Q4 2023 Cathay General Bancorp Earnings Call

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Good afternoon, ladies and gentlemen, and welcome to the fourth quarter and full year 'twenty twenty-three Cathay General Bancorp earnings Conference call. My name is M J and I'll 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. If you would like to participate in this portion of the call. Please press star followed by one at any time during the conference.

If assistance is needed at any time during the call. Please press star followed by zero and a coordinator will be happy to assist you.

Today's call is being recorded and will be available for replay at www Dot Cathay General Bancorp Dot com.

Now I would like to turn the call over to Georgia Lo Investor Relations of Cathay General Bancorp. Please go ahead.

Thank you Jay and good afternoon here to discuss the financial results today are Mr. Chengdu, Our president and Chief Executive Officer, and 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 is 19, five concerning future results and events and that these statements are subject to certain risks and uncertainties that could cause actual results to differ materially.

Louis and uncertainties are further described in the company's annual report on Form 10-K for the year ended December 31st 122 and item one 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 unaccepted as required by law, we undertake no obligation to.

Update or review any forward looking statements she was like future circumstances developments or events or the occurrence of unanticipated events. This afternoon, Cathay General Bancorp issued an earnings release outlining its fourth quarter and full year 2022 results to obtain a copy of our earnings release as well as our earnings presentation. Please visit our website at.

Www Dot Cathay General Bancorp Dotcom after comments by management today, we will open the call up for questions I will now turn the call over to our President and Chief Executive Officer, Mr. Chengdu.

Thank you, Georgia and good afternoon, everyone. Welcome to our 2023 fourth quarter earnings Conference call. This afternoon, we reported net income of $82 5 million for the fourth quarter of 2020, 380.1% increase as compared to a net income of $82 4 million for the third quarter of 2023.

Fourth quarter net income included an $11 3 million or 12 cents per diluted share charge for the one time FDIC special assessment.

The earnings per share was $1 13 per share for the fourth quarter of 2023.

Same as the third quarter of 2023.

In the fourth quarter of 2023, our gross loans increased by $124 million or 11, 5% annualized primarily driven by increases of $218 million or 9.9% annualized in commercial real estate loans $153 million or 11, 6% annualized in residential.

Mortgage loans and $214 million or 25, 9% annualized in commercial loans offset by a decrease of 52 million or 36, 9%.

Annualized in construction loans.

Overall loan growth for 2024 is expected to range between 4% and 5%.

We continue to monitor our commercial real estate loans, turning to slide eight of our earnings presentation.

As of December 31, 2023, the average loan to value of our CRE loans was 50%.

As of December 31st 2023, a retail property loan portfolio slide nine comprises 23% of our total commercial real estate loan portfolio with 12% of our total loan portfolio.

89% of the $2 3 billion in retail loans are secured by retail store building neighborhood in mixed use or strip centers only 10% is secured by shopping centers.

Slide 10 office property loans represents 16% of our total commercial real estate loan portfolio or 8% of the total loan portfolio.

Only 34% of the 1.5 building office property loans are collateralized by pure office buildings.

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 in medical offices.

<unk> 28 per cent of office property loans are collateralized by office condos.

For the fourth quarter of 2023, we reported net charge offs of $4 1 million, which included a $4 2 million reserve established during Q3 2023 on an office construction loan as compared to a net charge off of $6 6 million in the third quarter of 2023.

Our nonaccrual loans were 0.3 or 4% of total loans as of December 31st 2023, which decreased by $10 6 million to $66 7 million as compared to the end of the third quarter of 2023.

Turning to slide 13 as of December 31st 2023 classified loans decreased slightly to 200 million from $202 million as of September 20th 2023.

Special mention loans increased to $308 million from 278 million as of September 30th 2023.

We recorded a provision for credit loss of $1 7 million in the fourth quarter of 2023 as compared to <unk> 7 million in provision for credit losses for the third quarter of 2023.

Total average deposits increased by $244 3 million or five 2% annualized during the fourth quarter of 2023.

Average total core deposits increased 180.7 million or five 9% annualized and average total time deposits increased $63 6 million or 4% during the fourth quarter of 2023 due to organic growth and seasonal increases with.

For 2020 for the overall deposit growth is expected to range between 4% and 5%.

Total uninsured deposits were $8 7 billion.

Excluding 0.8 billion and collateralized deposits, the uninsured and and uncollateralized deposits were reduced to 7.9 billion or 49% of total deposits as of December 31st 2023.

Our unused borrowing capacity from the federal home loan bank with $6 6 billion in Unpledged and Unpledged Securities was 1.5 billion as of December 31st 2023.

Sources of available liquidity, where more than 100% of uninsured and uncollateralized deposits as of December 31st 2023.

I will now turn the floor over to our executive Vice President and Chief Financial Officer, and Mr. Heng Chen to discuss the fourth quarter of 2023 financial results in more detail.

Thank you Chad.

Afternoon, everyone.

For the fourth quarter of 2023 net income increased by $1 million.

One 1% to $82 5 million.

Care to 82 4 million.

Quarter of 2020.

