Cathay General Bancorp

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's fourth quarter and full year 2024 earnings conference call. My name is Asha, 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 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.capageneralbankcorp.com. Now, I would like to turn the call over to Georgia Lowe, Investor Relations of Capay General Bank Corp. Please go ahead.

Thank you, Asha, and good afternoon. Here to discuss the financial results today are Mr. Chang Liu, our President and Chief Executive Officer of and Mr. Hang 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 other reports and filing 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 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 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. Before we go into our 2024 fourth quarter earnings, I know that our hearts are heavy with the news of the devastating fires that have swept across Los Angeles. The destruction is unimaginable, and our thoughts are with every person affected. Recovery is a long-term process. When the flames are extinguished, the work of rebuilding lives and communities will continue. The bank, along with the rest of our Los Angeles community, will continue to work diligently towards that part. This afternoon, we reported net income of $80.2 million for Q4 2024, an 18.8% increase as compared to $67.5 million in Q3. Diluted earnings per share increased 19.1% to 1.12% per share for the fourth quarter as compared to 0.94% per share in Q3. During Q4 2024, we repurchased 506,651 shares of our common stock, at an average cost of $47.10 per share, or $23.9 million under our May 2024 $125 million stock buyback program. We anticipate continuing to repurchase around $30 million in stock in Q1 2025, depending on market conditions. In Q4 2024, total gross loans increased $2.4 million, or 0.05% annualized, primarily driven by increases of 59 million or 2.4% annualized in CRE loans, and 13 million or 11.9% annualized in construction loans, offset by decreases of 61 million or 4.2% annualized in residential mortgages, and 9 million or 1.1% annualized in commercial loans. We expect loan growth in 2025 to be between 3% and 4%. Slide seven shows the percentage of loans in each major loan portfolio that are either fixed-rate or hybrid loans in their fixed-rate period. Our loan portfolio consists of 63 percent fixed-rate and hybrid loans, excluding fixed-to-flow interest rate swaps on 4.1 percent of the total loans. Fixed-rate loans comprise 31 percent of total loans, and hybrid and fixed-rate period comprise 32 percent of total loans. We expect these fixed-rate loans to support our loan yield as market rates are expected to decline. We continue to monitor our commercial real estate loans. Turning to Slide 9 of our earnings deck, as of December 31, 2024, the average loan-to-value of our CRE loans was 49 percent. As of December 31, 2024, our retail property loan portfolio, as shown on Slide 10, comprised of 24 percent of our total CRE loan portfolio, or 13 percent of our total loan portfolio. Ninety percent of the $2.4 billion in retail property loan was secured by retail store and buildings, neighborhood mixed-use, or strip centers, and only 9% is secured by shopping centers. On slide 11, office property loans represent 14% of our total CRE loan portfolio, or 7% of our total loan portfolio. Only 36% of the $1.4 billion in office property loans are collateralized by pure office, and only 3.5% are in central business districts. 36% 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 Q4 2024, we reported net charge-offs of $16.3 million, as compared to $4.2 million in Q3. Of the $16.3 million net charge-offs, $12.2 million is related to a syndicated commercial loan for a borrower in the recycling business. Our non-accrual loans were 0.83% of total loans as of December 31, 2024, which increased $6.3 million to $169.2 million as compared to Q3. The increase in non-accrual loans during Q4 2024 came primarily from a $16 million CRE loan collateralized by a commercial and residential mixed-use property in New York. The loan was reclassified as non-accrual in December after the borrower filed for bankruptcy. The loan is fully secured by the collateral and no loss is projected. Turning to slide 13, as of December 31st, 2024, classified loans decreased slightly to $380 million from $382 million in Q3. And our special mention loans increased to $293 million from $203 million in Q3. We recorded a provision for credit loss of $14.5 million in Q4 2024, same as for Q3. the reserve to loan ratio decreased to 0.83% for Q4 from 0.85% for Q3. However, excluding our residential mortgage portfolio, the total reserve to loan ratio would be 1.08%. Total deposits decreased by $258 million or 5.3% annualized during Q4 2024, primarily due to the decrease of $449 million in broker deposits. Total core deposits increased $417 million, or 16.7% annualized, due to seasonal factors and marketing activities. Total time deposits, excluding broker deposits, decreased $226 million during Q4 2024. We expect deposit growth for 2025 to be between 3% and 4%. As of December 31, 2024, total uninsured deposits were $8.6 billion, net of $0.8 billion in collateralized deposits, or 43.8 percent of total deposits. We have an unused borrowing capacity from the Federal Home Loan Bank of $7.2 billion and the Federal Reserve Bank of $395 million, and unplanned securities of $1.5 billion as of December 31st, 2024. These sources of available liquidity more than covers 100 percent of uninsured and uncollateralized deposits as of December 31st, 2024. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Hang Chang, to discuss the quarterly financial results in more detail.

