Q1 2022 Cathay General Bancorp Earnings Call

Okay.

Good afternoon, ladies and gentlemen, and welcome to the Cafe General Bancorp's first quarter 2022 earnings conference call. My name is Andrew and I'll be your coordinator for today.

At this time all participants are in a listen only mode.

The prepared remarks, there will be a question and answer session if you'd like to participate in this portion of the call. Please press star followed by one at any time during the conference.

Distance is needed at 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 dot could they general Bancorp Dot com.

Now I would like to turn the call over to Meghan chain Investor Relations of Cathay General Bancorp.

Thank you Andrew and good afternoon here to discuss the financial results today are Mr. Chang <unk>, 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.

This risks and uncertainties are further described in the company's annual report on Form 10-K for the year ended December 31st 2021 and item one a in particular I mean, other reports and filings with the Securities and Exchange Commission from time to time.

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.

Elements or event or the occurrence of unanticipated events.

This afternoon, Cathay General Bancorp issued an earnings release outlining its first quarter 2022 results.

A copy of our earnings release as well as Allison first quarter earnings presentation.

Please visit our website at Www Dot Cathay General Bancorp Dotcom 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. Tang.

Thank you, Mike and good afternoon, everyone welcome to our 2022 first quarter earnings Conference call.

Afternoon, we reported net income of 75 million for the first quarter of 2022, a two 2% increase as compared to the net income of $73 4 million for the fourth quarter of 2021 day.

Diluted earnings per share increased seven 6% to 99 per share.

For the first quarter of 2022 compared to <unk> 92 per share for the same quarter a year ago.

In the first quarter of 2022 gross loans increased $1 1 billion or 25, 8%.

<unk> organic loan growth, excluding PPP loans, and HSBC acquired loans increased by 431 8 million to $16 8 billion, which represents an annualized growth rate of 10, 6%.

The increase in loans for the first quarter of 2022 was primarily driven by increases of $181 6 million or <unk> 25, 1%.

Annualized in commercial loans, excluding PPP and HSBC loans.

$258 5 million or 12, 7% annualized in commercial real estate loans.

$33 4 million or three 2% annualized in residential mortgage loans that excludes HSBC acquired loans.

Overall loan growth for 2022 is expected to range between 9% to 13%, including approximately $646 1 million of loans from the acquisition of certain HSBC West coast branches.

Without the HSBC acquisition, we project loan growth to be between 5% and 8% in 2022.

During the first quarter of 2020 to $37 4 million a PTT loans were forgiven.

At March 31, 2022, our deferred PPP loan fees were 49000.

We continue to monitor our commercial real estate loans, turning to slide eight of our earnings presentation as of March 31, 2022, the average loan to value of our CRE loans was 51%.

As of March 31st 2022, our retail property loan portfolio as shown on slide nine comprises 23% of our total commercial real estate loan portfolio.

11% of our total loan portfolio.

The majority 88% of the $1 93 billion in retail loans are secured by retail store buildings neighborhood mixed use was strip centers and only 11% of the secured by shopping centers.

For the first quarter of 2022, we reported net net recoveries of 100000 compared to net charge offs of 300000 in the fourth quarter.

Our 2021 on non accrual loans was <unk>, 5% of total loans as of March 31, 2022 increased by 21 5 million to $86 3 million as compared to the end of the fourth quarter of 2021.

A $14 million commercial loan was placed on non accrual.

Turning to slide 12, we were pleased to see that our classified loans decreased during the quarter from 266 million to $219 million at March 31 2022.

In our special mention loans decreased during the quarter from 499 million to 389 million at March 31st 2022.

We recorded a provision for credit loss of $8 6 million in the first quarter of 2022 as compared to a $3 5 million provision for credit losses in the fourth quarter of 2021.

And a $13 6 million reversal of provision for credit losses in the first quarter of 2021.

The provision for credit losses of $8 6 million reflected the growth in loans during the first quarter, which included a $2 3 million a two.

Peaceful CFL charge for the loans acquired from the HSBC acquisition.

Turning to slide three excuse me turning to slide five total average deposits, excluding HSBC acquired deposits increased by $218 6 million or seven 4% annualized during the first quarter of 2022 on.

