Cathay General Bancorp
NASDAQ:CATY
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Earnings Call Analysis
Q2-2024 Analysis
Cathay General Bancorp
In the second quarter of 2024, Cathay General Bancorp reported a net income of $66.8 million, a 6.4% decrease from $71.4 million in the previous quarter. This drop is attributed to an increase in the provision for credit losses and the accelerated amortization of solar tax credit investments, which impacted the earnings per share, reducing it to $0.92 from $0.88 in Q1 2024.
Total gross loans saw a decrease of $72 million, or 1.5% annualized, in Q2 2024. Notably, commercial loans dropped by $42 million (5.1%), residential mortgages and home equity lines of credit by $69 million (4.6%), and construction loans by $25 million (24.4%). However, there was an increase of $64 million (2.6%) in commercial real estate loans, reflecting an ongoing strategy to capture growth in this segment.
Due to slower-than-anticipated growth in the first half of the year, the company revised its loan growth guidance for 2024 down to a range of 0% to 2%. This reflects challenges in residential mortgage applications, which are down approximately 40% from the previous year, largely due to higher interest rates impacting borrowing capacities.
The net interest margin (NIM) for Q2 2024 was 3.01%, a slight decline from 3.05% in Q1. However, there are positive signs of stabilization as NIM increased to 3.06% in June. The bank anticipates that maturing high-cost certificates of deposit (CDs) worth approximately $7.2 billion will help lower deposit costs in the coming months, potentially enhancing the NIM further.
Noninterest income saw a significant increase of $6.6 million, reaching $13.2 million, thanks largely to a reduction in unrealized losses on equity securities. Conversely, noninterest expenses rose by $6.1 million, or 6.5%, which was driven primarily by higher amortization of housing and solar tax credits. The guidance for core noninterest expense has been increased to an annual growth rate of 4% to 5% from the previous range of 3% to 3.5%, signaling ongoing investment in infrastructure.
The effective tax rate for Q2 was reported at 7.9%, expected to rise between 10.5% and 11.5% in the second half of 2024. The total amortization of solar tax credit investments is projected at $32.5 million for 2024, with significant portions allocated to Q3 and Q4.
Total classified loans increased from $244 million in Q1 to $224 million as of June 30, 2024. Despite the increase in nonaccrual loans to $107.3 million, the bank maintains a solid loan-to-value ratio of 50% for its commercial real estate loans, indicating a level of confidence in underlying asset values.
As of June 30, 2024, Cathay General Bancorp reported total uninsured deposits of $8.2 billion, with available liquidity sources far exceeding this amount. The bank's strategy includes a $125 million stock buyback program, with $25.1 million repurchased in Q2 2024 and expectations to buy back around $35 million per quarter in Q3 and Q4, depending on market conditions.
Overall, Cathay General Bancorp faces a mixed outlook, balancing a strong liquidity position and proactive management strategies against challenges in loan growth and net interest margin stabilization. Investors should be mindful of slower growth projections and increasing operational costs, while also considering potential positive impacts from the anticipated lower deposit costs in the latter half of the year.
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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. [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.
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.
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 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 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 [ $0.88 ] per share in the prior quarter. During Q2 2024, we repurchased [ 689,406 ] 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%. 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. Fixed rate loans comprised 30% of total loans, and hybrid and fixed rate period combined [ 34% ] of total loans. We continue to monitor our commercial real estate loans.
Turning to Slide 8 of our earnings presenting. 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. [ 89% or $2.4 billion ] in retail property loan is secured by retail building, 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 $1.5 billion 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 real 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 million, of which $5.1 million was reserved as of March 31, 2024, compared to $1.1 million in Q1. Our nonaccrual 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 nonaccrual loans during Q2 2024 came mainly from 1 office CRE loan and 1 retail condo CRE loan totaling $8.3 million with no projected losses based on recent appraisals.
Turning to Slide 12. As of June 30, 2024, classified loans increased to $224 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 as compared to $1.9 million in provisions for credit losses for Q1. Total deposits decreased by $73 million or 1.5% annualized during Q2 2024 with [ NOW ] deposits decreased $186 million in Q2 due to the runoff of brokered NOW deposits. Total core deposits decreased $274 million or 11% annualized and total time deposits increased $201 million or 8.6% annualized during Q2 2020 due to a shift from core deposits to time deposit with higher rates.
