Q2 2023 Cathay General Bancorp Earnings Call

With the strong loan growth in the second quarter, we have revised our guidance for overall loan growth for 2023 to between 5% to 7% from our previous guidance of 1% to 3%.

Strong our strong loan growth during the second quarter included advances from a handful of commercial loan borrowers.

In addition, we have increased our loan spreads for fixed rate commercial real estate loans to help improve the returns.

We continue to monitor our commercial real estate loans, turning to slide seven of our earnings presentation as of June 30th 2022, the average loan to value of our CRE loans was 50%.

As of June 32023, our retail property loan portfolio slide eight comprises 22% of our total commercial real estate loan portfolio and 11% of our total loan portfolio.

88% of the $2 1 billion in retail loans is secured by retail store building neighborhood mixed use or strip centers and only 11% is secured by shopping centers.

Slide nine office property loans represent 17% of our total commercial real estate loan portfolio and 8% of the total loan portfolio.

Only 34% of the $1 6 billion office property loans are collateralized by pure office buildings, and only 3% of the office property loans are in central business does central business districts.

Another 38% of office property loans are collateralized by office retail stores office mixed use in medical offices. The remaining 28% of office property loans are collateralized by office condos.

For the second quarter of 2023, we reported net charge offs of $2 million compared to net charge offs of $4 9 million in the first quarter of 2023.

Our non accrual loans were 0.36% of total loans as of June 30 of 2023, which decreased by $4 6 million to 69 million as compared to the end of the first quarter of 2023.

Turning to slide 12.

June 32023 classified loans decreased $293 million from $240 million as of March at March 31, 2023, and our special mentioned loans increased slightly to $260 million from $251 million as of March 31st 2023.

We recorded a provision for credit loss of $9 2 million in the second quarter of 2023 as compared to an $8 1 million provision for credit losses for the first quarter of 2023.

We're pleased that total deposits increased by $448 1 million or 9.7% annualized during the second quarter of 2023.

Total uninsured deposits were $8 4 billion as of June 30th 2023.

Excluding 0.9 billion collateral collateralized deposits, the uninsured and uncollateralized deposits up 7.5 billion was 39, 2% of total deposits as of June 32023.

Our unused borrowing capacity from the federal home loan Bank as of June 30th 2023 was $6 1 billion in Unpledged Securities at June 30 of 2023 was $1 3 billion.

These and other sources of available liquidity, where more than 100% of uninsured and uncollateralized apologize as of June 32023.

Total time deposits increased 325 million or 18, 6% annualized during the second quarter of 2023 compared to the first quarter of 2023.

Total savings deposits increased by $241 million or 196, 2% annualized primarily due to a promotional campaign.

For 2023, the overall deposit growth is expected to range between 5% and 7%.

I will now turn to for virtual our executive Vice President and Chief Financial Officer, and Mr. Heng Chen to discuss the second quarter of 2023 financial results in more detail.

Thank you Chang and good afternoon, everyone. When the second quarter of 2023 net income decreased by $2 8 million or two 9% to $93 2 million compared to 96 million for the first quarter 2023.

The decrease was primarily a triple net interest margin compression.

Due to the increase in the cost of deposits and because most of the loan growth in the second quarter was from fixed rate loans.

Our net interest margin was three points or 4% in the second quarter 'twenty to 'twenty three.

Compared to three four.

4%.

The first quarter of 'twenty two 'twenty three.

In the second quarter of 2023 interest recoveries and pre.

The penalties.

Is it two basis points.

Interest margin as compared to eight basis points.

For the first quarter of 2023.

What's that mean anticipated fed rate hike in July 2023.

And no rate cuts after that joined 2023 we have revised our net interest margin expectations for 2023 to.

To be between three 5% to three 6%.

Noninterest income during the second quarter of 2023 increased by eight 9 million.

Is $23 1 million when compared to the first quarter of 2023.

Due to an increase of $5 8 million in gain on equity securities.

And.

From a $3 million.

Write off of a corporate bond security in the first quarter.

Non interest expense increased by $9 6 million or 11, 6% to $92 8 million in the second quarter of 2023.

When compared to a $3 2 million in the first quarter 2023.

The increase was primarily due to $6 5 million in higher amortization.

Solar tax credit investments $1.6 million of seasonally higher marketing expenses.

$1.5 million and higher professional expenses.

Set by 1.2 million and lower salaries and bonuses.