On slide 13 average money market deposits increased $421 8 million or 35, 6% annualized during the first quarter of 2022 compared to the fourth quarter of 2021.

Average time deposit decreased by $214 8 million or 17, 4% annualized due partly to the run off of brokered Cds and partly due to a migration of Cds to money market deposits.

For 2022, the overall deposit growth is expected to range between 9% and 12%, which includes approximately <unk> 6 billion of low cost deposits from the HSBC acquisition.

Excluding the acquired deposits from HSBC, we protect deposit growth to be between 5% and 8% in 2022.

We repurchased 704927 shares of our stock at an average cost of $46 six seven totaling $32 9 million in the first quarter of 2022, completing the September 2021 stock repurchasing program. We are working on a new stock buyback program.

The acquisition of certain West coast branches from HSBC was successfully completed on February seven 2022.

We welcomed a new customers in the HSBC associates in the 10 branches.

We acquired $646 million in loans final $75 million in deposits and 10 branches, expanding our northern and Southern California Branch network.

I will now turn the floor over to our executive Vice President and Chief Financial Officer, Mr. Heng Chen to discuss the first quarter of 2022 financial results in more detail.

Thank you Chang and good afternoon, everyone.

For the first quarter of 2022 net income was increased by $1 6 million or two 2% to $75 million compared to the first quarter of 2021 the.

The increase was primarily attributable to increase in net interest income.

Two continued strong loan growth in the first quarter of 2022.

Our net interest margin was three 6% in the first quarter of 2022 .

As compared to three 2% for the first quarter of 2021.

In the first quarter of 2022 interest recoveries and prepayment penalties added.

Four basis points.

The net interest margin as compared to six basis points.

For the fourth quarter of 2021.

And three basis points from the same quarter a year ago.

There were $2 3 billion of loans at the floor rate as of March 31, 2022 rigs.

Reducing from $3 1 billion at December 31, 2021.

Based on our year end fifth funds target up to two 5%.

We have increased our net interest margin expectation for 2022.

<unk> to be between three 3% to 341%.

Net interest margin during the non interest income during the first quarter of 2022 increased by $10 2 million to 22.

$2 million when compared to the first quarter of 2021.

Primarily due to an increase of $8 7 million in mark to market gains on equity securities.

An increase of $1 3 million in swap income.

Non interest expense increased by $1 3 million or one 8% to $72 7 million in the first quarter of 2022, when compared to $71 4 million in the first quarter of 2021.

The increase was primarily due to an increase of $3 2 million.

Acquisition.

The HSBC branches and $2 8 million in higher salaries and bonuses due to additional personnel.

Result.

Acquisition of HFC branches branch.

<unk> offset by $3 $3 million decrease.

And amortization of solar tax credit investments.

And one.

$9 million increase in marketing expense due to timing.

The effective tax rate for the first quarter of 2022.

It was 23, 5% as compared to 21, 9% for the first quarter of 2021.

For the second quarter of 2022.

We expect an effective tax rate as well.

Around 19, 5%.

The second half of 2022.

We expect an effective tax rate of between 21 and 22%.

We expect solar tax credit amortization of.

Half a million.

In the second quarter.

One 5 million in the third quarter and.

And $7 5 million in the fourth quarter of 2022.

As of March 31, 2020 shoe, our tier one leverage capital ratio decreased to 10, 1% as compared to 10, 4% as of December 31 2021.

Our tier one risk based capital ratio decreased to $12 three 7%.

12, 8% asset December 31, 2021 and.

And the total risk based capital ratio.

So clean 97% from 14, 1%.

As of December 31, 2021.

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

Thank you Lady.

Ladies and gentlemen, if you have a question at this time. Please press. The Star then one key on your Touchtone telephone we ask that you. Please limit yourself to one question and one follow up question.

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Prevent any background noise, we ask that you. Please place yourself on mute once your question has been stated.

Our first question comes from the line of Brandon Key withdrew security.

Thank you good evening.

Hi, Brendan.

So I wanted to first discuss the loan growth guidance. So it was pretty strong in the quarter.

And it seems that with such a strong quarter, we are expecting kind of softer growth throughout the year.

So if you could just talk about that what you're seeing in your markets with your customer base there.

