Cathay General Bancorp (NASDAQ:CATY) Q1 2024 Earnings Call Transcript April 22, 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 Cathay General Bancorp’s First Quarter of 2024 Earnings Conference Call. My name is Gary and I’ll be your co-ordinator 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 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, Gary, and good afternoon. Here to discuss the financial results today are Mr. Chang Liu, our President and Chief Executive Officer and Mr. 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 31st, 2023, 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 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 first quarter 2024 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 up 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. Welcome to our 2024 first quarter earnings conference call. This afternoon we reported net income of $71.4 million for the first quarter of 2024, a 13.4% decrease as compared to $82.5 million the previous quarter. Our net income this quarter included a $9 million or $0.09 per diluted share mark-to-market loss from equity securities and a $2.9 million or $0.03 per diluted share accrual for an increase in the FDIC special assessment. Diluted earnings per share decreased by 13.5% to $0.98 per share for the first quarter of 2024 as compared to $1.13 per share in the previous quarter. In first quarter 2024, total gross loans decreased $119 million or 2.4% annualized, primarily driven by increases of $92 million or 3.8% annualized in commercial real estate loans, offset by a decrease of $172 million or 20.9% annualized in commercial loans and $40 million or 37.7% annualized in construction loans.
Due to slower than expected loan growth in first quarter 2024, we have revised our overall loan growth guidance for 2024 to range between 3% and 4%. We’ve added slide six to show the percentage of loans in which major loan portfolio that are either fixed rate or hybrid loans in their fixed rate period. Our loan portfolio consists of 64% fixed rate and hybrid loans excluding fixed-to-float interest rate swaps on 4% of total loans. Fixed rate loans comprised 30% of total loans and hybrid loans in fixed rate period comprised 34% of total loans. We continue to monitor our commercial real estate loans. Turning to slide eight of our earnings deck, as of 31st 2024, the average loan-to-value of our CRE loans was 50%. As of March 31st, 2024, our retail property loan portfolio is shown on slide nine, comprised of 23% of our total commercial real estate loan portfolio or 12% of our total loan portfolio.
90% of the $2.3 billion in retail property loan is secured by retail store building, neighborhood, mixed-use or strip centers, only 9% is secured by shopping centers. On slide 10, office property loans represent 15% of our total commercial real estate loan portfolio or 8% of our total loan portfolio. Only 34% of the $1.5 billion in office property loans are collateralized by pure office buildings, only 3% are in central business districts. 38% of office property loans are collateralized by office retail stores, office mixed-use and medical offices and the remainder 28% are collateralized by office condos. For first quarter 2024, we reported net charge-offs of $1.1 million as compared to $4.1 million in the previous quarter. Our non-accrual loans were 0.5% of total loans as of March 31st, 2024, which increased by $31.4 million to $98.1 million as compared to the previous quarter.
The increase in non-accrual loans during first quarter 2024 came mainly from a $23 million low loan-to-value construction loan in New York, which is past due maturity, and two theater loans totaling $21 million. Turning to slide 12, as of March 31st, 2024, classified loans increased to $244 million from $200 million as of December 31st, 2023, and our special mention loans decreased to $249 million from $308 million as of December 31st, 2023. So for first quarter 2024, there was a small decrease in total special mention and classified loans. We recorded a provision for a credit loss of $1.9 million the first quarter of 2024 as compared to a $1.7 million in provision for credit losses for the previous quarter. Total deposits increased by $520.8 million or 10.8% annualized during the first quarter of 2024.
Total core deposits increased $210.9 million or 8.4% annualized and total time deposits increased $731.7 million or 31.3% during the first quarter of 2024, mainly due to our Lunar New Year CD campaign. We expect the overall deposit growth to continue in an estimated range between 4% and 5%. As of March 31st, 2024, total uninsured deposits were $8.1 billion, net of $0.7 billion in collateralized deposits or 40.7% of total deposits. We have an unused borrowing capacity from the Federal Home Loan Bank of $6.9 billion and unpledged securities of $1.7 billion as of March 31st, 2024. The sources of available liquidity more than cover 100% of uninsured and uncollateralized deposits as of March 31st, 2024. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Chen to discuss the quarterly financial results in more detail.
Heng Chen: Thank you, Chang, and good afternoon, everyone. For Q1 2024, net income decreased by $11.1 million or 13.4% to $71.4 million, compared to $82.5 million in the previous quarter, primarily due to $9 million unrealized loss of equity securities in Q1 2024 versus a $9 million unrealized gain on equity securities in Q4 2023, an additional $2.9 million accrual in Q1 2024 for the FDIC special assessment. Q1 2024 net interest margin was 3.05% as compared to 3.27% for the previous quarter. Interest recoveries and prepayment penalties did not change the net interest margin for Q1 2024 versus an increase of one basis point for the previous quarter. We estimate our net interest margin for 2024 to be between 3.05% to 3.15% based on the expectation for two rate cuts in 2024 with the first rate cut in September and the second rate cut in December.
Our prior net interest margin guidance was based on three rate cuts, with the first rate cut being in June. Given that 64% of our loans, fixed rate or hybrid loans in their fixed rate period, the lower number of rate cuts negatively impacted our net interest margin guidance. Non-interest income during the first quarter of 2024 decreased by $16.5 million to $6.6 million when compared to $23.1 million the previous quarter. The decrease was primarily due to $18 million increase in unrealized loss on equity securities between the two quarters. Non-interest expense decreased by $17.3 million or 15.6% to $93.2 million in Q1 2024 when compared to $110.5 million the prior quarter. This decrease was primarily due to a net decrease of $8.3 million from the FDIC special assessment, $11.7 million in lower amortization of solar tax credit investments, and $1.3 million lower in professional expense, offset by increase of $3.5 million in salary and benefits, which included a $2 million true up for 2023 bonuses and a $1.4 million seasonally higher payroll expense and an acceleration of $1 million of contributions into Q1 2024 as compared to the previous quarter.
The effective tax rate for Q1 2024 was 10.76% as compared to 11.28% the previous quarter. With the closing of a new solar tax credit fund investment in Q1 2024, we expect an effective tax rate of between 12% and 13% for 2024. We now expect total 2024 solar tax credit investment amortizations of $32.5 million with $8 million in Q2 of 2024 and $9 million each in Q3 and Q4. As of March 31, 2024, our Tier 1 leverage capital ratio increased to 10.71% as compared to 10.55% as December 31, 2023. Our Tier 1 risk based capital ratio increased to 13.08% from 12.83% as of December 31, 2023, and a total risk based capital ratio increased to 14.55% from 14.3% as of December 31st, 2023.
Georgia Lo: Thank you, Heng. We will now proceed to the question-and-answer portion of the call.
Operator: [Operator Instructions] The first question today is from Matthew Clark with Piper Sandler. Please go ahead.
Matthew Clark: Hey, good afternoon. Thanks for the questions. Just the first one around the margin. Can you give us the average margin in the month of March and then the spot rate on interest-bearing or total deposits at the end of March?
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