Q3 2022 Cathay General Bancorp Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp's third quarter 2022 earnings Conference call. My name is Matt and I'll be your coordinator for today at.
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Today's call is being recorded and will be available for replay at www Dot Cathay General Bancorp Dot com.
Now I would like to turn the call over to Georgia Lo Investor Relations of Cathay General Bancorp.
Thank you, Matt and good afternoon here to discuss the financial results today are Mr. Chengdu, 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 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.
Ripe in the company's annual report on Form 10-K for the year ended December 31st 2021 and item one a in particular and another 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 statements speak only as of the date on <unk>.
It has made unaccepted 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 its earnings release outlining its third quarter 2022 results to obtain a copy of our earnings release as well as our 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. Chang Lu. Thank you, Georgia and good afternoon, everyone. Welcome to our 2022 third quarter earnings conference call. The.
This afternoon, we reported net income of 99 million for the third quarter of 2020 to <unk> 30.
36, 8% increase as compared to a net income of $72 4 million for the third quarter of 2021.
Diluted earnings per share increased 45, 2% to $1 35 per share for the third quarter of 2022 compared to 93 cents per share for the same quarter a year ago.
The third quarter of 2022, a gross loans increased $318 9 million or seven 8% annualized.
The increase in loans for the third quarter of 2022 was primarily driven by increases of $193 4 million or 26, 8% annualized in commercial loans, excluding P. P. P loans.
$14 7 million or five 6% annualized in commercial real estate loans.
$85 3 million or eight 2% annualized in residential mortgage loans.
The overall loan growth for 2022 is expected to range between 11% to 12, 5%, including approximately $646 1 million of loans from the acquisition of certain HSBC West coast branches in February 2022.
Excluding the HSBC acquisition, we project loan growth to be between 7% and eight 5% in 2022.
We continue to monitor all commercial real estate loans, turning to slide seven of our earnings presentation as of September 30th 2022 average loan to value of our CRE loans was 51%.
As of September 30th 2022, our retail property loan portfolio S. Slide eight comprises 22% of our total commercial real estate loan portfolio and 11% of our total loan portfolio.
The majority 89% of the 1.95 billion in retail loans secured by retail store buildings neighborhood mixed use or strip centers, the only 10% secured by shopping centers.
For the third quarter of 2022, we reported net charge offs of <unk> 6 million compared to net recoveries of 0.2 million in the second quarter of 2022.
Non accrual loans were 0.38% of total loans as of September 32022 increased by 7.5 million to $68 1 million as compared to the end of second quarter of 2022.
Turning to slide 11 classified loans decreased slightly during the quarter from 244 million to $240 million as of September 30 of 2022 and.
Now a special mention loans increased slightly during the quarter from 295 million to 305 million as of September 30th 2022.
We recorded provision for credit loss of $2 million in the third quarter of 2022 as compared to a 2.5 million provision for credit losses in the second quarter of 2022, and $3 1 million provision for credit losses in the third quarter of 2021.
Total deposits increased by $288 4 million or six 4% annualized during the third quarter of 2022.
I'm deposits increased $686 million or 49.7% annualized and interest bearing demand deposits increased $76 million or 12% annualized during the third quarter of 2022 compared to the second quarter of 2022.
Money market deposits decreased by 287 million or 30, or 33, 6% annualized due primarily to a migration back to Cds from money market deposits and deposit run off.
For 2022, the overall deposit growth is expected to range between 8% and nine 5%, which includes approximately 600 million of low cost deposits from the HSBC acquisition.
In May 2022, the board of directors adopted a 125 million new share repurchasing program.
We repurchased 1.08 million of shares of our stock at an average cost of $42.88 totaling $46 3 million in the third quarter of 2022.
With $76 9 million remaining in the May 2022 stock repurchase program.
I will now turn the floor over to our executive Vice President and Chief Financial Officer, Mr. Heng Chen to discuss the third quarter of 2022 financial results in more detail.
Thank you Chang and good afternoon, everyone.
Third quarter 2022.
Income increased by $26 6 million or 36%.
Percent.
Compared to the third quarter in 2024.
The increase was primarily attributable to net interest margin.
Spansion continued strong lung.
In the third quarter 2022.
Our net interest margin was 383% in the third quarter of 2020 U S.
As compared to 322%.
For the third quarter of 2021.
The third quarter 2022.
Interest recoveries and prepayment penalties added three basis points to the net interest margin as compared to five basis points for second quarter of 2022 and.
And four basis points for the same quarter a year ago.
Based on the year UN fed funds target range between four 5% and $4 seven 5%.
We have increased our net interest margin expectation for 2022 to be between three 6% three 7%.
Noninterest income during the third quarter of 2000, Twenty's too deep.