Primarily due to a 9 million unrealized gain on equity securities.

Fourth quarter of 2023.

6.2 million unrealized loss on equity Securities.

In the third quarter of 2023.

Offset by 11.1 million.

Special FDIC assessment.

Three 5 million decrease.

Income before provision for credit losses.

In the fourth quarter of 2020.

Our net interest margin was 3.27 in the fourth quarter of 'twenty.

As compared to 3.38.

For the third quarter of 2023 in the fourth quarter, a 23 inch.

Interest recoveries in prepaid and penalty added one basis point.

Net interest margin as compared to.

Six basis points.

The third quarter of 2023.

We estimate our net interest margin for 2024 to be between 315.

3% to 5%.

For patients with three rate cuts in 2024.

Non interest income during the fourth quarter of 'twenty.

Increased by $15 3 million.

$23 1 million compared to seven point.

In the quarter.

Three.

The increase was primarily due to it.

Okay.

One 2 million increase in unrealized gains on equity securities.

When compared to the Covid.

Non interest expense increased by $16 5 million or 17, 6%.

$10 5 million in the fourth quarter of 2023.

Compared to 94 million.

2023.

The increase was primarily due to $11 3 million from the FDIC Special assessment.

<unk> 7 million in restructuring cost.

1.3 million higher salaries and benefits.

$3 million and higher amortization.

Solar tax credit investments.

We expect core noninterest expense, excluding tax credit and core deposit and tangible amortization FDIC special assessment.

To increase between three to three 5%.

From 'twenty to 'twenty three to 'twenty 'twenty four.

The effective tax rate or order of 2023 was 11 point.

Two 8% as compared to 10.5% third quarter 2023.

'twenty 'twenty four we expect an effective tax rate.

Wally and 21%.

We expect total 'twenty 'twenty four solar tax credit investment Ammar.

Amortization of $6 5 million.

With six months.

For Q1, and <unk> 5 million.

Yeah.

For Q2 2024.

As of December 31, 2023, our tier one leverage capital ratio increased to 10.5.

By 5% as compared to 10, 4% as of September 30 of 2023.

Here, one risk based capital ratio increased 12, 3%.

From 12, 7%.

September 30th Twentyish one three.

Total risk based capital ratio increase.

14, 3% from $14 two 1%.

September 30th 123.

We will now proceed to the question and answer portion of the call.

Thank you very much ladies and gentlemen, if you have a question at this time. Please press. The Star then one on your telephone keypad. We ask that you. Please limit yourself to one question and one follow up you made then return to the queue.

If your question has been answered or you wish to remove yourself from the queue. You May Press Star then two.

To prevent any background noise, we ask that you. Please place yourself on mute. Once your question has been stated.

Your first question comes from Gary Tenner with D. A Davidson. Please go ahead.

Thanks, Good afternoon.

Gary I notice Hey, I know this has been asked certainly on past calls in terms of kind of capital and buyback that just kind of looking at your metrics at year end.

The modest growth rate balance sheet growth rate likely for for next year.

It seems like you would probably be accretive so more capital. So just wondering kind of your updated thoughts.

We're closer to kind of.

Trying to get approval to re engage in a buyback.

Yeah.

Hum.

On.

Discussions with the fed.

During the first quarter.

There's a process or something.

So there's some objections simple form and all of that.

Yes.

And some time to put together those are standard.

No.

We'll be doing that.

Okay. So is that something hanging that.

Theoretically can be completed to where you could.

The active this quarter or would be a second quarter type of that.

I think you know.

Between the application process.

Soccer stars.

In early March.

Yep.

The earliest would be.

That was the capital Sir.

So well.

If we don't buy it.

We can always buy it later.

That's my point.

Correct.

Okay, and then just as it relates to the NIM guidance can you tell us what the rate outlook is or what rate assumptions you have.

Embedded in that guidance.

Yeah.

We're assuming.

We fed rate cuts, we think it's probably the first rate cut.

Followed by two more.

Okay.

Yeah.

One other things.

We are doing is Uh huh.

There for fed rate cuts is.

Sure.

The term of our.

Cds.

You May you may have seen our Chinese new year promotion.

On our website.

Hey, Sam.

Right. This is Wes.

A higher rate for six months.

Versus.

Hmm.

The lower rate for one year.

Plus.

Deposit so nice piggyback.

So it's calling for a while but the important thing is.

If we are.

Shortened the duration Cds will better match.

The fed's rate cuts.

Got it yes.

Appreciate it.

Color. Thank you.

Okay. Thanks again.

Thank you. The next question is from Brandon King with <unk> Securities. Please go ahead.

Hey, good evening.

Hi.

So with your NIM guidance, how are you thinking about the pace of the trajectory of the net interest margin. In 2024 are you expecting to maybe hit a trough sometime mid 2024 and stabilization or do you see sequential decreases in the end of 2024.

What we.

We think mid maybe Q3.

Yeah.

We look at our interest rate forecast all the time.

So.

Back of the envelope.

The picture is about two thirds of our loans are fixed this is counting.

About half a dozen of swaps.

Base pay fixed received floating.

