Cathay General Bancorp
NASDAQ:CATY
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Earnings Call Analysis
Q3-2024 Analysis
Cathay General Bancorp
Cathay General Bancorp reported a modest increase in net income for Q3 2024, rising to $67.5 million, a 1% increase from $66.8 million in the previous quarter. Diluted earnings per share also saw a rise, from $0.92 to $0.94, an increase of 2.2%. This growth was largely driven by increased revenues in both net interest and noninterest income, offset by a higher provision for credit losses.
The net interest margin for Q3 2024 was reported at 3.04%, up from 3.01% in Q2, signaling a potential trend of stabilization in interest income as the Federal Reserve begins a rate-cutting cycle. Guidance for 2024 suggests that the net interest margin will range between 3.05% and 3.10%, reflecting an optimistic outlook for interest income against a backdrop of declining market rates.
In Q3 2024, noninterest income surged by $7.2 million, reaching $20.4 million compared to $13.2 million in Q2. This robust growth was primarily due to a notable $5.7 million increase in mark-to-market gains on equity securities, demonstrating a strong performance within the investment portfolio.
Noninterest expenses decreased by 2.5% to $96.9 million in Q3, down from $99.4 million in Q2. This was attributed to reduced professional fees and operating costs, indicating effective cost management practices that could further enhance profitability.
The bank recorded a provision for credit loss of $14.5 million in Q3, substantially higher than the $6.6 million in Q2. This increase boosted the reserve to loan ratio from 0.79% to 0.85%. The uptick in classified loans, which rose to $382 million from $324 million, primarily due to a specific $38 million loan relationship, necessitated heightened reserves.
Gross loans experienced only a slight increase of $16 million, or 0.3% annualized, with expectations for full-year loan growth to be flat or slightly negative, between -1% and 0%. This cautious outlook stems from observed trends in loan performance, particularly declines in certain categories like residential mortgages and construction loans.
During Q3, the bank repurchased 832,460 shares at an average cost of $42, as part of a broader $125 million stock buyback initiative. The expectation is to continue repurchasing around $35 million in stock per quarter in the forthcoming periods, which speaks to the management's confidence in the company's value.
Total deposits increased by $171 million, or 3.5% annualized during Q3. The growth in core deposits was even more pronounced, rising by 7.8% annualized due to seasonal factors and marketing efforts. Importantly, the bank’s total earnings deposits amounted to $8.4 billion, indicating a robust deposit base to support operations.
The bank report noted a careful approach towards Commercial Real Estate (CRE) loans, with a low average loan-to-value ratio of 49%. Notably, 90% of retail property loans are backed by retail store buildings or mixed-use properties, which mitigates risk exposure.
As rates are expected to decline, the bank is positioned to decrease the cost of new deposits. For instance, maturing certificates of deposit (CDs) amounting to approximately $3.49 billion in Q4 are anticipated to reprice at significantly lower rates, potentially decreasing the average cost from the current 4.82% to the low to mid-4s.
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Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's Third Quarter 2024 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. 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 and 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, and at Item 1A and pertaining 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 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 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 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 minus 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 flow interest rate swaps on 4.5% of total loans. Fixed rate loans comprised 3% of total loans and hybrid in 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. Turning to Slide 8 of our earnings presentation. As of September 30, 2024, the average loan-to-value of our CRE loans was 49%. As of September 30, 2024, our retail property loan portfolio, shown on Slide 9, 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 secured by retail store building, neighborhood mixed-use or strip centers, only 9% secured by shopping centers.
On Slide 10, 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. 38% 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 30, 2024, and 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 90 days on $19 million of those loans.
Of this loan relationship, $11.2 million is a real estate loan where the borrowers looking for another lender. The borrowers also seeking new financing to repay commercial loans in this relationship. We expect the loan delinquency to be resolved in the next few months.
These are large new nonaccrual loan is a $12.7 million real estate loan in Hong Kong secured by 4 rental properties with no projected loss. During the third quarter, we also saw our largest nonaccrual loan, a $23 million construction loan and recovered $1.9 million of back interest.
Turning to Slide 12. 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 an accrual, 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 as 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 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 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 5 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 earnings 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 30, 2024. These sources of available liquidity more than covers 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 noninterest income and $2.5 million decreases in noninterest expense, offset by a $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 loan-composing 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 [indiscernible] added 5 basis points to the net interest income as compared to adding 2 basis points in net interest margin for Q2. Noninterest 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 and mark-to-market annualized gain on equity securities.
Noninterest 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 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 and with $1.5 million in Q4. A true-up of long-term 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% 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 14.88% from 14.74% as of June 30, 2024.
Thank you, Heng. We will now proceed to the question-and-answers portion of the call.
[Operator Instructions] Your first question today comes from Gary Tenner at D.A. Davidson.
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 the model or any inputs there?
Yes, 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. 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 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 hav that handy. Give me a couple of days and I'll get back to you. Most of those hybrid loans are residential mortgage.
And our next question today comes from Andrew Terrell with Stephen.
If I could just start on the CD repricing interesting to see the time deposit cost leveled out in the third quarter. Just curious, if you look at the fourth quarter, how much is coming up for maturity? And then relative to your average cost right now, 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?
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 where -- what kind of tenure, the clients choose whether it's 6 months or 12 months, those rates are going to be in the low to mid-4s.
And then we have about $600 million that is maturing in January and early February from our Chinese New Year promotion, that's the 1-year CDs. And 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 a 6-month Chinese promotion CDs that matured in July and early August. So they -- 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-point or so in reduction on those.
Okay. Very good. I appreciate it. If I could just ask 1 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 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 there'll be close to Q3. But we have this -- our largest project, which is the -- Improve our deposit opening process and that should be finished in Q3. So we'll save something there for office. It's just a couple of them Andrew from our guidance.
Our next question comes from Chris McGratty, KBW.
This is Nick Moutafakis on for Chris. Maybe just on start real quick on the amortization for low-income housing. Is $10 million still a good run rate for the fourth quarter?
Yes. 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 $725 million increase it to $150 million with the 5x, but [indiscernible] .
And our next question today comes from Adam Butler with Piper Sandler.
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?
Yes. So for the quarter, our spot rates on the residential mortgage is about 7% compared to portfolio is about 5.6% and mid-5s. Our spot rate for commercial real estate is in the mid -- around the mid-6s compared to our portfolio average yield that -- right at basically the 6% mark. And for the C&I loans, our spot rates should be at prime and the portfolio yield is about 8.4%.
And then I was also curious about the deposits and the NIM you have that.
Yes. So the deposits, it's -- I mean, we're going to get you by category. So now period end now account rate is 1.2%, savings is 1.83%, money market is 3.58%, and CDs is 4.58%, and total interest bearing is at 9.30% is 3.82%. And then the NIM for September it has quite a bit of interest recovery on that September NIM was 3.17%.
Okay. That's very helpful. And if I could ask just 1 more question. It looks like the nonperformers increased primarily due to that $38.1 million relationship, but it looks like a little bit more migrated in as well. You guys haven't -- can you guys provide any color on the remaining migration during the quarter?
Yes. One of them was the 1 we were talking about in Hong Kong that has secured by 3 retail center collaterals and that was about $12.7 million.
[Operator Instructions] Again, I want to thank everybody for joining us on our call. Thank you for your participation. I will now turn the call back over to Cathay General Bancorp's management for 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 good day.