Decreased by $2 3 million to $9 9 million when compared to the same quarter of 2021.
Primarily due to equity securities.
Loss of $3 7 million in Q3 2022.
Noninterest expense increase.
By $3 2 million or four 3% to $75 4 million in the same quarter of 2022.
When compared to $72 2 million in the.
Third quarter of 2021.
The increase was primarily due to a $1 2 million and higher salaries and bonuses.
And.
<unk> 8 million in higher occupancy expenses due in part to the acquisition of certain HSBC West coast branches.
1.1 million and higher marketing expenses.
The effective tax rate.
<unk> 22.
$23 8 million.
As compared to $19 1 million in the same quarter of 2021.
Which included.
At 1.2 million true up adjustment.
Uh huh.
<unk> thousand 21 eight months.
For the fourth quarter of 2022, we expect an effective tax rate.
22, 5% and 23%.
We expect solar tax credit amortization.
Seven 5 million in the fourth quarter of 2022.
As of September 32022, our tier one leverage capital ratio decreased to 10.12%.
As compared to 10, 5%.
As of June 32022.
Our tier one risk based capital.
Ratio decreased to $12 or 6% from $12, one 8% as of June 32022.
Total risk based capital ratio decreased to 13, five 9% from 13.74% as of June 30th.
'twenty two.
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 the star.
The Star then one key on your Touchtone telephone we ask that you. Please limit yourself to one question and one follow up 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 that has been.
<unk> stated.
Our first question will come from Brandon King with Truth Securities. Please go ahead.
Thank you good afternoon.
Hi, Brandon.
Hey.
So first question I appreciate the NIM guidance for full year, but wanted to get a sense of what your NIM outlook is beyond this year and into next.
Do you potentially see NIM topping out next year and kind of like what is the trajectory you see the NIM.
Going to.
Beyond this year.
Well, we think our NIM will still.
Italy increased in the fourth quarter and then.
It's hard to tell.
2023, but if our NIM is at 4% for the full year of 2023.
We feel pretty good about it.
Okay and for the fourth quarter. This year are you expecting a similar increase in net interest margin as it was in Q3 or do you see that kind of slowing down a bit based off of where we're at today.
It should be a little bit less primarily from.
The mix of deposits.
We're seeing a lot of the customers are.
Going into Cds now that rates are.
Alright.
Attractive compared to the past.
Okay. Okay, and then my last question before I step back in the queue I just want to understand in deposit.
Guidance growth guidance backing into it it seems like the fourth quarter, you're expecting a pretty pretty much a decent size growth outside of the growth in deposit balances and I wanted to make sure I'm interpreting that correctly and if so what gives you the confidence that you can achieve that sort of.
Deposit growth in this current environment.
Well, Brandon I think it could be in the rounding as we get to the end of the year, but we.
We.
We are targeting deposit growth.
Match loan growth.
So to the extent.
And we expect loan growth to be slower in Q4.
In Q3, mainly because.
The higher interest rates will damp in lung.
Okay. They will just match loan growth.
Okay got it got it okay, well thanks for taking my question and I'll step back in the queue.
Sure.
Our next question will come from Gary Tenner with D. A Davidson. Please go ahead.
Thanks, Good afternoon.
Wanted to follow up on especially the deposit question hang.
You're talking about 8% to 9.5% full year deposit growth off an 18.1 billion dollar based so that would even at the low end of that range would suggest about $19 billion at year end, which is almost a billion dollars over the September 30 number.
Obviously, well above I think where most would project your loan growth in the fourth quarter. So just again.
I know the question's been asked but I'm still confused by the.
The guidance.
In the slide deck versus I guess your previous answer.
I think oh.
I looked at it it seemed fine but.
We expect about $300 million as deposit growth.
In the fourth quarter.
Okay.
Great. Thank you.
And then on the.
Deposit at quarter end.
Could you give us the spot rate at September 30 for interest bearing deposit costs.
Our total deposit cost yes.
Yeah. This is total interest bearing deposit itself.
It doesn't count PD.
One point of 6%.
Okay. Thank you.
And then final question for me in terms of loan growth I know youre not giving.
We're giving guidance for 2020 three at this point, but as you think of.
You know well, we have an idea of what the fourth quarter might might look like of course, but as you're thinking about the segments of growth.
Or headwinds in 2023.
It reasonable to expect continued.
Sort of run off into construction and equity lines of business and slower growth in commercial mortgage is that generally how you think about 2023.
Yes, yes.
Okay. Thank.
Thank you.
Thank you.
Our next question will come from Andrew <unk> with Stephens. Please go ahead.
Hey, good afternoon.
Hi.
Maybe just to circle back on the on the funding.
