Q1 2023 Cathay General Bancorp Earnings Call
Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's first quarter of 2023 earnings Conference call. My name is M J 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.
I 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 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 Jay 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 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 31, 2022 and item one a 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.
Forward looking statements speaks only as of the date of 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 first quarter of 2023 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 I'll turn the call.
All over to our President and Chief Executive Officer, Mr. Chengdu.
You, Georgia and good afternoon, everyone. Welcome to our 2023 first quarter earnings Conference call. This afternoon, we reported a net income of 96 million for the first quarter of 2023, a one 6% decrease as compared to a net income of $97 6 million for the fourth quarter of 2022.
Net income for the first quarter of 2023 included a 3 million pre tax write off or <unk> <unk> per share for signature bank corporate securities dilutive.
Diluted earnings per share decreased <unk>, 8% to $1 32 per share for the first quarter of 2023 compared to $1.33 per share for the fourth quarter of 2022.
In the first quarter of 2023, our gross loans increased $63 3 million or one 4%.
Annualized.
The increase in loans for the first quarter of 2023 was primarily driven by increases of $123 million or five 6% annualized in commercial real estate loans.
$31 million or 10% annualized in residential mortgage loans offset by a decrease of $165 million in commercial loans, mostly due to seasonal factors.
The uncertain economy, we have reduced our guidance for overall loan growth for 2023 to between 1% to 3% from our previous guidance of 3% to 5%.
We continue to monitor our commercial real estate loans, turning to slide seven of our earnings presentation as of March 31st 2023, the average loan to value of our CRE loans was 50%.
As of March 31st 2023, a retail property loan portfolio slide eight comprises 22% of our total commercial real estate loan portfolio and 11% of our total loan portfolio.
89% of the $1 97 billion in retail property loans is secured by retail store building neighborhood mixed use or strip centers and only 10% are secured by shopping centers.
Slide nine office property loans represented 16% of our total commercial real estate loan portfolio and 8% of the total loan portfolio.
Only 38% of the $1 4 billion office property loans is collateralized by pure office buildings.
Another 33% of office property loans are collateralized by office retail stores office mixed use in medical offices.
The remaining 29% in office property loans collateralized by office.
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The first quarter of 2023, we reported net charge offs of $4 9 million compared to net charge offs of $2 5 million in the fourth quarter of 2022.
The net charge offs were primarily due to the $3 8 million collateral write down of our CRE alone Northern California.
And 2 million write off of a CNI loan, resulting resulted from a a bankruptcy filing offset by a $2 5 million recovery on CRE loan.
Our non accrual loans, whereas to your 0.4% of total loans as of March 31st 2023, which represents which increased by $6 9 million to $73 6 million as compared to the end of fourth quarter 2022.
Turning to slide 12 as of March 31st 2023 classified loans decreased slightly to $240 million from 256 million as of December 31st 2022.
In our special mention loans decreased to $251 million from $321 million as of December 31st 2022.
We recorded provision for credit loss of $8 1 million in the first quarter of 2023 as compared to a $1 4 million provision for credit losses in the fourth quarter of 2022.
We are pleased that total deposits increased by $143 6 million or three 1% annualized during the first quarter of 2023.
Total uninsured deposits were $8 7 billion as of March 31st 2023 decreased approximately 0.5 billion from $9 2 billion as of December 31, 2022.
Excluding 0.8 billion and collateralized deposits.
Shirt and uncollateralized deposits of $7 9 billion was 42, 6% of total deposits as of March 31st 2023.
Our unused borrowing capacity from the federal home loan Bank as of March 31st 2023 was $6 5 billion in Unpledged Securities at March 31st 2023 was $1 4 billion.
Sources of available liquidity, where more than 100% of the uninsured and uncollateralized deposits as of March 31st 2023.
Total time deposits increased 2.9 billion or 222% annualized during the first quarter of 2023 compared to the fourth quarter of 2022 due to Chinese new year promotional campaign in January of 2023.
Total money market deposits decreased by $1 4 billion or 119% annualized due primarily to a migration back to Cds and money market deposits and deposit run off.
On March 31st through April 19, total deposits have increased by 152 million to $18 8 billion and have almost recovered to the pre banking crisis level on March nine 2023.
For 2023, the overall deposit growth is expected to range between 2% and 4%.
During the first quarter of 2023, we repurchased we repurchased 375000 shares of our common stock at an average cost of $44.20 for $9 3 million, which completed a may 2022 stock repurchase program.
