Cathay General Bancorp - Q1 2023
April 20, 2023
Transcript
Operator (participant)
Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's first quarter of 2023 earnings conference call. My name is MJ, 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. If you 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.cathaygeneralbancorp.com. Now, I would like to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp.
Georgia Lo (Investor Relations)
Thank you, MJ, and good afternoon. Here to discuss the financial results today are Mr. Chang Liu, 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. 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 31st, 2022, at Item 1A 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. Any forward-looking statement 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 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.cathaygeneralbancorp.com. After comments from 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 Liu.
Chang Liu (President and CEO)
Thank you, Georgia, 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 1.6% 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 $0.03 per share for Signature Bank Corporate Securities. Diluted earnings per share decreased 0.8% 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 at 1.4% annualized.
The increase in loans for the first quarter of 2023 was primarily driven by increases of $123 million or 5.6% annualized in commercial real estate loans. $131 million or 10% annualized in residential mortgage loans, offset by a decrease of $165 million in commercial loans, mostly due to seasonal factors. Due to the uncertain economy, we have reduced our guidance for overall loan growth for 2023 to between 1%-3% from our previous guidance of 3%-5%. We continue to monitor our commercial real estate loans. Turning to Slide 7 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, our retail property loan portfolio, at Slide 8, 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% is secured by shopping centers. At Slide 9, office property loans represent 16% of our total commercial real estate loan portfolio and 8% of the total loan portfolio. Only 38% of the $1.44 billion in office property loans is collateralized by pure office buildings. Another 33% of office property loans are collateralized by office retail stores, office mixed use, and medical offices. The remaining 29% in office property loans is collateralized by office condos.
For 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 a CRE loan in Northern California and $2 million write-off of a CNI loan resulted from a bankruptcy filing, offset by a $2.5 million recovery on CRE loan. Our non-accrual loans were 0.4% of total loans as of March 31st, 2023, 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. Our special mention loans decreased to $251 million from $321 million as of December 31st, 2022. We recorded a 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 3.1% 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 31st, 2022.
Excluding $0.8 billion in collateralized deposits, the uninsured 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, and unpledged securities at March 31st, 2023 was $1.4 billion. These sources of available liquidity were more than 100% of 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 a 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 from money market deposits and deposit runoff. On March 31st through April 19th, total deposits have increased by $152 million to $18.8 billion and have almost recovered to the pre-banking crisis level on March 9th, 2023. For 2023, the overall deposit growth is expected to range between 2% and 4%. During the first quarter of 2023, we repurchased 375,000 shares of our common stock at an average cost of $44.20, or $9.3 million, which completed the May 2022 stock repurchase program. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Heng Chen, to discuss the first quarter of 2023 financial results in more detail.
Heng Chen (EVP and CFO)
Thank you, Chang. Good afternoon, everyone. The first quarter of 2023, net income decreased by $1.6 million, or 1.6% to $96 million, compared to $97.6 million for the fourth quarter of 2022. It decrease were primarily attributable to net interest margin compression due to the increase in the cost of deposits. Our net interest margin was 3.74% in the first quarter of 2023, as compared to 3.87% for the fourth quarter of 2022. In the first quarter of 2023, interest recoveries and prepayment penalties added 8 basis points to the net interest margin, as compared to 1 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 3.6%-3.7%. Non-interest 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 an increase of $5.8 million in gain on equity securities, offset by a $3 million write-off of a corporate bond security. Non-interest expenses increased by $2 million or 2.4% to $83.2 million in the first quarter of 2023, when compared to $81.2 million in the fourth quarter of 2022.
The increase was primarily due to $3.1 million in higher salaries and bonuses, $1 million in higher amortization of solar tax credits, solar tax credit investments, $1.1 million in higher FDIC assessments due to the general FDIC insurance rate increase for 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 and HSBC integration expenses to increase 3.5% from 2022 to 2023. The effective tax rate for the first quarter of 2023 was 16.8% as compared to 25.7% for the fourth quarter of 2022. For 2023, we expect an effective tax rate of between 16.5% and 17.5%.
We expect 2023 solar tax credit investment amortization of $30 million, including $10 million for Q2 and $13 million in Q3 of 2023. As of March 31, 2023, our Tier 1 leverage capital ratio increased to 10.27% as compared to 10.08% as of December 31, 2022. Our Tier 1 risk-based capital ratio increased to 12.42% from 12.19% as of December 31, 2022, and our Total risk-based capital ratio increased to 13.94% from 13.71% as of December 31, 2022.
Chang Liu (President and CEO)
Thank you, Heng. We will now proceed to the question and answer portion of the call.
Operator (participant)
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 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 Truist. Please go ahead.