That went into your loan growth updated guidance.

Sure.

Economy continues to improve I think you saw that we had experienced a surge of our loan demand.

I would just also caused by the perceived interest rate hikes for the remaining of 2022.

We expect that the overall loan growth for $2000 to continue to range between the 9% to 12% that includes the growth from HSBC with a 5% to 8% excluding HSBC, but we also expect loan demand to soften we're slow later in the year as a result of higher interest rates.

Okay and did you benefit for many.

Increasing C&I utilization.

Slightly we looked at utilization rate it probably increased by 2% to 3%.

Okay.

And then for the deposit it seems like you're matching loan growth with deposit and a lot of banks.

Our reported already are experiencing slower deposit growth. So could you talk about what youre, saying.

Your ability to ability to grow deposits and what gives you confidence that you can grow the projects at the same pace of our loan book.

On the deposit side I think it's a little bit of both it's both.

Or does that increase the rates, we have to kind of look at that but I think we have a tendency to lag behind our beta expectation on that it's been about 30%.

And also at the same time I think we're continuing our business promotion, so marketing for business deposits and continue to look for growth there as well.

Okay and within that deposit.

Guidance for.

For your strategy for the year are you do you plan on doing any more CD specials or walking give me sort of long term funding.

No no.

We may.

We may start going back to the broker CD market.

What we're not.

So we're not able to run any specials.

In our relationships in the market.

I think our customers are.

Uncertain as to how fast the fed will increase so that because it would be reluctant to.

To jump at anything.

That'd be offer because.

Many people think rates will be much higher.

Yes.

Alright, Thank you very much.

Thank you. Thank you.

And our next question comes from the line of Matthew Clark with Piper Sandler.

Hey, good afternoon.

Maybe just starting with the increase in non accruals the $20 million increase in <unk>.

It looks like I think you mentioned 14 $14 million credit was added can you just give us more color on what drove that increase in specific situations.

Sure.

Hi loan collateralized by the assets of the business and we also have a residential home.

Part of the collateral in the Pacific.

Palisades in southern California, which is a.

A strong area.

Provided a small reserve for the loan the loan substantially collateralized in my opinion at this point.

Okay, and then you built reserves in the quarter I think part of that at least within SSR was related to HSBC, but there was some.

Additional building commercial real estate.

Can you give us a sense for what drove the increase in reserves how much of it was kind of macro driven.

Versus more specific.

Or any other key factors.

Yes, yes, Matthew it's mostly macro driven.

You know.

We.

We.

We looked at the Moody's forecast fairly closely.

And.

It was prepared as as we understand it.

On March 10.

For example in the base case.

Projecting.

And fed funds rate of 85 basis points.

Hi.

And.

So.

We have a favorably.

Yes.

<unk>.

Strong.

Overlay on top of Moody's too.

Two for us too.

The factory and the higher interest rate debt.

Ill effect, we expect them to have in.

In the June forecast to have.

Much.

Relatively lower GDP, which is one of the variables in our econometric equations and.

So so we think we captured much of that and then.

That's equivalent of improvement is Chang mentioned, but we did.

We did reserve for those.

For the non accrual that that went on.

First quarter.

Okay great.

And then just.

Switching gears to the tax credit amortization you gave the solar.

And I think the low income housing tend to be a little more stable, but can you provide your expectations for low income housing tax credit amortization for the upcoming quarter and the second half of the year.

Yes, it should be about.

$6 $5 million a quarter.

For each of the next three quarters.

Okay, great. Thank you.

Okay.

And our next question comes from the line of David <unk> with Wedbush Securities.

Hi, Thanks, I wanted to follow up on that.

$14 million credit where it.

It sounds like it's well covered just curious if you're able to share what industry that was in and if youre seeing any kind of systemic issues in the industry, where it was coming out of sure.

Office furniture industry and the principles of the company was trying to launch a new one.

We won't be okay lets us generalize we wanted to get.

Yes, that's helpful.

And it seems very COVID-19 specifics the office market, so that makes sense.

Thank you for that and then.

Over on the on the loan growth front, you mentioned about your expectations and assumptions of slower growth.

Towards the back half of the year with higher rates are you seeing any signs of an economic slowdown or any signs of a slowdown in loan demand as you sit here today.

