Cathay General Bancorp (NASDAQ:CATY) Q3 2023 Earnings Call Transcript

Cathay General Bancorp (NASDAQ:CATY) Q3 2023 Earnings Call Transcript October 23, 2023

Cathay General Bancorp beats earnings expectations. Reported EPS is $1.13, expectations were $1.12.

Operator: Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp’s Third Quarter of 2023 Earnings Conference Call. My name is Rocco, and I will be your coordinator for today. [Operator Instructions] 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.

Georgia Lo: Thank you, Rocco, and good afternoon. Here to discuss the 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 10-K for the year ended December 31, 2022, 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 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 General Bancorp issued an earnings release outlining its third quarter 2023 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: Thank you, Georgia, and good afternoon, everyone. Welcome to our 2023 third quarter earnings conference call. This afternoon, we reported net income of $82.4 million for the third quarter of 2023, an 11.6% decrease as compared to a net income of $93.2 million for the second quarter of 2023. Diluted earnings per share decreased 11.8% to $1.13 per share for the third quarter of 2023 compared to $1.28 per share for the second quarter of 2023. In the third quarter of 2023, our gross loans increased $71 million or 1.6% annualized, primarily driven by increases of $218 million or 9.9% annualized in commercial real estate loans, and $143 million or 10.9% annualized in residential mortgage loans, offset by a decrease of $227 million or 27.4% annualized in commercial loans.

The slower loan growth during the third quarter resulted in part from paydown of several large commercial loans originated in the second quarter of 2023. We continue to monitor our commercial real estate loans. Turning to Slide 7 of our earnings presentation. As of September 30, 2023, the average loan-to-value of our commercial real estate loans was 50%. As of September 30, 2023, our retail property loan portfolio at Slide 8 comprises 23% of our total commercial real estate loan portfolio or 11% of our total loan portfolio. 89% of the $2.2 billion in retail loans is secured by retail store, building, neighborhood, mixed use or strip centers and only 10% secured by shopping centers. At Slide 9, office property loans represent 16% of our total commercial real estate loan portfolio or 8% of total loan portfolio.

Only 34% of the $1.5 billion in office property loans are collateralized by pure office buildings and only 4% of the office property loans are in central business districts. Another 25% of office property loans are collateralized by office retail stores, office mixed use and medical offices. The remaining 28% of office loans are collateralized by office condos. For the third quarter of 2023, we reported net charge-offs of $6.6 million, of which, $4.3 million have been reserved for in prior quarters compared to net charge-offs of $2 million in the second quarter of 2023. Our nonaccrual loans were 0.41% of total loans as of September 30, 2023, which increased by $8.3 million to $77.3 million as compared to the end of the second quarter of 2023.

Turning to Slide 12. As of September 30, 2023, classified loans increased slightly to $202 million from $193 million as of June 30, 2023, and our special mention loans also increased slightly to $278 million from $260 million as of June 30, 2023. We recorded a provision for credit loss of $7 million in the third quarter of 2023 as compared to a $9.2 million in provision for credit losses for the second quarter of 2023. We are pleased that total deposits increased by $539 million or 11.6% annualized during the third quarter of 2023. As a result, we were able to reduce our borrowings from Federal Home Loan Bank by $800 million during the quarter to $15 million as of September 30, 2023. Total uninsured deposits were $9 billion, but excluding $0.8 billion in collateralized deposits, the uninsured and uncollateralized deposits were reduced to $8.2 billion or 41.7% of total deposits as of September 30, 2023.

An employee counting notes in the back office of a bank. Editorial photo for a financial news article. 8k. –ar 16:9

Our unused borrowing capacity from the Federal Home Loan Bank was $7.2 billion, and unplaced securities was $1.4 billion. These sources of available liquidity were more than 100% of uninsured and uncollateralized deposits as of September 30, 2023. Total time deposits increased $237 million or 31.2% annualized during the third quarter of 2023 compared to the second quarter of 2023. Total core deposits increased by $301 million or 10.5% annualized, primarily due to organic growth and seasonal increases. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Chen, to discuss the third quarter 2023 financial results in more detail.

Heng Chen: Thank you, Chang, and good afternoon, everyone. For the third quarter of 2023, net income decreased by $10.8 million or 11.6% to $82.4 million compared to $93.2 million for the second quarter of 2023, primarily due to a $6.2 million unrealized loss on equity securities or $0.06 per share in the third quarter of 2023 as compared to a $10.7 million unrealized gain on equity securities or $0.10 per share in the second quarter of 2023. Our net interest margin was 3.38% in the third quarter of 2023 as compared to 3.44% for the second quarter of 2023. In the third quarter of 2023, interest recoveries and prepayment penalties added 6 basis points to the net interest margin as compared to 2 basis points for the second quarter of 2023.