Brandon King (LDP Credit Analyst)
Good afternoon.
Heng Chen (EVP and CFO)
Hi.
Brandon King (LDP Credit Analyst)
Hey, so I wanted to get a sense of if there's gonna be any changes in your deposit strategy given what has gone on recently and as far as how you want to gather deposits and how you want to control your concentrations.
Heng Chen (EVP and CFO)
I think, like many other banks, we have been offering products that spread deposits or individual depositors deposit through ICS or CDs so that they're fully insured. I mean, that's reassuring to our depositors that have concerns. Aside from that, I mean, what we're looking at more, a CNI related deposit.
Chang Liu (President and CEO)
Yeah. On that part of it, you know, we'll continue to focus on business deposits and, bringing in, core and non-interest-bearing deposits and, you know, we certainly have a base of CDs that we continue to use but, the business deposits and leveraging that to our CNI clients and CNI base is also a key part of that.
Brandon King (LDP Credit Analyst)
Got it. 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?
Heng Chen (EVP and CFO)
Well, I think, you know, like many other banks that announced this last week, there's been a catch up in deposit betas. I think that's typically the case when we get to the end of a Fed rate hike cycle in that more depositors become aware that there's higher rates if you go to the CDs and so forth. Yeah, you know, we think there's only one more rate hike, which is gonna be in early May. We think we're well positioned in that. Our Chinese New Year promotion locked up over $1.5 billion of our CDs, so they won't reprice till Q1 in 2024. That should help support our NIM short term. That's pretty much it, Brandon. Yeah.
Brandon King (LDP Credit Analyst)
Okay. Just to follow up, could you remind us what the rate is on those CDs, the average rate for the CDs you raised in the first quarter?
Heng Chen (EVP and CFO)
Well, come again, the CDs for the Chinese New Year promotion or the upcoming maturity?
Brandon King (LDP Credit Analyst)
Yeah. Yeah. The average rate on those.
Heng Chen (EVP and CFO)
About $420.
Brandon King (LDP Credit Analyst)
Okay. All right. I'll hop back in the queue. Thank you for taking my questions.
Heng Chen (EVP and CFO)
Thank you.
Operator (participant)
The next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Matthew Clark (Principal of Equity Research)
Yeah, good afternoon, guys.
Heng Chen (EVP and CFO)
Hi.
Matthew Clark (Principal of Equity Research)
Can you update us on the amount of liquidity available? I didn't see it in your deck or in the press release. As it relates to, you know, the capacity you have to borrow relative to your uninsured deposits of $8.7 billion. I see the $252 million in cash, just wanted to get the latest and greatest at the end of March.
Heng Chen (EVP and CFO)
I mean, it was, you know, in your remarks. Yeah. I can cover that. We have at the Federal Home Loan Bank, we have as of the end of March, $6.5 billion that was available, and unpledged securities was $1.4 billion. You know, in our first quarter we had residential mortgage growth of about $150 million. That would add to the Federal Home Loan Bank borrowing capacity. We're slightly over 100% coverage, not counting cash, not counting about $900 million of cash that we have on balance sheet. We did not borrow from the Fed. To us, it's really the lender of last resort for us.
Matthew Clark (Principal of Equity Research)
Got it. Okay. If you happen to have the average margin in the month of March, I'll take it, and the spot rate at the end of March in terms of deposits.
Heng Chen (EVP and CFO)
Yeah. Yes. Yeah, let me I have it, but margin in March was a little bit low because it was a 31-day month, and we only had half a month of the Fed increase. The margin for March was 3.55%. Yeah, you wanted the period-end rate for loans and deposits?
Matthew Clark (Principal of Equity Research)
No, just deposits is fine.
Heng Chen (EVP and CFO)
Oh. Oh, yeah. Let me find it.
Chang Liu (President and CEO)
The spot rate for the end of March for now accounts is zero point-.
Heng Chen (EVP and CFO)
Total. Just give me total.
Chang Liu (President and CEO)
Oh, the total? The total is about 2.65.
Matthew Clark (Principal of Equity Research)
Okay. Is that interest-bearing or is that total deposits including non-interest?
Heng Chen (EVP and CFO)
That's interest-bearing.
Matthew Clark (Principal of Equity Research)
Okay.
Heng Chen (EVP and CFO)
That's inclusive.
Matthew Clark (Principal of Equity Research)
That makes sense.
Heng Chen (EVP and CFO)
Yeah.
Matthew Clark (Principal of Equity Research)
That makes sense. Okay. Great. On 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 in that portfolio?
