Cathay General Bancorp (NASDAQ:CATY) Q4 2023 Earnings Call Transcript
Cathay General Bancorp (NASDAQ:CATY) Q4 2023 Earnings Call Transcript January 24, 2024
Cathay General Bancorp isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2023 Cathay General 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. Following the prepared remarks, there will be a question-and-answer session. [Operator Instruction] 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. Please go ahead.
Georgia Lo: Thank you, MJ, and good afternoon. Here to discuss the financial results today are Mr. Chang Liu 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 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 Form 10-K for the year ended, December 31, 2022, at Item 1 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 statement speaks only as of the date on which it is made and accept 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 an anticipated event. This afternoon, Cathay General Bancorp issued an earnings release outlining its fourth quarter and full year 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 this call up 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 fourth quarter earnings conference call. This afternoon, we reported net income of $82.5 million for the fourth quarter of 2023, a 0.1% increase as compared to a net income of $82.4 million for the third quarter of 2023. The fourth quarter net income included an $11.3 million or $0.12 per diluted share charge for the one-time FDIC special assessments. Diluted 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 $524 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.
The 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 31, 2023, our retail property loan portfolio at slide nine comprises 23% of our total commercial real estate loan portfolio or 12% of our total loan portfolio. 89% of the $2.3 billion in retail loans is secured 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 $1.5 billion in 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. The remaining 28% of office property loans are collateralized by office condos. In 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 non-accrual loans were 0.34% of total loans as of December 31, 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 31, 2023, classified loans decreased slightly to $200 million from $202 million as of September 20, 2023, and our special mention loans increased to $308 million from $278 million as of September 30, 2023.
We recorded a provision for credit loss of $1.7 million in the fourth quarter of 2023, as compared to $7 million in provision for credit losses for the third quarter of 2023. Total average deposits increased by $244.3 million or 5.2% annualized, during the fourth quarter of 2023. Average total core deposits increased $180.7 million or 5.9% 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. For 2024, the overall deposit growth is expected to range between 4% and 5%. Total uninsured deposits were $8.7 billion, but excluding $0.8 billion in collateralized deposits, the uninsured and uncollateralized deposits were reduced to $7.9 billion or 40.9% of total deposits as of December 31, 2023.
Our unused borrowing capacity from the Federal Home Loan Bank was $6.6 billion, and unpledged securities was $1.5 billion as of December 31, 2023. The sources of available liquidity were more than 100% of uninsured 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 Chen, to discuss the fourth quarter 2023 financial results in more detail.
Heng Chen : Thank you, Chang, and good afternoon everyone. For the fourth quarter of 2023, net income increased by $0.1 million or 0.1% to $82.5 million, compared to $82.4 million for the third quarter of 2023, primarily due to a $9 million unrealized gain on equity securities in the fourth quarter of 2023, from $6.2 million unrealized loss on equity securities in the third quarter of 2023, offset by $11.1 million for the special FDIC assessment, and a $3.5 million decrease in net interest income before provision for credit losses in the fourth quarter of 2023. Our net interest margin was 3.27% in the fourth quarter of 2023, as compared to 3.38% for the third quarter of 2023. In the fourth quarter of 2023, interest recoveries and prepayment penalties added 1 basis point to the net interest margin as compared to 6 basis points for the third quarter of 2023.
We estimate our net interest margin for 2024 to be between 3.15% to 3.25%, based on expectations for three big cuts in 2024. Non-interest income during the fourth quarter of 2023 increased by $15.3 million to $23.1 million, when compared to $7.8 million in the third quarter of 2023. The increase was primarily due to a $15.2 million increase in unrealized gains on equity securities, when compared to the third quarter of 2023. Non-interest expense increased by $16.5 million or 17.6%, to $110.5 million in the fourth quarter of 2023, when compared to $94 million in the third quarter of 2023. The increase was primarily due to $11.3 million from the FDIC special assessment, $0.7 million in restructuring costs, $1.3 million in higher salaries and benefits, and $3 million in higher amortization of solar tax credit investments.
We expect core non-interest expense, excluding tax credit and core deposit and tangible amortization in FDIC special assessment, to increase between 3% to 3.5% from 2023 to 2024. The effective tax rate for the fourth quarter of 2023 was 11.28%, as compared to 10.95% for the third quarter of 2023. For 2024, we expect an effective tax rate of between 20% and 21%. We expect total 2024 solar tax credit investment amortization of $6.5 million, with $6 million for Q1 and $0.5 million for Q2 of 2024. As of December 31, 2023, our Tier 1 leverage capital ratio increased to 10.55%, as compared to 10.44% as of September 30, 2023. Our Tier 1 risk-based capital ratio increased to 12.83%, from 12.7% as of September 30, 2023, and our total risk-based capital ratio increased to 14.3% from 14.21% as of September 30, 2023.
Chang Liu: Thank you, Heng. We will now proceed to the question-and-answer portion of the call.
Operator: Thank you very much. [Operator Instructions]. Your first question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Gary Tenner : Thanks. Good afternoon.
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