Q4 2022 Cathay General Bancorp Earnings Call
Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's fourth quarter and full year 2022 earnings conference call.
My name is Sarah and I'll be your coordinator for today.
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Following the prepared remarks.
There will be a question and answer session.
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Today's call is being recorded and will be available for replay at www Dot Cathay General Bancorp dotcom.
Now I would like to turn the call over to Georgia Lo Investor Relations of Cathay General Bancorp.
Thank you Sarah 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 the speakers on this call may make look forward like these 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 with.
And uncertainties are further described in the company's annual report on Form 10-K for the year ended December 31, 2021 and item one a in particular and in other reports and filings with the Securities Exchange Commission from time to time as such we caution you not to place undue reliance on forward looking statements any forward looking statements speaks only as of the date of which it is.
Made and except as required by law, we undertake no obligations 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 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 from 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. Chengdu.
Georgia and good afternoon, everyone welcome to our 2022 fourth quarter earnings Conference call.
Good afternoon, we reported net income of $97 6 million for the fourth quarter of 2022, a 29, 6% increase as compared to a net income of $75 3 million for the fourth quarter of 2021.
<unk> earnings per share increased 35, 7% to $1 33 per share for the fourth quarter of 2022 compared to <unk> 98 per share for the same quarter a year ago.
In the fourth quarter of 2022, a gross loans increased $147 2 million or three 6% annualized increase in loans for the fourth quarter of 2022 was primarily driven by increases of $116 million or five 3% annualized.
Annualized in commercial real estate loans, $122 3 million or nine 5% annualized in residential mortgage loans.
The overall loan growth for 2023 is expected to range between 3% to 5%.
We continue to monitor all commercial real estate loans, turning to slide eight of our earnings presentation as of December 31st 2022, the average loan to value of our CRE loans was 51%.
As of December 31st 2022, our retail property loan portfolio S. Slide nine comprises 22% of our total commercial real estate loan portfolio and 11% of our total loan portfolio.
The majority 89% of the $1 96 billion in retail loans secured by retail building neighborhood mixed use or strip centers and only 10% secured by shopping centers.
For the fourth quarter of 2022 reported net charge offs of $2 5 million, which included two 2 million that were fully reserved as of September 32022, compared to net charge offs of zero point $6 million in the third quarter of 2022.
Our non accrual loans, whereas 0.38% of total loans as of December 31st 2022 increased by 3 million to $68 9 million as compared to the end of the third quarter of 2022.
Turning to slide 12 as of December 31st 2022 classified loans increased slightly to $256 million from $240 million as of September 32022, now of special mention loans increased to $321 million from 305 million as of September 32022.
We recorded a provision for credit loss of $1 4 million in the fourth quarter of 2022 as compared to a 2 million provision for credit losses in the third quarter of 2022, and $3 5 million provision for credit losses in the fourth quarter of 2021.
Total average deposits increased by $387 5 million or 9% annualized during the fourth quarter of 2022.
Average time deposits increased $1 4 billion or 99, 2% annualized during the fourth quarter of 2022 compared to the third quarter of 2022.
Average money market deposits decreased by $802 8 million or 73, 1% annualized due primarily to a migration back to Cds from money market deposits and deposit runoffs.
For 2023, the overall deposit growth is expected to range between 3% and 5%.
I will now turn the floor over to our executive Vice President and Chief Financial Officer, and Mr. Hayne Chen to discuss the fourth quarter 2022 financial results in more detail.
Thank you Cheng.
Good afternoon, everyone.
For the fourth quarter of 2022, net income increased by $22 3 million or 29, 6% to $97 6 million compared to the fourth quarter of 2021 incur.
The increase was primarily attributable to net interest margin expansion.
Fourth quarter of 'twenty, one to compare to the year ago quarter.
Our net interest margin was three 7% in the fourth quarter of 2022 as compared to three.
3.23% for the fourth quarter of 2021.