Mainly to higher FICA taxes.

Paid in the first quarter.

We expect our noninterest expense, excluding tax credit in Cortland core deposit intangible amortization.

It just you see integration expenses.

To increase three 5% from 'twenty to 'twenty two to 2023.

The effective tax rate for the second quarter of 'twenty twice, where it was 9.2%.

As compared to 21, 4% for the first quarter of 2023 due mainly from additional investments.

And solar tax credits.

Solar tax credit funds.

Or 2023.

We expect an effective tax rate of between 13 and 14%.

We expect.

2000, Twenty's tween solar tax credit investment amortization.

A $42 million.

Including $16 million for Q3, and the $11 million in Q4 of 2023.

As of June 30 of 2023.

Tier one leverage capital ratio.

Increased 10.45% as compared to 10.27%.

As of March 31, 2023.

Tier one risk based capital ratio decreased to $12 three 8%.

12.42%, so much one 'twenty two 'twenty three.

Total risk based capital ratio.

Greece to 13.88% from $13, 94%.

As of March 31 2020, thank.

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

Yeah.

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

You May then return to the queue. If your question has been answered or you wish to the more you start from the queue. Please press Star then two to prevent to prevent any background noise. We ask that you. Please please yourself on mute once your question has been stated.

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

Hey, good afternoon.

Okay.

First one for me.

On the margin.

If you can give us the spot rate on interest bearing deposits at the end of June and the average margin in the month of June .

Yeah. The average margin for the month of June was three.

3.41%.

So it was up slightly from March and for the months of May and then.

The spot rate.

Of our total interest bearing deposits at June 30th was 3%.

Okay great.

And then getting from the $3 41 back up to that 350.

Do you have the benefit I guess year to date of $3 59 in terms of the first half margin.

Alright.

So it seems like you're you expect that 341 June margin to hang in there can you speak to what you're assuming on.

On deposit cost.

And any kind of pay down borrowings.

Yeah.

We think the loan growth in.

In Q3, and Q4 won't be quite a bit lower than in Q2.

So.

I will make it easier for us to.

To fund the loans are.

So I think between that and the.

Additional fed rate hikes that we assume.

What will happen and when.

S T a.

Well health improved margins and we do expect our interest recovery between now and the end up with.

Slightly over 1 billion so that.

That's kind of added to that.

Okay, Great and then.

Just around expenses.

The core or adjusted expense.

Outlook is three 5% which is unchanged.

After 255 million last year.

That implies some relief here in the second half could you just speak to what do you expect to come out of the expense run rate.

Well.

Matthew in in Q2, we had.

Yes.

As we mentioned in her comments.

We make both silver.

Contributions are.

In the second quarter.

And then we had probably we have probably about a million plus of.

One time items, that's in the second quarter.

And then I will ask the.

Well.

We think we might accrue lower bonus expenses in the second half.

You know it.

If it's likely higher than three and a half I don't think it will be much higher than that.

Okay.

And then the low income housing tax credit amortization for the third and fourth quarter or do you have those numbers.

It should be about 10 million per quarter.

Okay. Thank you.

Yes. Thank you.

The next question comes from Andrew <unk> with Stephens. Please go ahead.

Hey, good afternoon.

Hi.

Just a follow up on.

Matt's question there on the expenses.

I guess to get to three 5% core expense growth for 2023. It implies the core expense run rate steps down to about.

I'm, just a little over $63 million per quarter in the back half of the year does that sound right to you.

No, we we kind of think it.

It should be close to the.

Okay.

Oh 67 that yes.

Okay.

Got it so similar to the first quarter run rate.

Yeah.

Okay understood.

And then on the on the loan growth front it sounded like last quarter on the conference call when when the loan growth guidance was lower than it was.

Mostly predicated on uncertainty within the economy, I guess I'm surprised that after that.

Revision last quarter, just surprised to see such strong loan growth here in the second quarter I guess of your views around uncertainty in the economy improved and where did you see growth opportunities in the second quarter and just what gives you confidence in the growth put on in the second quarter.

So Andrew during our second quarter. The C&I loan growth was really from just a handful of large clients are on the tech side in the pharmaceutical side that drew down on the advances of the line that was not the case in the first quarter.

In addition, we have some pull through on the commercial real estate side that really kind of started the processing in the latter part of the first quarter, but it didn't close until sometime in the second quarter, but we don't we don't expect and particularly with the increase in the margins on the CRE side were not expecting to see a.