I would now turn the floor, which while executive Vice Chip, Vice President and Chief Financial Officer Heng Chen to discuss the first quarter of 2023 financial results in more detail.
Thank you Chang and good afternoon, everyone.
First quarter of 2023 net income decreased by $1 6 million.
One 6% to $96 million compared to $97 6 million for the fourth quarter of 2022.
The decrease was primarily attributable to net.
Net interest margin compression.
Due to the increase in our cost of deposits.
Our net interest margin was 374% in the first quarter of 2023.
As compared to 387%.
Fourth quarter of 2022.
In the first quarter of 2023 interest recoveries and prepayment penalties.
Added eight basis points to the net interest margin as compared to one basis point.
For the fourth quarter of 2022.
With the anticipated fed rate hike in May.
And no rate cuts until late.
Q4, we have revised our net interest margin expectation for 2023.
To be between three six to three 7%.
Noninterest income during the first quarter of 2023.
Increased by $2 2 million to $14 2 million when compared to the fourth quarter of 2022.
Due to the increase of $5 8 million.
Gain on equity Securities offset.
Five 3 million write off of our corporate.
On security.
Noninterest expenses increased by $2 million or two 4%.
3.2 million in the first quarter of 2023, when compared to $81 2 million in the fourth quarter of 2022.
Increase was primarily due to three.
Three 1 million higher.
In higher salaries and bonuses are.
$1 million and higher amortization.
Solar tax credits.
So the tax rate investments $1 1 million in higher FDIC assessments.
Just a general FDIC insurance rate increase or 2023, offset by $2 9 million in lower marketing and other operating expenses.
We expect core non interest expense.
Excluding tax credit and core deposit intangibles amortization.
<unk> integration expenses to increase three 5% from 'twenty to 'twenty two to 'twenty to 'twenty three.
The effective tax rate for the first quarter 2023 was 16, 8%.
As compared to 25, 7% for the fourth quarter of 2022.
For 'twenty three we expect the effective tax rate of between $16 five and 17, 5%.
We expect 2023 solar tax credit investment amortization.
$30 million.
Including $10 million for Q2, and $13 million in Q3 of 'twenty to 'twenty three.
Oh, sorry.
As of March 31, 2023, our tier one leverage capital ratio increased.
10.27% as compared to 10.18%.
As of December 31, 2022.
Tier one risk based capital, which will increase to $12 four 2%.
$12, one 9% as of December 31, 2022.
And our total risk based capital ratio increased to $13, 94%.
$13 seven 1% as of December 31 2022. Thank.
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.
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.
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 Brandon King with Trust. Please go ahead.
Good afternoon.
Hi.
Hey, so I wanted to get a sense of if theres going to be any changes in your deposit strategy given what's gone on recently and as far as how you want to.
Gathered deposit.
How you want to control your concentrations.
Oh I see.
Like many other banks we have been.
Offering.
Products that are.
Uh huh.
Spread deposits are individual depositors deposit.
Through Ics or <unk> for that.
There folding insurers.
So I mean that's.
That's reassuring to our depositors that have concerns.
Aside from that I think changed I mean, what we're looking at more.
Our CNI related deposits, yes, so on that part of it will continue to focus on business deposits and are.
Bringing in core and noninterest bearing deposits and we certainly have a base of Cds that we continue to use but.
The business deposits and leveraging that to our C&I clients in C&I basis is also a key part of that.
Yeah.
Got it and.
And I guess.
Now that you know slower loan growth you don't need to grow deposits as much.
What are you expecting as far as deposit betas from here on out.
Oh well.
I think like many other banks announced this last week.
There's been a catch up in deposit betas.
I think that's typically the case.
We get to the end of a fed.
Rate hike cycle in that more depositors become aware of that.
There's higher rates, if you go to the Cds and so forth, but yeah.
Yeah.
We.
We think there's only.
One more rate, which is going to be in early may sell.
We think we're well positioned in that.
Our Chinese new year promotion locked up.
Over a $1 billion five of our C. D. So we won't reprice till Q1 in 2024.
So that should help.
Uh huh.
Support our NIM.
Short time.
That's pretty much it branded.
Okay, and just a follow up could you remind us what rate is on most CD average rates with CPG raised in the first quarter.
Yeah about well.
Come again, the Cds for the Chinese new year promotion or.
Yes, yes, the average rate on those.
About for 'twenty.
Okay.
All right I'll hop back in the queue. Thank you for taking my questions.
Thank you.
The next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Hey, good afternoon guys.
Okay.
Can you update us on the amount of liquidity available I didn't see it in your deck or in the press release and as it relates to.
