Cathay General Bancorp Q4 2023 Earnings Call Transcript

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January 24, 2024

There are 8 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the 4th Quarter and Full Year 2023 Cathay Bancorp Earnings Conference Call. My name is MJ, and I'll be your coordinator for today. At this time, all participants are in listen only mode. Cafe Generals and a coordinator will be happy to assist you. Today's call is being recorded and will be available for replay at www.

Operator

Cafegeneralbancorp.com. Now, I would like to turn the call over to Georgia Lowe, Investor Relations of Cathay General Bancorp. Jiang. Please go ahead.

Speaker 1

Thank you, MJ, and good afternoon. Here to discuss the financial results today are Mr. Chang Liu, our President and Chief Executive Officer and Hang 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 Joe. Within the meaning of the applicable provisions of the Private Securities Litigation Reform Act of 1995 concerning future results and events are further described in the company's annual report on Form 10 ks 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.

Speaker 1

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 Cathay. 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 Q4 and full year 2023 results. CAFE.

Speaker 1

To obtain a copy of our earnings release as well as our earnings presentation, please visit our website at www.cathaygeneralbancorp.com. Joe. After comments by management today, we will open this call up for questions. I will now turn the call over to our President and Chief Executive Officer, Mr. Chang Liu.

Speaker 2

Thank Thank you, Georgia, and good afternoon, everyone. Welcome to our 2023 Q4 earnings conference call. This afternoon, we reported net income of 82,500,000 for the Q4 of 2023, a 0.1% increase as compared to a net income of $82,400,000 for the Q3 of 2023. The 4th quarter net income included an $11,300,000 or $0.12 per diluted share charge for the one time FDIC special assessments. Joe's earnings per share was $1.13 per share for the Q4 of 2023, same as the Q3 of 2023.

Speaker 2

In In the Q4 of 2023, our gross loans increased $524,000,000 or 11.5 percent annualized, primarily driven by increases of $218,000,000 or 9.9 percent annualized in commercial real estate loans, 153,000,000 or 11.6 percent annualized in residential mortgage loans and 214,000,000 or 25.9 percent annualized in commercial loans, offset by a decrease of 52,000,000 commercial loans, offset by a decrease of $52,000,000 or 36.9 percent annualized in construction loans. Overall loan growth for 2024 is expected to range between 4% 5%. We continue to monitor our commercial real estate loans. Turning to slide 8 of our earnings presentation. As of December 31, 2023, the average loan to value of our CRE loans was 50%.

Speaker 2

As of December 31, 2023, our retail property loan portfolio at slide 9 comprises 23% of our total commercial real loan portfolio was 12% of our total loan portfolio. 89% of the $2,300,000,000 in retail loans By retail store building, neighborhood mixed use or strip centers, only 10% is secured by shopping centers. At slide 10, office property loans represent 16% of our total commercial real estate loan portfolio or 8% of the total loan portfolio. Only 34% of the $1,500,000,000 office property loans are collateralized by pure office buildings and only 3% of office property loans are in Central Business Districts. Another 24% of office property loans are collateralized by office retail stores, office mixed use and medical offices.

Speaker 2

The Remaining 28% of office property loans are collateralized by office condos. For the Q4 of 2023, Joe. We reported net charge offs of $4,100,000 which included a $4,200,000 reserve established during Q3 2023 Joe on an office construction loan as compared to a net charge off of $6,600,000 in the Q3 of 2023. Our non accrual loans were 0.34 percent of total loans as of December 31, 2023, which decreased by $10,600,000 to $66,700,000 as compared to the end of the Q3 of 2023. Turning to slide 13.

