Cathay General Bancorp Q3 FY2024 Earnings Call

Good 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. 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.

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 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. These risks 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 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 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 third quarter earnings conference call. This afternoon, we reported net income of $67.5 million for Q3 2024, a 1% increase compared to $66.8 million in Q2. Diluted earnings per share increased 2.2% to $0.94 per share for the third quarter 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 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 minus 1% and 0% based on the loan trends so far in 2024. Our loan portfolio consists of 63% fixed rate and hybrid loans excluding fixed to flow interest rate swaps on 4.5% of total loans. 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. As of September 30, 2024, the average loan to value of our CRE loans was 49%. The retail property loan portfolio comprised 24% of our total CRE loan portfolio or 12% of our total loan portfolio. 90% of the $2.4 billion in retail property loans are secured by retail store buildings, neighborhood mixed-use, or strip centers, with only 9% secured by shopping centers. 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, while 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 remaining 27% are collateralized by office condos. For Q3 2024, we reported net charge-offs of $4.2 million, compared to $8 million in Q2. Our non-accrual loans were 0.84% of total loans as of September 30, 2024, which increased $55.5 million to $162.8 million compared to Q2. The increase in non-accrual loans during Q3 2024 came primarily from a $38 million loan relationship that was placed on non-accrual due to interest delinquency of more than 90 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 non-accrual 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 saw our largest non-accrual loan, a $23 million construction loan, and recovered $1.9 million of back interest. As of September 30, 2024, 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 non-accrual, and our special mention loans increased to $203 million from $202 million in Q2. We recorded a provision for credit loss of $14.5 million in Q3 2024, compared to a $6.6 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 had 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 in 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, with unpledged securities of $1.5 billion as of September 30, 2024. These sources of available liquidity more than cover 100% of uninsured and uncollateralized deposits as of September 30, 2024. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Chen to discuss quarterly financial results in more detail.

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 a $7.9 million increase in provision for credit losses and a $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 loan compounding tax credits recorded for 2023. Q3 2024 net interest margin was 3.04% 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 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 $7.2 million to $20.4 million, 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 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 other operating expenses. The effective tax rate for Q3 2024 was 13.6% 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 of low-income housing tax credits for 2023 added $2.2 million in third quarter 2024 income tax expense. As of September 30, 2024, Tier 1 leverage capital ratio decreased to 10.82% 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.

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

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

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 non-accrual in the quarter or any other changes that you made to the model or any inputs there?

Yeah, Gary. This is Heng. That's a $30 million loan. We did not have any specific reserves against that. So we mainly added the extra $10 million net of charge-offs just to bolster our reserves. It's general reserves.

Okay. Thank you. And then, as we're looking 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?

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 mortgages.

Okay. All right. Thank you.

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

Hey, good afternoon.

Hi, Andrew.

It's encouraging to see that the cost of time deposits stabilized in the third quarter. I'm wondering how much will mature in the fourth quarter. Additionally, can you share the current average cost associated with what will be rolling off during that time, as well as the interest rates for new CDs today?

So I can start with that. In the fourth quarter, maturing CDs is going to be about $3.49 billion. The average yield on those maturing CDs is about 4.82%. Depending upon the tenure clients choose, whether it's six months or 12 months, those rates are going to be in the low to mid-4s.

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. Those were at 4.85% and they'll roll down to hopefully low 4s, maybe 4.20%, 4.30%. And then lastly, we have another $800 million or so in six-month Chinese promotion CDs that matured in July and early August. So we repriced some down by maybe 20 basis points. But when they come up for renewal in January and February, there will be another 60 basis point or so in reduction on those.

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 a moderation again by a few million dollars off the core run rate, in 4Q '24, 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 4Q?

I think they'll be close to Q3. But we have our largest project, which is to improve our deposit opening process, and that should finish in Q3. So we’ll save something there for office. It’s just a couple of million from our guidance.

Okay. Very good. Thank you for taking my questions. I’ll step back.

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

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

Yes.

Okay. And then just on the buyback, I know you said $35 million for this quarter and next. But any reason to deviate as you looked into 2025 for re-up in the authorization just given the capital levels?

Well, our Board will consider that when we're done with this one. But we will probably do the same signs; maybe we'll increase it instead of $125 million; we’ll increase it to $150 million for the buyback, but we’ll have to see how things are.

Okay. Thank you for taking my questions.

Yeah. Thanks.

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

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. Do 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?

For the quarter, our spot rates on residential mortgages are approximately 7%, while our portfolio average yield is around 5.6% and in the mid-5s. The spot rate for commercial real estate is in the mid-6s, compared to our portfolio average yield, which is roughly at the 6% mark. For C&I loans, our spot rates are at prime, with the portfolio yield at about 8.4%.

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

Yeah. So for deposits, I mean, we can get you by categories. The period-end now account rate is 1.2%, savings is 1.83%, money market is 3.58%, and CDs is 4.58%, with total interest-bearing at 3.82%. The NIM for September had quite a bit of interest recovery on that; September NIM was 3.17%.

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 provide any color on the remaining migration during the quarter?

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

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

Of course, thank you.

Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and good day.

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.