It looks like you brought on some <unk> advances during the quarter I'm just curious whether those were term advances are just overnight funding and I guess, just given kind of what you're expecting for loan and deposit growth in the fourth quarter should we.
<unk>.
Borrowings to remain relatively kind of stable from here or do you have any flexibility to pay.
FHA will be down.
Yeah that was.
We expect that to go down.
It was just.
Timing of deposits came in at quarter end.
So right now Oh S. H L. B borrowings they were down to about $150 million.
Okay.
And then on the CD side can you just remind us how much in CD deposits you have maturing in the fourth quarter.
Do you have what the costs are rolling off at and what kind of going on rate for for a new CD is at Cathay right now and then.
Also out of that $300 million of deposit growth that you referenced what kind of portion of that do you expect to be represented by CD deposits.
Well okay.
I'll get back to you on the up.
On the CD roll off Andrew.
And then.
I left that schedule in my office and then euro.
Second part of your question was.
Just on the you referenced kind of $300 million or so of anticipated deposit growth in the fourth quarter.
How much of that you expect it to be represented by CD deposits as opposed.
Money market or IV checking or noninterest bearing.
We would expect most of it to be Cds.
Okay.
Does that mean, it's hard to protect.
Some new depositors they prefer money market.
As.
If there is further they're not locked into a rate for the next year. So if they still think that the fed is going to continue to increase.
2023.
No they'll want to stay in money market. So.
But my expectation is that most of that.
Fourth quarter deposit growth will be in Cds.
Okay.
Great I appreciate I'll hop back in the queue. Thanks for the time.
Okay. Our next question will come from Matthew Clark with Piper Sandler. Please go ahead.
Hey, good afternoon.
Yes.
Maybe just on the on the outlook around your deposit beta through the cycle. What do you. What are you assuming for your cumulative deposit beta with similar when we get to 450 475 fed funds.
Well Matthew it was according to our slides that deposit beta in Q3 was 23%.
On page 15.
Yeah, I'm basing that on average fed funds.
We think are.
The over a cycle deposit beta should be about 80% it might be a little bit higher.
Uh huh.
But.
So you would say.
It would be good enough for us.
Okay great.
And then the.
The lower comp expense this quarter can you give us a sense for what drove that relative to last quarter and how sustainable is that run rate.
Uh huh.
Yeah in the second quarter well.
Sorry about that.
By the $1 million of according to quarter swing is.
People go on vacation in the summer.
And we had some commission expense in the second quarter.
So I think a good rate for Q4, you should just add $1 million to our Q to Q.
Q3 rate for those regions.
Okay great.
And.
And then your guidance on <unk> loans.
Low income housing tax credit amortization for the fourth quarter I know you gave us solar.
Yeah.
Probably going to be $8 million.
And adding investment so.
As a.
Yes.
As a seasoned.
The amortization.
Increases.
Okay. Thank you.
Thank you.
Again, if you have a question. Please press Star then one our next question will come from Chris Mcgratty with K B W. Please go ahead.
Great. Thanks for the question.
A lot of attention this quarter has been on.
Our TCE ratios for the industry.
Given OCI moves you, obviously don't have a big bond portfolios, you've been largely immune to that.
Interested in kind of the outlook for capital return.
Given where your capital levels stand in the growth outlook.
Yes.
Still have.
A portion left in our current buyback authorization.
So we would expect to.
Given.
Given the pace of our capital generation.
And the fact that loan growth is going to be slower.
We are thinking of buying back 1 million shares in the fourth quarter.
And then.
We'll have to we'll we're likely to have a new buyback authorization in the first quarter.
Okay.
2023.
Okay great.
And then maybe to follow up on Matt's question more broadly on expenses.
The inflationary pressures that are that are out there.
Your core expenses are up 5% year on year, how should we think about.
Kind of the incremental headwinds to run the business.
As we go into 2023.
Well, let me start Jan can add some more but.
The one.
We closed several branches in 2022.
Uh huh.
Some because of the Hs.
<unk> branch acquisition.
Where we have branches that are close to theirs and their location is better located.
We should save a small amount from that.
Then.
We're just starting our 2023.
Our budget process. So we don't want to give guidance until our January earnings call, but change you wanted to add I mean, the only other thing I'll add to that is of course, we're very mindful of.
The talent that we need and the people we need to retain to build the relationships and we got it.
Compete with the marketplace in terms of what they can get out there. So we're selectively.
Looking at people and their performance and kind of year to date and doing what we need to retain them while at the same time, managing our cost as carefully as we can.
Okay. That's great. Thank you.
Okay.
At this time there are no questions in the queue again to ask a question. Please press Star then one.
Yeah.
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 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 good day.