Speaker 2

As of December 31, 2023, classified loans decreased slightly to $200,000,000 from $202,000,000 as of September 20, 2023, and our special mention loans increased to $308,000,000 from $278,000,000 as of September 30, 2023. We recorded a provision for loss of $1,700,000 in the Q4 of 2023 as compared to $7,000,000 in provision for credit losses for the Q3 of 2023. Total average deposits increased by $244,300,000 or 5.2 percent annualized during the Q4 of 2023. Deposits increased $63,600,000 or 4% during the Q4 of 2023 due to organic growth and seasonal increases. For 2024, the overall deposit growth is expected to range between 4% 5%.

Speaker 2

Total uninsured deposits were $8,700,000,000 But excluding $800,000,000 in collateralized deposits, the uninsured and uncollateralized deposits were reduced to $7,900,000,000 or 40.9 percent of total deposits as of December 31, 2023. Our unused borrowing capacity from the Federal Home Loan Bank was 6,600,000,000 and unpledged securities was $1,500,000,000 as of December 31, 2023. These sources of available liquidity were more than 100% of Joint and Uncollateralized Deposits as of December 31, 2023. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Chang to discuss the Q4 2023 financial results in more detail.

Speaker 3

Thank you, Chad, and good afternoon, everyone. For the Q4 of 2023, net income increased by $100,000 or 0.1 percent to $82,500,000 compared to $82,400,000 in the Q3 of 2023, primarily due to a $9,000,000 unrealized gain on equity Securities in the Q4 of 2023 from $6,200,000 unrealized loss on equity securities Special FDIC assessment and a $3,500,000 decrease in net interest income before provision joint as compared to 3.38 for the Q3 of In the Q4 of 2023, interest recoveries and prepaid penalties added 1 basis point We estimate our net interest margin for 2024 to be between 3.15% Non interest income during the Q4 of 2020 increased by $15,300,000 to 23 joint. $1,000,000 when compared to $7,800,000 in Q3 of 2023. The increase was primarily due CAFE. $200,000 increase in annualized gains on equity securities 17.6 percent to $110,500,000 in the Q4 of 2023 Joint compared to $94,000,000 in the Q3 of 2023.

Speaker 3

The increase was primarily due to $11,300,000 from the FDIC special assessment, dollars 700,000 in restructuring costs, $1,300,000 in higher salaries and benefits and $3,000,000 in higher amortization of solar tax credit investments. We expect core non interest expense excluding tax credit and core deposit intangible Jones. The effective tax rate for the Q4 of 2023 was 11.28% as compared to 10.95% for the Q3 of 2023. For 2024, we expect an effective tax rate of between 20% 21%. We expect total 2024 solar tax rate investment amortization of 6,500,000 increased to 10.55% as compared to 10.44% as of September 30, 2023.

Speaker 3

June. And our total risk based capital ratio increased to 14.3% generated from 14.21 percent as of September 30, 2023.

Speaker 2

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

Operator

Thank you very much. Joe. Janssen. Please go ahead.

Speaker 4

Jones. Thanks. Good afternoon. Hi, Gary. I know this has been asked certainly on past calls in terms of capital and buyback, but just kind of looking at your metrics at year end, the modest growth rate, balance sheet growth rate likely For next year, it seems like you would probably be accreting some more capital.

Speaker 4

So just wondering kind of your updated thoughts or if you are I just Closure to kind of trying to get that approval to reengage in a buyback?

Speaker 3

Yes. We plan During the

Speaker 5

Q1,

Speaker 3

there's a process, there's some Yes. There's some projections and performance and all that. So, it takes some time to put together. Those are standard, but No. We'll be doing that.

Speaker 4

Okay. So is that something, Heng, that Theoretically can be completed to where you could be active this quarter or would be a second quarter type of that?

Speaker 3

I think between the application process and the blackout period, which starts If we don't buy it, we can always buy it later in the year. That's my

Speaker 4

Jones. Okay. And just as it relates to the NIM guidance, can you tell us what the rate outlook Is or what rate assumptions you've got embedded in that guidance?