We expect the overall deposit growth to continue an estimated range between 3% and 4%. As of June 30, 2024, total uninsured deposits were $8.2 billion, net of $0.8 billion in collateralized deposits or 41.5% of total deposits. We have an unused borrowing capacity from the Federal Home Loan Bank of $7.1 billion and the Federal Reserve Bank of $174 million and [ employed ] securities of $1.7 billion as of June 30, 2024. These sources of available liquidity more than cover 100% of uninsured and un-collateralized deposits as of June 30, 2024. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Chen, to discuss the quarterly financial results in more detail.
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 for Q2 2024 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 since the NIM for the month of June was 3.06%. Approximately $7.2 billion in high-cost CDs, which were mature and repriced in the second half of 2024. And this will help lower the cost of deposits as they reprice, [ including ] 2 interest recoveries and prepayment penalties added 2 basis points of net interest income -- I'm sorry, to the net interest margin as compared to no basis points in net interest margin for Q1.
Noninterest income for Q2 2024 increased $6.6 million to $13.2 million compared to $6.6 million in Q1 2024. The increase was primarily due to a $7.6 million decrease in mark-to-market unrealized loss on equity securities, offset by $1.1 million decrease in realized gain on sale of investment securities in Q1 2024. Noninterest expense increased by $6.1 million or 6.5% to $99.3 million in Q2 2024 when compared to $93.2 million in Q1. This increase was primarily due to [ $9 million ] in higher amortization of long-term housing and solar tax credit investments, $1.2 million higher in professional expense, and $1.2 million higher in OREO expense offset by a decrease of $3 million in salaries and benefits due to a $2 million true-up for the 2023 bonds in Q1, and $1.1 million seasonally higher payroll expense in Q1. And lastly, a decrease of $2.3 million in FDIC 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 noninterest 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%. The 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 2024. We now expect total 2024 solar tax credit investment amortization of $32.5 million with $10 million amortization in Q3 and $2 million 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.
Thank you, Heng. We'll now proceed to the question-and-answer portion of the call.
[Operator Instructions] Our first question today will come from Matthew Clark with Piper Sandler.
Maybe just one 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, 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 onetime expenses in Q2, higher consulting, higher marquee, 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. And do you -- can you quantify, I guess, how much of that was unusual, I guess, around consulting, marketing and charitable contribution?
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.
And our next question will come from Andrew Terrell with Stephens.
Wanted to ask on the -- I appreciate the $7.2 billion, 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?
Yes. It's -- 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 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 [ secured ] the rates this time. And 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 kind of repricing benefit there 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 [indiscernible] last quarter, up to $324 million 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?
They're mostly downgrades from the EM class, and they're all -- 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, any -- can you maybe refresh us on your interest for M&A currently? I'd just like to get kind of a strategy update on that point.
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, we don't have anything on the boards right now.
[Operator Instructions] Our next question will come from Gary Tenner with D.A. Davidson.
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. So given the change in tone in terms of the full year loan growth, can 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?
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&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&I business. But for the most part, you'll probably see any of the increases deposit side on the CRE side.
Appreciate that. And then historically, on C&I, you've had kind of 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. 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 or looking for a fourth quarter positive impact during that period.
And our next question will come from Chris McGratty with KBW.
This is Andrew 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? .
Well, we're going to keep the earning asset number flat to up slightly, so that should go up partly with the now expected September rate cut and then the second 1 in December.
Okay. And then just 1 more if I can. CRE reserve is at 79 basis points and your CRE concentration is [ 28% ] of total RBC. What's your comfortability there? And any thoughts on greater reserve build from here?
Well, I think we're -- we look at the low LTVs, which are about 50% and the fact that almost all of our CRE loans have full personal guarantees. So we just -- usually, what happens with the nonaccrual loans is that they stay in nonaccrual for 2 or 3 quarters, depending on the [ California early ] or -- and if the borrowers still can't pay, they become OREO. So then, we normally are able to sell OREO close to our book. So we don't think there's, in Cathay's history, with the economy being still solid, we think we'll be okay. But we would want to have a solid quarterly loan loss [ per is ] to make sure that we remain adequately reserved.
Thank you for your participation. I will now turn the call back over to Cathay General Bancorp's management for any closing remarks.
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.