There is some of that slowdown for example in the commercial real estate market. I think is still ranked as the interest rates go up some of the bridge will be positioned place in multifamily may not pencil out.

So that segment has slowed a bit for us we're still seeing some.

<unk>.

Purchases and some other activities in the commercial real estate side, but.

Scott the other multifamily reposition side has had some asphalt demand for us.

Got it thanks very much.

Thank you.

And our next question comes from the line of Andrew <unk> with Stephens.

Yeah.

Hey, good afternoon Andrew.

Hey, I just wanted to circle in on the net interest margin guidance.

<unk> said 340 for the full year 2022.

Fed funds at year end of two in a quarter can you just remind us I think it was 10 bps up on both sides from the prior guide can you just remind us what what youre assuming for yearend fed funds in the prior net interest margin guidance.

Again, while the prior net interest margin NIM guidance was 10 basis points lower.

And.

We happened.

We don't update this.

Forecast our time so.

That guidance was based on.

Seven.

25 basis points.

That increases.

Now it looks like maybe 40 50 basis points, so I would.

I would.

Funds flow.

The improvement.

Hmm.

And then our floors.

This 50 basis points by.

Bye.

Okay.

Fed meeting.

Our loans will be all clear up the floors.

The average drive around 50 basis points for the loans on floors.

Yes, Okay got it.

And then within that kind of margin guidance.

Do you assume any kind of further earning asset mix change away from cash into securities or loans and can you just talk about.

How we should think about just the size of the bond book as we work throughout the year.

Yeah.

I think we will get the target about.

A $1 billion in.

Cash at the fed we may move some of that into.

Let's say nine months treasuries, because the yield curve itself flat.

And then in terms of the bonds.

It's only 5% of our total assets so our.

Yeah.

All right.

Mark to market.

This adjustment was relatively light.

We're going to be cautious in terms of.

Much more investing et cetera.

Shorter duration securities.

Such as.

Treasuries, we made by some MBS Butler.

We wanted to wait till it's.

Clearly.

It's closer.

So we don't get any more.

Unrealized.

First losses.

Uh huh.

Understood. Okay. Thank you for taking my questions yes. Thank.

Thank you. Thank you.

Thank you at this time there are no questions in the queue.

To ask a question please press star one.

And I'm showing we have a question from the line of Chris Mcgratty with <unk>.

Alright, how does how has it gone this is annualized turn on for Chris Mcgratty.

Yeah. So on the expense guidance I was just wondering.

Can you remind us where the base starting point is.

Poor.

4%.

Expense growth expense growth.

Well, we're guiding to 3.5% and then 4% for the HSBC acquisition, but the <unk>.

Guidance is for full year 2021.

Yes.

Yes.

The actual number that you are basing that off of Paul.

Ah.

Well, if you look at our slide 17.

Yes.

Quarters.

And the core expense growth.

Tend to be right around $60 million.

In Q1 Q4, we were at 61 one.

And I am sorry, Q4, and then Q1 were $60 two with.

You might also go on the Q4 number.

61, one and you annualize that and.

In our guidance.

We'll go from there.

Okay, great. Thank you.

And then with your longer deposit ratio at 96%.

Given where your loan and deposit balances.

Should we assume that that deposit ratio staying still.

Stable from here.

Can you repeat the last part.

Should we assume that that 96% loan deposit ratio is going to stay.

Fairly stable.

Yes, yes.

We have the upper limit of 100% and.

But yes, 96% 97%.

That's probably the right level for us.

Okay. Thank you.

Yes for that NIM guidance can you remind us what.

What the deposit betas were last cycle and what you're assuming for.

This upcoming cycle. Thank you.

Well we.

It was about 30%.

For the last cycle, and we think it will be about 30% this cycle.

We've gotten less dependent on Cds over the last.

Couple of years so.

That might be.

<unk>.

<unk> provided a little bit of cushion, but in all of these.

The rate of fed increases.

Is that a fairly fast compared to.

For the last 20 years.

Okay. Thank you that's all the questions I have.

Okay.

Thank you.

Thank you for your participation I will now turn the call back 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 in our next quarterly earnings release call.

Yes.

Okay.

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