Q4 2023 Cathay General Bancorp Earnings Call
Participants
Georgia Lo; Investor Relations; Cathay General Bancorp
Heng Chen; Chief Financial Officer, Executive Vice President, Treasurer; Cathay General Bancorp
Presentation
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. (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. 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 up call up 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, 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 in $11.3 million or $0.12 per diluted share charged 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 8 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 9 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. Resources 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 Cheng, 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 $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 increased 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 one basis point to the net interest margin as compared to six 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 rate 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, intangible amortization, and 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.
Thank you, Heng. We will now proceed to the question-and-answer portion of the call.
Question and Answer Session
Operator
(Operator Instructions) Gary Tenner, D.A. Davidson.
Thanks. Good afternoon. I know this has been asked certainly on past calls in terms of capital and buyback, but just looking at your metrics at year-end, the modest growth rate, balanced growth rate likely for next year, and it seems like you would probably be accreting some more capital. So just wondering kind of your updated thoughts or if you're closer to trying to get that approval to re-engage in a buyback.
Heng Chen
Yeah. We plan on discussions with the Fed during the first quarter. There's a process. There's some projections and performance and all that. So, it takes some time to put together. Those are standard, but we'll be doing that.
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?
Heng Chen
I think between the application process and the blackout period, which starts in early March, it's probably -- the earliest would be Q2. But the capital's there, Gary. So, if we don't buy it, we can always buy it later in the year. That's my point.
Right. 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?
Heng Chen
Yeah. We're assuming three Fed rate cuts. We think it's probably May for the first rate cut, followed by two more. And one of the things that we're doing is to prepare for Fed rate cuts is to shorten the term of our CDs. So, you may have seen our Chinese New Year promotion now on our website. We're paying a similar rate as East-West, a higher rate for six months versus a lower rate for one year. Plus, the deposit gets a nice piggyback. So, it's going very well. But the important thing is if we shorten the duration of CDs, we'll better match the Fed's rate cuts.
Got it. Yeah, I did see that. I appreciate the coloring. Thank you.
Heng Chen
Yeah. Thank you, Gary. Thank you. The next question is from Brandon King with Truist Securities. Please go ahead. Hey, good evening. Hi, Brandon. So, with your NIM guidance, how are you thinking about the pace of or the trajectory of the net interest margin in 2024? Are you expecting to maybe hit a trough sometime mid-2024 in stabilization, or do you see sequential decreases through the end of 2024? We think mid, you know, maybe Q3. We look at our interest rate forecast all the time. So, the back of the envelope picture is about two-thirds of our loans are fixed. This is counting about half a billion swaps. These fixed receipts floating. And then about two-thirds of our, in our looking at things, about two-thirds of our deposits are floating. So, at some point, you know, if the deposit, the deposit costs are going to go down, and then plus, we probably will originate two and a half billion of new loans during the year, and 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, you know, help us because we have more fixed rate loans than DEA. Got it. Got it. And would you say at this point, if the forward curve plays out, would the interest margin potentially 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? You know, it's hard to predict, you know, particularly if the additional rate cuts are late in the year, it'll have very little impact on NII for 2024. Okay. And then on loan growth, what categories are you expecting to be the drivers of loan growth for 2024? Brandon, based on 2023 results, we saw about a 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, and yet we saw a headline that, you know, purchase activities were the lowest in 28 years. So, you know, 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 jump back in from the sidelines and we'll see some more activity there as well. Got it. All right. Thanks for all the answers, and I'll hop back into 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 Stevens. Please go ahead. Hey, good afternoon. Hi, Andrew. A couple of questions, if I could just start on the margin. Can you talk us through just within the NIM guidance that you provided at 315 to 325 for 2024, what you assume for non-interest bearing deposit balances? Does that predicate kind of stable balances, or would you expect continued decline within that forecast? We think it's been relatively stable. So, we're looking at the DEA to be about the same in 2024. 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. 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 first quarter of 2024? Yeah, that's our highest renewal quarter. Because we had the Chinese New Year deposit promotion last Q1. So, it's $3.8 billion. The average yield is $4.16. So, we'll flex up a little bit with this year's promotion. And then Q2, it drops to be $2 billion, and the rate there is $4.53. Q3 is $1.1 billion. The rate is $4.41. And then Q4 is $2 billion, and the rate is $4.54. So, the latter three quarters, there's already a fair amount of CD repricing in that rate, in existing base. Yeah. Okay. So, one Q, 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 24 guide, do you have an expectation for the low-income housing tax amortization? Yeah. It'll be slightly higher than this year. I think the amortization will be maybe $5 million higher than this year's number. I'll email you back. Okay. Perfect. I would appreciate that. That's it for me. I appreciate you all taking the questions. Okay. Thank you. Thank you. The next question comes from Matthew Clark with Piper Sandler. Please go ahead. Hey, good afternoon. 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? Yeah. Let me find that. So, the total interest-bearing deposits is at year-end, 12-31-2023. It's 3.54. And the December NIM is 3.19. Okay. Thank you. And then, any material prepay fees in the margin this quarter? I think it was a couple million last quarter. Yeah. It's less. It was only one basis point this quarter. Okay. Got it. Thank you. It was six in Q3. Yep. Okay. Thank you. And then, the step-up in C&I reserves this quarter looked like it was up about 11 million, and I think your special mention 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 there's something else going on? Oh, yeah. We had one loan that 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... Yeah. We didn't have to add reserves for that because most of the increase in C&I loans in the fourth quarter came from that same borrower that came in in Q2. It's a tech company. Yeah. So, with very good credit. It's a public tech company. So, it didn't need much reserve. Got it. Okay. Great. And then, the low-income housing tax credit amortization, sounds like you'll confirm that, maybe just send that around, I guess, to everyone if you don't mind. But it seems like... Would that be evenly spread throughout the year? Is that a fair assumption, assuming it's $5 million higher from last year? Okay. Okay. Thank you. Yeah. I'll send it around. Yes. Okay. Okay. Thanks for your help. Yeah. Thank you for your participation. I will now turn the call over to Cathay General Bank Corp'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 have a great day.
