3.01% as compared to 3.05% for Q1. We are seeing signs that our net interest margin has begun to bottom out, especially since the NIM for the month of June was 3.06%. Approximately $7.2 billion in high-cost CDs will mature and reprice in the second half of 2024, which will help lower the cost of deposits as they reprice. In Q2, the interest recoveries and prepayment penalties added 2 basis points of net interest income to the net interest margin compared to 9 basis points in net interest margin for Q1. Noninterest income for Q2 2024 increased by $6.6 million to $13.2 million from $6.6 million in Q1 2024, primarily due to a decrease in mark-to-market unrealized loss on equity securities, offset by a decrease in realized gain on sale of investment securities. Noninterest expense increased by $6.1 million or 6.5% to $99.3 million in Q2 2024 compared to $93.2 million in Q1, primarily due to $9 million in higher amortization of long-term housing and solar tax credit investments, as well as higher professional expenses. We expect the overall deposit growth to continue in an estimated range between 3% and 4%. Our Tier 1 leverage capital ratio increased to 10.83% as compared to 10.71% as of March 31, 2024.

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.

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.

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.

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

Okay. Got it. And then just on your updated expense guide on a core basis, it implies that core run rate of $74.2 million this quarter drops slightly below $72 million in the second half to get to the midpoint of the guide. Just trying to get a sense of what's going to drive that reduction in the core expense rate.

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

Okay. Can you quantify how much of that was unusual regarding consulting, marketing, and charitable contributions?

Yes. I'd say it's about $2.5 million.

Okay. Got it. And then just a quick one. Low-income housing amortization expected in 3Q and 4Q?

It’s about $10 million a quarter each for low-income housing.

I wanted to ask about the $7.2 billion in certificates of deposit that are set to mature in the second half of the year. Are these more concentrated in one quarter, or are they evenly distributed between the third and fourth quarters? Additionally, could you discuss your expectations for spread pickup and the deposit cost reduction you are targeting?

Yes. Q3 is slightly higher than Q4, so it's $3.7 billion in Q3, and Q4 is about $3.5 billion. Our 6-month CDs from that promotion started to renew in July, so we haven't seen any net runoff so far. That's good news. I think we're targeting around 5%, so that would be 20 basis points.

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

Yes, yes. Of course, yes.

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

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

Okay. Got it. And then, Chang, maybe just quickly, can you refresh us on your interest for M&A currently? I'd just like to get a strategy update on that point.

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

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

Gary, most of it probably will come from some of the commercial real estate growth as you saw in the second quarter results. Our residential mortgage applications are down about 40% from the prior year. C&I business is also down due to the higher rates. Because of these 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 both our loan and deposit sides and pick up more C&I business, but for the most part, you'll probably see any increases on the CRE side.

Appreciate that. Historically, on C&I, you've had some positive fourth-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?

Probably more tempered this year, Gary. Given where the rates are, even if there is a potential rate cut in September, we think the balances will still stay on the lower end. Utilization has been relatively flat around the 50 percentile. So we’re not expecting a fourth-quarter positive impact during that period.

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?

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

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

Well, we look at the low LTVs, which are about 50%, and the fact that almost all of our CRE loans have full personal guarantees. Generally, nonaccrual loans stay in nonaccrual for 2 or 3 quarters, depending on the weather in California or New York. If borrowers still can’t pay, they become OREO. We normally are able to sell OREO close to our book. So we don’t think there’s a hit. With the economy being solid, we believe we’ll be okay. But we would want to have solid quarterly loan loss provisions to ensure we remain adequately reserved.