Cathay General Bancorp
NASDAQ:CATY
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Earnings Call Analysis
Q4-2023 Analysis
Cathay General Bancorp
The company demonstrated financial resilience, with an increase in their Tier 1 risk-based capital ratio to 12.83% and total risk-based capital ratio to 14.3%, both showing improvement from the levels reported as of September 30, 2023. Additionally, there are upcoming discussions with the Federal Reserve planned for the first quarter, targeting approval for share buybacks. If the application process and regulatory blackout periods align, share buybacks could potentially commence as early as the second quarter.
Anticipating three federal rate cuts, the company is adjusting its approach by shortening the terms of its certificates of deposit (CDs) to better align with these rate changes. The executive team expects that deposit costs will decrease by mid to late 2024, allowing net interest margins (NIM) to improve due to a higher proportion of fixed-rate loans compared to floating rate deposits and new loan origination at fixed rates. NIM is guided to be between 3.15% to 3.25% for 2024, with expectations for noninterest-bearing deposit balances to remain stable.
The company saw significant growth in residential mortgages, up 9% in 2023, a trend attributed to a customer base that is less interest rate sensitive. Purchases accounted for 90% of this business, suggesting robust activity despite wider market slowdowns. Commercial mortgages also experienced a 10% increase in 2023. Looking ahead, the company expects modest growth in this area, especially if federal rate cuts materialize, potentially stimulating more market activity.
Liquidity management is a critical consideration, with approximately $3.8 billion in CDs set to reprice in the first quarter of 2024, reflecting the company's largest renewal quarter stemming from the previous year's Chinese New Year promotion. Subsequent quarters also have significant amounts due for repricing, with Q2 at $2 billion, Q3 at $1.1 billion, and Q4 at $2 billion. The company is being proactive with its current promotional strategy to ensure CD pricing aligns with the interest rate environment and consumer expectations.
The company anticipates a slight increase in low-income housing tax credit amortization, estimating it may be $5 million higher than the previous year. This expectation accounts for the company's ongoing efforts to manage costs effectively across the business.
Total interest-bearing deposits reached 3.54% at the year-end of 2023, with the December NIM recorded at 3.19%. The company continues to focus on the management of deposit costs and maintaining a healthy NIM, considering these factors in their ongoing financial planning and strategy.
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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 to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp. Please go ahead.
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 1A 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 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 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.
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 $11.3 million or $0.12 per diluted share charge for the onetime FDIC special assessment. 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 $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. 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, mix 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, mix use and medical offices. The remaining 28% 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 0.34% 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. These 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.
Thank you, Chang, and good afternoon, everyone. For the fourth quarter of 2023, net income increased by $0.1 million of 0.1% to $82.5 million compared to $82.4 million for the third quarter of 2023, primarily 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 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.
Noninterest 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. Noninterest 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 noninterest 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 for the investment amortization of $6.5 million or $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.
[Operator Instructions] Your first question comes from Gary Tenner with D.A. Davidson.
I know this has been asked, certainly, on past calls in terms of kind 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 and it seems like you'd probably be accreting some more capital, so just wondering kind of your updated thoughts or how -- if you're closer to kind of trying to get that approval to reengage in a buyback.
Yes. We plan on discussions with the Fed during the first quarter. There's a process or some -- there are some projections in 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 it would be a second quarter type event?
I think. Between the application process and the blackout period, which starts in early March, it's probably -- the earliest would be in Q2, but the capital's there already, 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?
Yes. We're assuming 3 fed rate cuts, we think it's probably made 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 [ 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 back. 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.
The next question is from Brandon King with Truist Securities.
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 and stabilization? Or do you see sequential decreases through the end of 2024?
We think mid, maybe Q3. We look at our interest rate forecast all the time and sort of "back of the envelope" pictures, about 2/3 of our loans are fixed. This is counting about $0.5 billion of swaps, fixed received floating and then about 2/3 of our -- or looking at things about 2/3 of our deposits are floating. So at some point, if the deposit costs are going to go down and plus, we probably will originate $2.5 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 help us, because we have more fixed rate loans than DDA.
Got it. And would you say at this point, like, if the forward curve plays out, would the interest margin potentially be a little bit better just given the comments you just said? Or because you end up in kind of in the same place, this is more of a timing thing?
It's hard to predict, particularly if the additional rate cuts are late in the year. You'll have very low 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 purchase activity is -- were 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 jump back in from the sidelines and we'll see some more activity there as well.
[Operator Instructions] The next question comes from Andrew Terrell with Stephens.
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, 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 within that forecast?
We think it's been relatively stable, so we're looking at the DDA 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. 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 first quarter of 2024?
Yes. 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 million, so it'll flex up a little bit with this year's promotion and then Q2 withdraws to be $2 billion and the rate there is 4.53%. Q3 $1.1 billion, the rate is 4.41% and then Q4 is $2 billion, and the rate is 4.54%. So the latter 3 quarters, there is already a fair amount of CD pricing in that rate existing base.
Yes. Okay. So 1Q, 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?
Yes. It's it'll be slightly higher than this year. I think the amortization would be -- may be $5 million higher than this year's number. Let me -- I'll e-mail you back.
The next question comes from Matthew Clark with Piper Sandler.
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?
Yes. So the total interest-bearing deposits is, at year-end 12/31/2023 is 3.54% and the December NIM is 3.19%.
Okay. And then any material prepay fees in the margin this quarter? I think it was a couple of million last quarter.
Yes, it's less. It was only 1 basis point this quarter and it was 6 in Q3.
Yes. Okay. And then the step-up in C&I reserves this quarter, it looked like it was up about $11 million. And I think your special mention was up. I mean, could 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?
Yes. We had one loan that -- it was a nonaccrual in Q3, so we put a fairly heavy reserve on that one loan in Q4, but I think the rest of the portfolio is -- we didn't have to add reserves for it. 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 -- so with very good credit. It's a public tech company, so that it didn't mean much reserve.
Got it. Okay. Great. And then the low-income housing tax credit amortization, sounds like you'll confirm, 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? Is that a fair assumption? Assuming $5 million higher from last year?
Yes. I'll send it around, yes.
Thank you for your participation. I will now turn the call 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 have a great day.