We have revised our net interest margin expectations for 2023 to be between 3.45% to 3.50%. Noninterest income during the third quarter of 2023 decreased by $15.3 million to $7.8 million when compared to $23.1 million in the second quarter of 2023. The decrease was primarily due to a $16.9 million decrease in unrealized gains on equity securities offset in part by a $1.5 million increase in commissions from wealth management when compared to the second quarter of 2023. Noninterest expenses increased by $1.2 million or 1.2% to $94 million in the third quarter of 2023 when compared to $92.8 million in the second quarter of 2023. The increase was primarily due to $1.7 million in higher salaries and benefits and $1.4 million in higher amortization of solar tax credit investments, offset by $1 million in lower professional expenses.

As a result of expenses incurred in 2023 to strengthen the bank’s information security infrastructure, enterprise risk management and from higher FDIC insurance premiums, we expect core noninterest expense, excluding tax credit and core deposit intangible amortizations in OREO expense to increase between 8.5% to 9.5% from 2022 to 2023. This excludes the impact of any special FDIC assessment for bank failures expected to be finalized during the fourth quarter of 2023. During the first 9 months, approximately $3 million in nonrecurring professional expenses related to information of security, enterprise risk management and internal control processes were incurred. In addition, we are taking a hard look in our other expenses during the fourth quarter of 2023 and to reduce the rate of noninterest expense growth in 2024.

The effective tax rate for the third quarter of 2023 was 11% as compared to 9.2% for the second quarter of 2023. For full year 2023, we expect an effective tax rate of between 12.5% and 13%. We expect solar tax credit investment amortization of $12 million in Q4 of 2023. As of September 30, 2023, our Tier 1 leverage capital ratio decreased to 10.44% as compared to 10.45% as of June 30, 2023. Our Tier 1 risk-based capital ratio increased to 12.7% from 12.38% as of June 30, 2023, and our total risk-based capital ratio increased to 14.21% from 13.88% as of June 30, 2023.

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

Operator: [Operator Instructions] Your first question today comes from Matthew Clark at Piper Sandler.

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Q&A Session

Matthew Clark : Just a couple of questions around the margin. Did you have any — I guess, I was looking to quantify the prepay fees and any recoveries in the loan yield. It looked like the loan yield was up a little more, up about 20 basis points this quarter. Just wondering if anything was kind of elevated on that front?

Heng Chen : Well, we had about $2 million of interest recoveries. As I mentioned, it was 6 basis points of NIM, but the rest of it would be just improved pricing for loans.

Matthew Clark : Got it. And I think you had about $1 million last quarter. Is that right?

Heng Chen : A little less than that. Yes.

Matthew Clark : Okay. I can come back to that later. And then if you have the spot rate on deposits, interest-bearing or total and the average margin in the month of September?

Heng Chen : Yes. Let me go through — so the spot rate at September 30 on total interest-bearing deposits at the end of the month was 3.28. What was the next part of your question, Matthew?

Matthew Clark : If you had the average margin in September, I’d take it.

Heng Chen : Yes. The average — it’s a little bit noisy because we had interest recoveries were out the quarter, but it was 3.42.

Matthew Clark : Okay. Understood.

Heng Chen : For the month, September, yes.

Matthew Clark : Okay. Great. And then just maybe one more housekeeping item, and then I’ll get back in the queue. The low-income housing amortization for the year, I know you gave solar, but is it still about $41 million?

Heng Chen : Let’s see, yes, yes.

Operator: Our next question today comes from Gary Tenner at D.A. Davidson.

Gary Tenner: First, I had a question on expenses. I may have misheard what you were saying in terms of the expected core expense run rate, I heard 8.5% to 9.5%, which I thought you were saying for 2023, but you said it excluded any potential, I guess, special assessment. So I was confused if you’re talking about ’23 or ’24?

Heng Chen : We’re talking about ’23. As you know, there is a proposal that’s not final. And under GAAP, whenever finalized, banks are expected to accrue it.

Gary Tenner: All right. I just wanted to clarify that. In terms of the loan pipeline at your guidance still looks like it suggests still a solid level of loan growth for the fourth quarter. I just wonder if you could give any kind of updates in terms of kind of where the pipeline strength is coming from, areas that you’d expect loan growth to kind of continue through the fourth quarter?

Chang Liu : Sure, Gary. I think we’re still seeing some strength surprisingly in the residential mortgage market. That pipeline is holding up pretty well, and about 90% of that organic pipeline is about purchases actually. So that kind of makes sense given today’s market. So the activity there is still fairly strong across the states that we’re in. Commercial real estate is — that’s definitely slowing down, but we’re seeing continued activity both from — mostly from our current client base. Some new relationships that we’re betting very carefully. And then on the C&I side, we’re looking for kind of really supporting our clients and looking at their credit metrics and make sure they’re prepared going forward into 2024, and not a lot of new activity coming out of that or new, new business coming in. But to the extent that we find some good prospects, we’re definitely continuing on with that path.

Gary Tenner: I appreciate that. And just one last question. I think in the prepared remarks, there was a note of some larger commercial loans that were originated in the second quarter, paid off during the third quarter, were those anticipated payoffs? Correct me, if you talked about it previously, and I don’t recall.