Speaker 3

Yes. We're assuming We think it's probably May for the first rate cut, That we're doing is to prepare for Fed rate cuts is to shorten the term of our So you may have seen our Chinese New Year promotion on our website. We're paying a simpler rate at East West, a higher rate for 6 months versus A lower rate for 1 year, plus the deposit gets a nice piggy bank. So, it's going very well, but the important thing is, if we Shortened the duration of CDs will better match the Fed's rate cuts.

Speaker 4

Got it. Yes, I did see that. I appreciate the color, Hank. Thank you.

Speaker 3

Yes. Thank you, Garrett.

Operator

Thank you. The next question is from Brandon King with Chrous Securities. Please go ahead.

Speaker 5

Hey, good evening.

Speaker 3

Hi. Hi, Benoit.

Speaker 5

So with your NIM guidance, How are you thinking about the pace of or the trajectory of the Managed's margin in 2024? Are you expecting to maybe hit a trough sometime mid-twenty 24 in stabilization or do you see sequential decreases through the end of 2024?

Speaker 3

We think mid, maybe Q3. We look at our interest rate forecast all the time and sort of the back of the envelope Jones. About 2 thirds of our loans are fixed. This is counting about $500,000,000 of swaps, And then about 2 thirds of our in our Okay, I think it's about 2 thirds of our deposits are floating. So at some point, The deposits costs are going to go down.

Speaker 3

As on plus, We probably will originate $2,500,000,000 of new loans During the year, most of that is fixed. So, at some point, our NIM will improve just from The fact that the deposit pressure will fade and actually Because we have more fixed rate loans than DDA.

Speaker 5

Got it. And would you say at this point, like if the forward curve plays out, would I just margin potentially be a little bit better just given the comments you just said or could you end up in the kind of in the same place just as more of a timing thing?

Speaker 3

It's hard to predict particularly if the additional It's sort of late in the year. It will have very low impact on NII for 2024. Okay.

Speaker 5

And then on loan growth, What categories are you expecting to be the drivers of loan growth for 2024?

Speaker 2

Brandon, based on 2023 results, we saw about 9% increase on the residential mortgage. It's quite interesting for that year because that was a record booking year for us. 90% of that business was from purchases. Yes, we saw a headline that purchase activities were the lowest in 28 years. I think because our buyers are a lot less rate sensitive, so we continue to see activity there.

Speaker 2

So, I think residential mortgage is certainly one driver for 2024. And then the commercial mortgage, we also saw about a 10% increase in 2023. I don't think we expect it to be as high as that, but I think we'll see Some modest growth there as well, particularly if the rate cuts become a reality, then I think more people will sort of jump back in From the sidelines and we'll see some more activity there as well.

Speaker 5

Got it. All right. Thanks for all the

Operator

Joe. The next question comes from Andrew Terrell with Stephens. Please go ahead.

Speaker 6

Hey, good afternoon. Joe. Couple of questions, if I could just start on the margin. Can you talk us through just within the NIM guidance that you provided the 315 to 325 for 2024, what you assume for non interest Sparing deposit balances, does that predicate stable balances or would you expect continued decline within that forecast?

Speaker 3

We think it's been relatively stable. So, We're looking at the DEA to be about the same in 2024.

Speaker 6

Okay, got it. And then I want to maybe better understand The time deposit portfolio, some of the near term repricing dynamics. I know you had a lot of success in your Lunar New Year campaign early in 2023. And I appreciate the color around The cost or the rate and the term for the special this year, but can you remind us how much in terms of CDs you have repricing In the Q1 of 2024?

Speaker 3

Yes, that's our So it's $3,800,000,000 The average Yield is 4.16. So, we'll flex up a little bit with This year's promotion and then Q2 would drops to be $2,000,000,000 and the rate there is 4.53, Q3 is $1,100,000,000 the rate is $4,410,000,000 and then Q4 is $2,000,000,000 and the rate is 4.54. So the latter three quarters, there is already a fair amount of CVV pricing in that rate in the existing base?