Thank you, Chang, and good afternoon, everyone. For Q4 2024, net income increased to $12.2 million, or 18.8%, to $80.2 million, compared to $67.5 million for Q3 2020. primarily due to an increase of $1.9 million in net interest income, $11.6 million decrease in non-interest expense, and $4.1 million decrease in income tax expense, offset by a $4.9 million decrease in non-interest income. Q4 2024 net interest margin was 3.07% as compared to 3.04% for Q3. We are pleased that our NIM and net interest income appear to have bottomed out, and we anticipate further benefit to the NIM and net interest income based on the ability to lower deposit costs over the next few quarters. while having the support of our fixed rate loans. With the strong December job report, the Fed Fund Futures Group projects one rate cut in July 2025. We anticipate that the net interest margin for 2025 to range between 3.2% 10% and 3.20%. In Q4, interest recoveries and prevent penalties added four basis points to the net interest income, sorry, to the net interest margin as compared to five basis points in net interest margin for Q3. Non-interest income for Q4 2024 decreased $4.9 million to $15.5 million compared to $20.4 million in Q3 2024. A decrease was primarily due to a $5.6 million change in market-to-market unrealized gain of 4.3% in Q3 2024. to unrealized loss of 1.3 million in Q4 equity securities. Non-interest expenses decreased by 11.6 million or 12% to 85.2 million in Q4 2024 when compared to 96.9 million in Q3. This decrease was primarily due to $12.7 million in lower solar tax credit funds amortization with respect for non-interest expense, excluding tax credit and core for deposit and tangible amortization to increase between 4.5% to 5.5% for 2020. from 2024 to 2025. The effective tax rate for Q4 2024 was 7.6% as compared to 13.6% for Q3. We expect an effective tax rate between 19.5% and 20.5% for 2025. we do not anticipate investing in any solar tax credit investment funds in 2025. As of December 31, 2024, our Tier 1 leverage capital ratio increased to 10.97% as compared to 10.2% as of September 30, 2024. Our Tier 1 risk-based capital ratio increased to 13.55% from 13.33% as of September 30th, 2024. And our total risk-based capital ratio increased to 15.09% from 14.88% as of September 30th, 2024.

Thank you, Heng. We will now proceed to the question and answer portion of the call.

Ladies and gentlemen, if you have a question at this time, please press star then one key on your touch-tone phone. We ask that you please limit yourself to one question and one follow-up question. You may then return to the queue. If your question has been answered or you wish to remove yourself from the queue, please 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 Matthew Clark with Piper Sandler. Please go ahead.

Good afternoon. Just a few questions around the margin. Could you give us the average margin in the month of December and the spot rate on deposits at the end of the year?

Yeah, the average margin for the month of December was 3.05%. I'm sorry, 3.11%. That included six basis points of interest recoveries. And then what was the other part of your question?

The spot rate on deposits, either total or interest-bearing at year-end.

So the total weighted spot rate at your end was 3.52. Okay.

That's interest-bearing. Okay. And then can you remind us how much in the way of CDs you have coming due here in the first quarter and the rates they're maturing at and what you expect them to renew at?

It's quite a bit. So we have 4.2 billion of CDs maturing. This is from our Chinese Lunar New Year promotion that's maturing. And the average yield is 4.6%. We're offering the renewal from the Chinese New Year CD. at between 4% and 4.1, depending on the size of the deposit.

Okay. And then just last one, and then I'll hop back in the queue. Your expectations for the low-income housing tax credit amortization this year in dollars? It's about $10 million a quarter, Matthew. Okay. And I know you're not going to do any solar, but are there any other tax credit investments embedded in that tax rate guidance, or is it just the low-income housing we're assuming for now? It's just low-income housing.

Okay. Thank you. The next question comes from Chris McGrady with KBW. Please go ahead.

Oh, great. Thanks for the question. I was wondering if you could unpack the expense the core expense growth of roughly 5% a little bit higher than what we've been seeing. I'm wondering if there's a catch up in some investments or anything in particular you'd call out.

It's mostly we've been adding to staff in 2024. So it's a full year impact of that and then We expect higher bonus accruals for next year because this year we were paying out bonuses at lower than the target. So that's that. But really, there's nothing... Nothing significant.

Yes. So, Chris, you know, since spring of 23, you know, we had to really beef up our risk side of our business given the higher level of maturity on the risk side that's expected from the regulatory side. So that's where we've been adding some of the bodies. I looked at actually our headcount. It's been pretty consistent on the branch side and the lending side other than the uptick in the operational side.