And then about two thirds of our.

We are looking at things about two thirds of our deposits are low.

So at some point it out.

Yes, the deposits that deposit costs are going to go down.

Plus.

We probably will originate.

Two 1 billion.

Loans.

Joining me most of that is fixed so at some point.

Our NIM will improve just from the fact that the deposit pressure wall.

Well say that actually yeah.

Help us because we have more fixed rate loans.

Then.

Yeah.

Got it got it and would you say at this point.

If the forward curve plays out would maybe cause margin potential to be a little bit better just given the comments you just said or.

Could you end up kind of in the same place just as more of a timing thing.

It's hard to predict particularly.

Additional week sort of late in the year, you will have very little impact.

NII for 2024.

Okay.

And then on loan growth.

What categories are you expecting to be the drivers of loan growth for 2024.

Brendan based on 2023 results, we saw at about 9% increase on the residential mortgage.

It's quite interesting for that year, because that was a record bookings year for us 90% of that business was from purchases and yet we saw a headline that.

Purchase activities was the lowest in 28 years so.

I think because our buyers are a lot less rate sensitive. So we continue to see activity. There. 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 jumped back in from the from the sidelines and we will.

See some more activity there as well.

Got it alright. Thanks.

Thanks for all the answers and I'll hop back in the queue.

Yeah. Thank you.

Thank you.

As a reminder to ask a question you May Press Star then one the next question comes from Andrew Terrell with Stephens. Please go ahead.

Hey, good afternoon.

Hi, Andrew.

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 $3 15 to $3 25.

For 2024, what you assume for noninterest bearing deposit balances does that predicate kind of stable balances or would you expect continued decline was in that forecast.

We think it's been relatively stable so.

Hum.

Yes.

We're looking at.

The DEA to be about the same.

In 2024.

Okay got it.

And then I wanted maybe better understand the.

From the time deposit portfolio some of the near term repricing dynamics I know you had a lot of success in your letter new year campaign early in 2023 I appreciate the color around the.

The cost or the rate.

The term for the special this year, but can you remind us how much in terms of Cds you have repricing in the first quarter of 2024.

Yes, that's our highest.

I guess.

Renewal quarter.

Because.

We had the Chinese new year deposit promotion.

Q1.

So it's three 8 billion.

The average yield is a 4.16.

So ill.

Oh flex up a little bit with this.

This year's promotion and then Q2 with drops to be too.

<unk> 2 billion and the rate is 4.53.

Q3's, $1 1 billion the Raiders 4.41.

And then Q4 2 billion and liberate us.

4.54, so the latter three quarters Theres already.

Fair amount of wheat.

Our CD pricing.

Isn't that great.

That's the base.

Yeah. Okay. So why don't you definitely kind of the heaviest quarter from a repricing standpoint.

Right yes.

Okay and then.

I also wanted to ask on just.

The full year 2004, Guy do you have an expectation for the <unk>.

The low income housing tax.

Tax amortization.

Yeah.

Yeah.

Hi.

It'll be slightly higher than this year.

I think the amortization would be maybe.

Yeah.

$5 million higher than this year's number.

Let me I'll E.

E Mail you back.

Perfect I appreciate that.

That's it for me I appreciate you all taking my questions.

Okay. Thank you.

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

Yeah.

Hey, good afternoon.

Hi.

Wanted to just touch a couple more questions around the NIM margin.

Do you happen to have the spot rate I guess at year end on deposits whether interest bearing a total and then the average name in the month of December.

Yeah, Let me, let me find that.

Yeah.

Oh the.

The total.

Interest bearing deposits.

Oh.

31.

2023 is 3.54.

And December NIM is SaaS.

One nine.

Okay. Thank you and then any material prepay fees in the margin this quarter I think it was a couple million last quarter.

Hi, guys.

It was only one basis point.

This quarter, Okay got it. Thank you was 6% fixed in Q3.

Yep.

Okay.

Thank you and then.

The step up in C&I reserves this quarter. It looked like it was up over that 11 million.

And I think.

I think your special mentioned was up I mean can you speak to what drove the increase in C&I reserves this quarter and.

Whether or not that was related to the special mention increase or not or if theres something else going on.

Oh, Yeah, we had one loan that.

It was not.

Non accrual in Q3.

We are they are.

Fairly heavy sort of bump on low Q4.

Speaker Change: But I think the rest of the portfolio.

Yes.

Yes, we do.

Didn't have to add reserves for that.

Most of the increase.

And C&I loans.

Fourth quarter Okay.

Came from that same borrower that came in in Q2.

Right.

Yeah.

So what drove it.

Credit.

Public Tech companies.

So in the luxury sector.

Got it okay, great and then.

The low income housing tax credit amortization, it sounds like Youll confirm that maybe just send it around I guess to everyone. If you don't mind, but it seems like.

Would that be evenly spread throughout the year or is that a fair assumption.

Yes, $5 million higher from last year, Okay. Okay. Thank you.

Speaker Change: I'll send around yes, okay. Okay. Thanks Ralph.

Okay.

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

Speaker Change: 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 great day.

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