Continued demand at that pace in the second quarter, we think theres going to be more of a muted oh sort of pick up on any any loan growth in the second half of the year.

Yes, I understand okay.

And then.

In terms of.

Yeah.

Yeah of that Shang mentioned, we had.

Infrequent tax or.

That that.

Ooh down on their line they have since paid that off.

In the third quarter itself.

So all of that.

That will help Oh, I'll make the third quarter loan growth lower.

Just from a pay pay off.

Understood. Okay I appreciate it.

And then if I'm reading it right. It seems like the guidance would be for the deposit growth to maybe slightly outpaced loan growth in the back half of the year.

I guess, that's the plan going to be to pay down the FH lbs and <unk>.

It's a portion of them.

Well, we're going to try to target a 90% loan to deposit ratio. One reason it crept up is we had really strong loan growth in the month of June .

So it was hard for us to.

To match that loan growth.

Yeah.

In the short time quota, whereas happened.

And then similarly, the federal home loan bank borrowings they also chunk.

Up in the second half of June we sense pay down.

About 250 million loss federal home loan bank borrowings.

Joe where it's now a more stable level.

For the second half.

Okay got it thank you for taking the questions.

Thanks.

Again, a reminder to limit yourself to one question and one follow up question. Our next question comes from Christopher Mcgratty with K B W. Please go ahead.

Hey, How's it going this is Andrew on for Chris Mcgratty.

I was just wondering.

Have you started to see any stabilization and your noninterest bearing deposit outflows.

And I guess should we continue to expect further mix shift.

From here. Thank you.

Yeah.

Okay.

We think it stabilize.

Yeah just.

Just.

Just.

Do you have the month end balances it was.

Three point.

7 billion at the end of April $3 7 billion round. It at the end of May and then.

3.6 billion at the end of June so.

Yeah.

Chengdu, Yeah, we're not seeing any additional sort of outflows I think at this point given the rate hikes and you know some of the sensitive clients with the cash and liquidity that hadn't been checking and money market. They to the extent they wanted to move them into higher yielding accounts stable really done. So at this point. So we believe that the noninterest.

Bearing costs should remain relatively stable.

Okay, great. Thank you that's a truly helpful. And then on credit have you started to see any credit migration within the office portfolio and and can you also just remind us what reserve you have on that portfolio.

Sure just kind of on the credit portfolio, a little bit we kind of Ah Theres, a theres a page on page nine of the deck.

You know it's it's it's all encompassing is about 1.55 billion in total and the average loan size of these is about $2 1 million average property size is only about 12000 little over 12000 square feet only 3% of it is in the commercial business district, so truly downtown core the rest of it is <unk> 66 per.

Sending urban 31% in the suburban space and and if you exclude some of that portion of that 28% that wasn't office condos.

You know might have might skew the balance was lower balance and no lessor with square footage, but even if we exclude the office condos. The average loan size is still just about a little over 3 million with an average property size just a little over 21000 square feet. So we're not in a big class a 300000 downtown core that's not what we are in and some of these a lot of these are sort of office.

Over over retail and some of our all the medical office space as well.

As far as your at the average occupancy we're about 84% across the board and the average debt cover on these is about 1.8 or higher.

And then.

We don't have any.

Special reserves on office. So it's the same as our C. R E Caesars.

Uh huh.

Which is the CRE reserves are about the same.

One 8%.

Of loans.

We did build up properties.

Our reserve this quarter.

By about $7 million so.

But that wasn't for office it was for general.

General.

Reserving.

Okay, great. Thanks for the questions.

Yeah. Thank you.

Again as a reminder, if you have a question. Please press star then one to be joined interact here.

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

Thanks, Good afternoon.

Most of my question I were asked but just on the on the capital front, just wondering given the strong capital ratios and beef.

Beefed up the ATRA blow a little bit this quarter are the ACR this quarter.

Any thoughts on you know resuming buyback at this point.

No not for Awhile, Gary we wanted to see.

How.

Our economy shakes out.

Well hopefully very late in the year.

Early next year.

Thank you.

Yes.

Okay.

At this time there are no questions in the queue.

I think again to ask a question. Please press Star then one.

Oh.

As we see no questions. This ends the Q&A session 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 gentleman. Thank you for your participation in today's conference. This concludes the presentation. You may all now disconnect. Thank you good day.