In the fourth quarter of 2022 interest recoveries.
The penalties added one basis point.
The net interest margin as compared to three basis points for the third quarter of 2022, and six basis points for the same quarter a year ago.
Based on.
Funds target range a.
Of between $4 75, and 5% we have increased our net interest margin expectation for 2023 to be between $3, 75% to 3.85%.
2023.
Net interest margin expectations include the impact of a $3 1 million interest recovery.
From a full repayment of our nonaccrual loan last week.
Our non noninterest income during the fourth quarter of 2020 to decrease by $7 7 million to $12 1 million when compared to the fourth quarter of 2021.
Two an increase of $3 2 million and loss on equity Securities a decrease of $3 1 million.
Gain on venture capital investment.
Distributions and a decrease.
At one point.
In Caribbean.
Income.
Noninterest expense increased by.
Our 11% to $81 1 million or four.
2022.
Compared to $73 2 million.
The fourth quarter of 2021.
The increase was primarily due to $1 2 million in higher salaries and bonuses.
$3 8 million and higher amortization of loan come housing and solar tax credit investments.
Yeah.
Which included a $1 3 million catch up adjustment in the first quarter.
1 million higher amortization.
<unk>.
Oh.
Core deposit intangibles.
Which included approximately 900000.
And celebrated write downs, and $1 1 million and higher professional and marketing expenses.
Special items in the fourth quarter of 2022.
Once again included a $1 3 million catch up adjustment for.
Or impairment loan come housing investments.
Point 9 million additional CDI amortization.
We expect core non interest expense, excluding tax credit and <unk>.
Core deposit intangibles and amortization.
To increase three 5%.
2022 to 2023.
The effective tax rate.
For the fourth quarter of 2022 was 25, 7% as compared to 23 six.
6%.
For the fourth quarter of 2021.
For 2023.
We expect an effective tax rate of between 17.5%.
<unk>, 5%.
We expect 'twenty to 'twenty, three solar tax credit investment amortization of 30 million.
Which is $10 million.
Of the first three quarters of 2023.
As of December 20th 31, 2022.
Tier one leverage capital ratio increased to 10.08%.
As compared to 10, 2%.
September 30 of 2022.
Our tier one risk based capital ratio increased to $12 one 9%.
From 12 point or 6% as of September 32022.
Total risk based capital ratio increased to 13 point sub one.
Seven 1%.
From 13.59% as of September 32022.
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 then one key on your Touchtone telephone.
I ask that you please limit yourself to one question and one follow up.
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Your first question comes from Chris Mcgratty with <unk>. Please go ahead.
Oh, great good evening.
Hang on I want to make sure I understand the expenses just to make sure I'm buttoned up on the expenses.
The three 5% growth is that off the it looks like the 255, and then I'm, adding on top of that.
30 on solar.
Right.
Yes, yes.
You've got to add a $40 million and low income housing amortization is roughly $10 million a quarter now.
Okay.
Solar is 30 and in low income is how much I missed that.
40.
Okay. So 7 million total amortization, okay, yes, and that's why the tax rate is.
Slower.
Projected to be lower in 2023.
Okay, Great and then.
Maybe on the margin guide.
Pretty decent mix shift this quarter, so I'm interested.
And what I guess, what further remixing.
You might be forecasting in.
In the CD portfolio, how much how much more do you have that increasing proportionately to get to that.
370, 535 margin. Thank you.
Yeah, we are.
Covid.
We used to do Chinese new year promotions.
And so we are.
We're in the we're in the third week of.
Our Chinese promotion.
So the average rate.
Is.
We have two tiers, but the average rate is probably about a 4.21%.
We were very pleased with the results of that.
We think we'll get net new funds into the bank.
At least 600 million.
And so in terms of contacts.
One your broker Cds would be at 4.85.
So our rate is four point too low.
And are we.
We are borrowing from the federal home loan bank, we were borrowing them short terms.
So that rate was about 4.8.