Okay, great. Yeah, you've talked about that, Chang, in the past, beating up the regulatory side. Okay, that makes sense. And then on the $90 million increase in, I guess, a special mention, any color there that you could provide?

Most of it is one credit that just had some lower credit. So as an abundance of caution, we put that loan on special medicine.

Great. Thank you very much.

Yes. Thank you.

The next question comes from Gary Tenner with DA Davidson. Please go ahead.

Thanks. Good afternoon. I wanted to ask about the impact of the wildfires. Obviously, nothing in terms of a kind of credit ramification for you this quarter. I know a lot of those areas had been closed to access for a period of time. They may still be. Can you talk about how you've gone about sort of assessing kind of the either property-specific exposure you might have or kind of exposure to underlying businesses that might operate in some of these areas?

Sure, Gary. So let me let me kind of give you some update. We look at the affected areas by zip codes. We also looked at what additional data is available based on LA County inspections. So far, we have no loss reported of any of our commercial real estate portfolio, nothing in the business banking portfolio and nothing in the SBA portfolio. We have some reported items in the CNI portfolio. There's one CNI portfolio with a collateral in the Cal Estates in that segment of it. And we have a few of the mortgages and two HELOCs that we've received reports as well as have verified them through some of the websites. But it's a small number compared to the size of the mortgage assets that we have in total.

Okay, I appreciate the caller there. And then just in terms of the securities yield, it's come down a few quarters in a row. I didn't recall there being much in the way of variable rate securities in your portfolio. Could you kind of talk to expectations of the securities yield going forward?

Yeah. It's mostly most of a change. We've been buying six-month treasuries and we owe So that rate has come down between 2020, during 2024. And then we have some financial institutional debt that's been called or matured. Those were generally over 5% range, and those were not replaced. But that's pretty much it. We're not looking to expand the total amount of our securities portfolio at this time.

All right, thank you.

Once again, if you have a question, please press star, then one. The next question with Stevens. Please go ahead.

Hey, good afternoon. Shane, just a question around capital. I think I heard in your prepared remarks, you know, continued maybe interest in the buyback, but your capital is still in a really strong position. Just wanted to get, you know, updated thoughts from you on any other potential avenues of capital deployment. Is M&A of interest to you in 2025? We'd love to hear your thoughts.

Yeah, sure. Andrew, we've always had an eye on the M&A side of the business, but as you know, we operate in a very niche market. There are certainly a number of players in our market. There are certainly some in Texas and New York, but the Texas and New York always sort of sub a billion, which doesn't really move the base that much, the wines in our backyard. It depends on the opportunity. If the opportunity is there, then certainly we'll look at it. If it makes sense for us and it's accretive to the numbers and if it's a strategic mix for us that makes sense, that's definitely something we'll look at. But some of them have profiles that's very similar to ours and there's not a lot of sort of enterprise value there. So it certainly gives us a pause, even if they were to become available.

Understood. Thank you. Um, and then on the, on the margin, I guess, specifically the, the broker deposit runoff this quarter, was that pretty evenly spread throughout the fourth quarter? Was it, you know, front end or back end loaded? Um, and then just expectations going forward. Is there any more broker, um, broker deposits that you foresee remixing throughout 2025?

Uh, Yeah, Andrew, most of it was in November and December where we had an inflow of core deposits. Some of which left in the second half of December, the core deposits. But we'll probably just maintain the brokerage CD portfolio. It's come down quite a bit and we'll just maintain it unless we have good deposit growth that's higher than our loan growth. But it's an incremental source of deposits for us. Got it.

Okay. Thank you for taking the questions.

Thank you.

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

I think you called out as part of your net charge-offs being share national credit related. Can you just remind us how large your SNCC portfolio is?

It's about 4% of our total loans. We've been stretching that in 2024. to reduce risk exposures.

Got it. And I guess what percent of that portfolio is criticized?

I think most of the criticized is in our non-approval. So it's lower than average because we did sell about $50 million of shared national credits in Q4 to reduce credit exposures. And we sold those at a small discount, 2% or 3%.

Got it. Okay. And then just on the chief risk officer departure, I think late last week looked like a retirement, but can you just provide some more color there on the?

Sure. Sure. Yeah, we, you know, I mean, it's really kind of just timing, right? I mean, it's really the incumbent CRO has expressed, you know, that he wanted to step down and retire and kind of move off to the next chapter. But in the meantime, we were able to go out into market and search for candidates that are qualified in that space. And really, I think post-spring of 23, we need to be more focused on the risk side of the business. And so we believe we found the right candidate in Diana, and we're counting on her and going forward to elevate the maturity level of the risk side for us. Great. Thank you.

Thank you for your participation. I will now turn the call back over to Kathy, General Bankers Management, for closing remarks.

Please go ahead. 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.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.