The.
The capacity you have to borrow relative to your uninsured deposits of eight.
$8 7 billion, let's say the 252 million of cash, but just wanted to get the latest and greatest at the end of March.
I wish you well in your remarks.
I can cover that so so we have at the federal home loan bank.
We have.
As of the end of March.
Six 5 billion.
That that was available.
Pledged securities was 1.4 billion.
So in our first quarter, we had.
Residential mortgage growth of about 150 million, so that would add to the federal home.
Federal home loan bank.
Borrowing capacity.
So were were slightly over 100% coverage not counting cash.
Not counting about $900 million of cash down from here.
Balance sheet.
And we.
We.
We did not borrow from the fed.
It's really the Len.
Lender of last resort for us.
Hello.
Got it okay.
And then if.
You happen to have the.
Average margin in the month of March all ticket and the spot rate at the end of March in terms of deposit Scott, Yes, Yes, let me let me.
I have it but.
Margin in March was a little bit low because.
It was a 31 day months.
Yeah, we only had half a month of February so.
The margin for March was 3.55.
Yes.
While at the period end rates for loans and deposits.
No just deposit at this time.
Oh yeah.
Let me find it.
So the spot rate for AR at the end of March or now accounts is your points in total.
The total the total is about 2.65.
Okay and that's.
Yeah.
That interest bearing or is that total deposits, including noninterest interest bearing.
Okay does that mean.
That makes sense okay.
Great and then.
The office CRE.
Exposure that you have can you give us the reserve that you have set aside for that.
Exposure and if you have anything in criticized.
Portfolio.
Yeah on the reserve it's <unk>.
Standard CRE reserve.
Which I'm doing this from memory is.
It's probably about 70 basis points.
We don't have much in.
Criticize Ah.
And.
On non accruals.
I think it's only.
$5 million.
The office.
But I'll.
I'll get back to you on that.
I'll email you.
Okay.
The office non accrual it could be zero.
Okay No worries. Thank you.
The next question comes from Gary Tenner with D. A Davidson. Please go ahead.
Thanks, Good afternoon.
A little bit of a follow up to brandon's question regarding some assumptions around that and then just.
Are you thinking about that and you mentioned what your rate assumptions are so that's helpful, but from a deposit mix perspective.
Obviously, a lot of kind of migration within the deposit buckets over the last couple of quarters. What's your what's your base expectation for kind of ongoing shift of deposits to help support them.
NIM guide that you provided.
We think we think we're pretty much done now.
We typically offer 12 months CD and.
So.
It's not because.
Because there's a term structure to it.
We've got the people that.
Have the.
Liquidity that they can afford to lock up for a year.
Okay.
Alright, so basically your euro assumption.
NIM is at your deposit mix is relatively on track trigger.
Right right.
Okay.
And then Mark just.
Yes go ahead sorry.
Sorry, I got it.
Well no well there was a shift during the quarter so where.
Or.
Starting off from the March.
Deposit mix at the period end deposits.
Got you okay, great. Thanks.
And then just in terms of capital.
You've completed the prior repurchase program last quarter, you had indicated that when you did that you would be looking for another $125 million or so authorization Keith.
Can you just sort.
Sorry about that us on.
The potential for that is that so given the economic concern or something that.
No.
Management.
Recommended and the board would.
Arthur.
It's on hold for now Gary we made.
Restart that ladies.
Late in the year, but.
Like many other banks.
We want to see how things shake out.
Okay, and then last question if I could just post the.
The failed banks.
And everything that we're getting kind of early mid March.
Was there any thoughts about building liquidity more than you did I mean cash was up just a little bit.
Year end to March 31, obviously you had.
A lot of Cds that you brought in so was there some more liquidity on the balance sheet at that point kind of normalized or or was that never really a consideration.
That kind of mid mid March timeframe.
Well yeah.
We didn't feel the need.
Two built up a lot of liquidity.
One thing about the federal home loan Bank, we should call by 11 o'clock.
Well actually within call by two o'clock or 230, which is.
The fed wild deadlines and get.
Hundreds of millions of dollars of fundings so we.
Amazing.
We saw.
Very small amount of.
Of.
Depositors that.
Took their money out.
A small.
Yeah.
So what are your $40 million over over the space.
Over the first week so it wasn't.
It's not it's.
It's not like some other banks, what they had billions of dollars to go out.
That week after our Silicon Valley Bank sale, so because of that because we had.
$1 billion of cash on balance sheet as well as the federal home loan bank.
Same day availability.
We didn't feel the need to build.
Buildup cash.