Speaker 6

Yes. Okay. So 1Q definitely kind of the heaviest quarter from a repricing standpoint?

Speaker 3

Right. Yes.

Speaker 6

Okay. And then also wanted to ask on just the full year 'twenty four guide. Do you have an expectation for The low income housing tax amortization?

Speaker 3

Yes. It It will be slightly higher than this year. I think the amortization would be Maybe $5,000,000 higher than the shares number. Let me I'll e mail you back.

Speaker 6

Okay, perfect. I would appreciate that. That's it for me. I appreciate you all taking the questions.

Speaker 3

Jones. Thank you.

Operator

Thank you. The next question comes from Matthew Clark with Piper Sandler. Please go ahead.

Speaker 7

Jones. Hey, good afternoon. Hi. I wanted to just touch a couple more questions around the NIM, the margin. Do you happen to have the spot rate, I guess, at year end on deposits, either interest bearing or total and then the average NIM in the month of December?

Speaker 3

Yes, let me find that. So, the total Interest bearing deposits at year end twelvethirty onetwelvethirty onetwenty 2023, it's 3.54. And the December NIM is 3.19.

Speaker 7

Okay. Thank you. And then any material prepay fees in the margin this quarter? I think it was a couple of 1,000,000 last quarter.

Speaker 3

Yes, it was only one basis point this quarter.

Speaker 7

Okay, got it. Thank you.

Speaker 3

And it was 6 in Q3.

Operator

Yes. Okay.

Speaker 7

Thank you. And then The step up in C and I reserves this quarter, it looked like it was up about 11,000,000 And I think your special mention was up. I mean, could you speak to what drove the increase in C and I reserves this quarter and Whether or not that was related to the special mention increase or not or if there's something else going on?

Speaker 3

Yes. We had one loan that It was a it went on non accrual in Q3. So we put a fairly heavy reserve on that one loan in Q4. But I think the rest of the portfolio is yes, we didn't have to add reserves for that because most of the increase in C and I loans in the 4th quarter came from that same borrower that came in Q2. Joe.

Speaker 3

It's a tech company. So, with very good Credit, it's a public tech company. So that it didn't need much reserve.

Speaker 7

Got it. Okay, great. And then the low income housing tax credit amortization, sounds like you'll confirm that, maybe just send it around, I guess, Everyone, if you don't mind, but it seems like would that be evenly spread throughout the year? Is that a fair assumption? This is $5,000,000 higher from last year?

Speaker 7

Okay. Okay. Thank you.

Speaker 3

Yes. I'll send it around. Yes. Okay.

Speaker 7

Okay. Thanks for your help.

Operator

General. Thank you for your participation. I will now turn the call over to Cathay General Bancorp's management for closing remarks.

Speaker 3

Jefferies. I want to

Speaker 2

thank everyone for joining us on our call and we look forward to speaking with you at our next quarterly earnings release call.

Operator

Jones. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

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Key Takeaways

  • Q4 net income of $82.5 million increased 0.1% quarter-over-quarter, with EPS stable at $1.13, and included an $11.3 million one-time FDIC special assessment.
  • Gross loans grew by $524 million (11.5% annualized) in Q4—driven by CRE (+9.9%), residential mortgages (+11.6%) and commercial loans (+25.9%)—with 2024 loan growth guided to 4–5%.
  • Total deposits rose $244.3 million (5.2% annualized) in Q4, uninsured deposits represented 40.9% of the total, and deposit growth is expected to be 4–5% in 2024.
  • Net interest margin was 3.19% in December, and management forecasts a NIM of 3.15% for 2024, anticipating a mid-year trough followed by improvement as funding costs decline.
  • Total risk-based capital ratio climbed to 14.3% at year-end, and the bank plans to seek regulatory approval to resume share buybacks in the first half of 2024.
AI Generated. May Contain Errors.
Earnings Conference Call
Cathay General Bancorp Q4 2023
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