They'll go up to 5% in February when the fed increase changes. So so we think that's.
Uh huh.
Oliver.
Good margin in Q1, plus that 3.1 million interest recovery mode at six basis points to that but.
We had one quarter.
On our slide 15, it shows the average fed funds.
Versus our cost.
Deposit so.
For 2022.
Our deposit beta was.
In the fourth quarter.
But.
Once again, we think the first quarter of deposit beta.
Not be 16, 61%.
And we have two prime rate increases in Q1, so a loan beta is 44% and that chip can kill you. So once again.
Yes.
That's why we think we'll be in the range or was that okay.
Okay, if I could just make sure im totally buttoned up the interest recovery is that in the $3 75 for you guys to 85, yes, yes, okay.
Okay.
And then the mix of deposits Cds or <unk>.
<unk>, 38% I think pre Covid. It was north of 40, I mean, the expectation is that were perhaps approaching 50% by the time. The fed's done does that is that reasonable or is that too far.
I think thats too far, but you know it's the fast not done it's going to help us.
NIM wise in net interest.
Income wise in 2023.
And we're gonna be focusing on 2024, when we had to reprice the Cds downward.
We think we can.
Got it thanks, guys I appreciate it.
Sure.
Yes.
The next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Hey, good afternoon.
Yeah.
Hey, Don just wanted to round out the NIM discussion.
A bit here.
Do you have the spot rate on interest bearing deposits at the end of the year to give us.
Some visibility going into <unk>, yes.
Let me find it.
So.
Yeah.
It's.
Okay.
I have it as one point 97.
Okay.
Makes sense.
Okay.
And it sounded like the you know the expectation is the overall NIM kind of hangs in there in the current range. So I don't need necessarily a monthly NIM, but if you had the December monthly NIM I'll take it.
Yeah, Yeah, it's a.
It was down slightly from the full quarter NIM.
Yes.
So the December NIM, that's a 31 day month so.
Okay.
Thank you.
Got it.
And then.
Just on the overall reserve dipping down a little bit here.
80 basis points.
Can you give us a sense for.
What you.
Considered in terms of macro factors, what's your overall unemployment rate outlook for this year and how you might be weighing kind of a baseline versus adverse scenarios.
Yeah.
Matthew as as.
I might have mentioned in the past we use.
A blended rate.
For.
Until the fourth quarter, we were at this.
30, 40 30.
The 30% is the S. One that Moody's S. One which is the most favorable.
Forecasts base is.
Is there a base and moodys in their December based forecasts.
<unk> no recession in the next eight quarters.
And then the.
The S. Three the Moody's suite has a decline that has that's so.
Basically.
Modest recession forecast.
So I have three quarters of negative GDP.
Maximum.
Decline is three.
Three 6% in Q2 this year.
Unemployment goes up to seven 8% in Q1 2024.
And declined for seven three in Q4 2024.
So what we did is we.
We were.
Since we adapt our CFO , we were at $30 40.
40.
38.
$30 $40 30, so this quarter.
Uh huh.
We we.
We change that to where the.
The.
Moderate recession is now 55%.
Of our move of our CFO calculation.
The leases.
And be optimistic.
10% so.
So.
So we think.
Or 2023.
We're expecting 3% to 5% loan growth, primarily single family residential which requires very little serving about 30 basis points for us.
At.
That our provision for 2023 would be basically net charge offs.
Plus a modest amount for loan growth.
Okay, great. That's good color. Thank you.
Yes.
Again, if you'd like to ask a question. Please press Star then one at this time.
Our next question comes from Gary Tenner with D. A Davidson. Please go ahead.
Thanks, Good afternoon.
Hi, Gary a couple of follow up questions.
In terms of the CD special will be running for the for the Chinese new year.
$600 million of new funds as you mentioned hang.
Should we assume that that is larger.
Largely paid down.
That's H L b.
Borrowings.
That you had as of 12 31.
Yes, correct.
And then in terms of the NIM.