That's helpful. Thank you.
Yeah.
As a reminder to ask a question you May Please press star and then one.
The next question comes from Andrew Terrell with Stephens. Please go ahead.
Hey, good afternoon.
Hi.
Hey, if I could continue on some of the margin related questions.
How much in Cds do you have that mature during the second quarter.
What's the rate at those are.
Repricing from and what's the incremental cost of a new CD today is it relatively similar to that.
For 420, or so that was the new year promotional rate.
Yeah, so the second quarter.
It was a fairly light maturity we have about.
One point.
<unk> 5 billion that's maturing.
The average CD rate is 3.32.
So it's now.
Not far off from our average blended CD rate 353.
So.
That's the number I think in terms of what renewing rate is.
Depends on the deposit size.
So.
We locked up a lot of CD funding.
In the fourth quarter and the first quarter. So I think the most eager.
Depositor us CV deposit suite wise <unk> been locked up. So these are hopefully we can renew.
Something slightly above the 3.32 range.
Okay.
Got it I appreciate it.
<unk>.
And then also I just wanted to.
Make sure. That's the case I think last conference call, we talked about a $3 1 million non accrual interest recovery that would come through in the first quarter.
Did that occurred just as we're thinking about kind of the <unk>.
Starting point for loan yields going into the second quarter.
Yes, yes, it's happened in January it's part of our eight bases.
NIM pick up from non accrual.
Prepayments fees.
Okay Gotcha.
And then last question for me.
Just on office around 8% of total loans or so.
See the average outstanding in the slide deck is around $2 9 million average size can you just help us think about that.
The distribution around that around that average specifically to the large around I guess what are the sizes of the largest two or three office loans in the portfolio and just trying to get a sense of whether you have any.
True downtown Metro type exposure, just any incremental color there on the largest credits would be helpful.
So our kind of geographic split on sort of central business district was about 19% or so and the rest of it is what we consider urban and suburban urban really being not your downtown core but for example, if you use L. A that would be passing a west L. A south bay and those kind of things and.
So that's kind of what we tend to focus on.
And as far as the largest size of credits are larger size office as well.
Probably off memory between $10 million to $15 million.
And that's that's sort of the just on the higher end of it but as you as you noted on the deck, it's about 2.9.
Yes, okay. So there's still even at the largest end of the spectrum is still pretty pretty small and pretty granular relatively neutral right.
Right right right.
Well very good and thank you for talking my questions.
Thank you.
The next question comes from Chris Mcgratty with <unk>. Please go ahead.
Hi, This is Nick <unk> on for Chris Mcgratty, Good afternoon, guys.
Question.
So most of my questions have already been hit on but maybe you could just touch on the provision see ramps up this quarter.
Kind of at a.
Run rate going forward should we expect it to go higher from here and maybe you can speak to where you see.
Reserve levels headed as we move through 2023.
Yeah. So.
During this quarter, we had that one.
Larger CRV charge off.
But.
Microsoft small ball of snap pro favorably.
We hope.
We don't get.
Large charge offs again in the second.
Yes.
So.
Yes loan growth is let's say, 2% and mostly residential mortgage.
You will need for a much in the way of reserves.
We reserve residential mortgage and about 75 basis points.
And then lastly.
The.
Our reserve for unfunded wins.
Went up by about $4 5 million this quarter.
Fees are.
Line usage is lower at the end of.
March so well.
You will see us shift.
More of that onto the.
Balance sheet allowance for loan losses.
In the second quarter.
Yes, the trend I think it should be lower than in the first quarter.
You can see our sure Stan went down a little bit this quarter.
And then maybe just switching gears on the.
On the guide I guess.
Do you guys have a deposit beta assumption for the.
So your guidance for the NIM.
We think.
It's going to be closer to 40.
Well, we'll certainly have a good idea at the end of June when the Fed's done and we tally up everything from day one.
But.
That's what we're thinking.
For interest bearing.
Yeah interesting, yes, that's total so for Cds that will be much higher money market would be kind of in the middle end.
For like.
Savings accounts.
Thank you.
I mean, everyone else hit on most of the points. So I appreciate that thanks.
Thanks, guys, Okay alright.
The next question is a follow up from Matthew Clark with Piper Sandler.
Hey, Jim.
Just wanted to close the loop on the tax credit amortization, you gave the $30 million for the year for solar but.
Can you update us on the low income housing I think it was I think we're looking for $40 million for the year.
Yeah.
That's still the same asking is at $10 million a quarter.
Okay.
Great. Thank you.
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 on 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.
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