So again I think you said that includes 75 basis points of.
Tightening.
Besides you know.
We are I think it might have been poorly worded, but we're assuming 25 basis points on February one.
Only five basis points.
In mid March.
And we're not sure.
There might be something in December in terms of a rate cut.
I would happily.
Minor impact Okay, no that's fine I thought I thought I heard you say 75.
You may have misheard, so if you combine.
The ability to pay down the S. H L. B you know the benefit of the hikes in the first quarter and the interest recovery.
It would seem to suggest that the first quarter is kind of keeping them and then you maybe stay in that range for the full year, but trend lower from there is that because that's the way that you would as you would expect.
Set up.
Yes, yes, Gary.
Okay.
And then.
So you took the loss on sale of Securities do you reinvest that and if so what was the yield pick up and then.
Well I'll pick up on those is that right.
Hum.
We've had no losses that was the mark to market.
Equity Securities.
In the fourth quarter, we had fortunately light.
Investing I think when you bought <unk>.
$75 million of corporates.
Sure.
They were in the five 5% range callable corporates.
And then we bought some MBS they were in the high fours.
Okay. Thanks for that clarification hanger.
Mr Misra.
Misread that in your press release.
And then last question I had.
In terms of capital.
Alright, thank you.
Read through the kind of where capital is at year end, you did buy some stock back but less than you did in the third quarter just thoughts about.
Buyback in 2023 is there any element of.
What kind of economic uncertainty that might keep you on the sidelines or would you still be a buyer of your stock.
And 'twenty three.
Yes.
We still have about 15 $16 million left in our buyback.
Buyback authorization.
So.
We would use that up in the first quarter and then our plan is.
Get fed approval apply for approval for another $125 million.
And given.
The relatively weak loan growth.
Thank you Mike.
Subject to economic conditions, we might try that.
Uh huh.
Yes.
Use up most of that in 2023.
Three.
Thanks very much.
Yes. Thank you.
Our next question comes from Andrew <unk> with Stephens. Please go ahead.
Hi, good afternoon.
Hi.
If I can maybe start on just the expenses.
For three 5% expense growth in 2023.
It sounds like that might be a bit light versus kind of what we're hearing across the industry. Just given inflationary impacts I was hoping you could speak to maybe just some of the puts and takes.
As we think about expenses through 2023 and kind of the progression of the quarterly expense base.
Andrew we've gone through alright.
Already have significantly more than half of our population during last October's review process. So that's why you saw some of the core noninterest expense increase in the salary section at the Q4 numbers and then we have a second round of the officers and higher reviews that will come up in March and.
Our objective is to hold that number to the three 5% range.
Understood Okay.
And then maybe if I could go back to the margin just thinking about the spot I know you have the spot rate on deposit costs at the end of the quarter do you happen to have the spy yield on the securities portfolio at the end of the end of the quarter.
Yeah.
Not on the securities we have it on the loans if you want it.
Well.
On the Securities I have the December securities.
It's at $2 72.
Okay.
Okay that works.
And then I think I just want to make sure I heard it correctly the.
It sounds like the new kind of offering rate on Cds is around.
Low kind of 4% territory for 2% or so I guess I'm, just thinking what the duration of the.
The CD book should we expect the CD costs to kind of over the next 12 months throughout 2023 kind of fully repriced to that low 4% territory.
Uh huh.
Hopefully not.
Sure.
<unk>.
Yes.
This is a promotional rate.
Program and part of it is.
Yeah.
You have to bring.
If it's a $100000 CD, bringing half at least half of it.
She has to be non cafe funds.
So.
Outside of our normal.
Promotion environment, I think we will be in the mid threes.
For seating for retail depositors.
So.
For large corporate depositors.
We're higher than.
For two but that's that's the market.
We've been doing that.
In the fourth quarter.
Okay.
Got it thank you for taking the questions I appreciate it.
Thank you.
There are no further questions at this time. 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.