Heng Chen (EVP and CFO)
Yeah. On the reserve, it's a standard CRE reserve, which I'm doing this from memory is, it's probably about 70 basis points. We don't have much in criticized. On non-accruals, I think it's only $5 million. That's office. I'll get back to you on that, Matthew. I'll email you on the-
Matthew Clark (Principal of Equity Research)
Okay.
Heng Chen (EVP and CFO)
The office non-accrual. It could be zero, but.
Matthew Clark (Principal of Equity Research)
Okay, no worries. Thank you.
Operator (participant)
The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Gary Tenner (Managing Director and Senior Research Analyst)
Thanks. Good afternoon.
Heng Chen (EVP and CFO)
Hi.
Gary Tenner (Managing Director and Senior Research Analyst)
A little bit of a follow-up to Brandon's question regarding some assumptions around the NIM. Just, you know, as you think about the NIM, and you mentioned what your rate assumptions are, so that's helpful. From a deposit mix perspective, obviously a lot of, kind of, migration within deposit buckets over the last couple of quarters. What's your base expectation for kinda ongoing shift of deposits to help support the NIM guide that you provided?
Heng Chen (EVP and CFO)
You know, we think we're pretty much done. You know, we typically offer 12-month CDs and, because there's a term structure to it, we think we've got the people that have the liquidity that they could afford to lock up for a year.
Gary Tenner (Managing Director and Senior Research Analyst)
Basically your assumption for the NIM is that your deposit mix is relatively unchanged from here.
Heng Chen (EVP and CFO)
Right. Right.
Gary Tenner (Managing Director and Senior Research Analyst)
Okay. Okay.
Heng Chen (EVP and CFO)
Yeah.
Gary Tenner (Managing Director and Senior Research Analyst)
A-and then, um-
Heng Chen (EVP and CFO)
Going to March.
Gary Tenner (Managing Director and Senior Research Analyst)
Just-
Heng Chen (EVP and CFO)
Yeah, go ahead.
Gary Tenner (Managing Director and Senior Research Analyst)
Sorry, go ahead.
Heng Chen (EVP and CFO)
No. There was a shift during the quarter, you know, we're starting off from the March deposit mix or the period-end deposit mix.
Gary Tenner (Managing Director and Senior Research Analyst)
Gotcha. Okay. Great. Thanks. Just in terms of capital, you know, you've completed the prior repurchase program. You know, last quarter, you had indicated that when you did that, you would be looking for, you know, another $125 million or so authorization. Can you kinda, you know, sort of update us on the potential for that? Is that still, you know, given the economic uncertainty, something that, you know, management would recommend and the board would authorize?
Heng Chen (EVP and CFO)
It's on hold for now, Gary. We may restart that late in the year, but like many other banks, you know, we wanna see how things shake out.
Gary Tenner (Managing Director and Senior Research Analyst)
Okay. Last question, if I could. Just, you know, post the, you know, the failed banks, you know, and everything happening beginning kinda 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, you know, a lot of CDs that you had brought in, so was there some more liquidity on the balance sheet at that point that kinda normalized, or was that never really a consideration, you know, in that kinda mid-March timeframe?
Heng Chen (EVP and CFO)
Yeah. We, we didn't feel the need to build up a lot of liquidity because one thing about the Federal Home Loan Bank, you know, we should call by 11:00, but we actually wasn't called by 2:00 or 2:30, which is the FedWire deadline, and get, you know, hundreds of millions of dollars of fundings. Amazing was we saw a very small amount of depositors that took their money out, pretty small. It would be $30 million-$40 million over the first week.
It wasn't, it's not the, you know, it's not like some other banks where they had billions of dollars go out that week after Silicon Valley Bank failed. We because of that, because we had, one, the $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 up cash. That's helpful. Thank you. Yeah.
Operator (participant)
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.
Andrew Terrell (SVP and Senior Equity Research Analyst of Regional Banks)
Hey, good afternoon.
Heng Chen (EVP and CFO)
Hi.
Andrew Terrell (SVP and Senior Equity Research Analyst of Regional Banks)
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 that those are repricing from? What's the incremental cost of a new CD today? Is it relatively similar to that 4.20% or so that was the New Year promotional rate?
Heng Chen (EVP and CFO)
The second quarter is a fairly light maturity. We have about $1.45 billion that's maturing. The average CD rate is 3.32%. It's not far off from our average blended CD rate, 3.53%. That's the number. I think in terms of what the renewing rate is, it depends on the depositor size. We locked up a lot of CD funding in the fourth quarter and the first quarter. I think the most eager depositor CD depositors rate-wise, they've been locked up. These are hopefully we can renew at something slightly above the 3.32% range.
Andrew Terrell (SVP and Senior Equity Research Analyst of Regional Banks)
Got it. I appreciate it. I just wanted to make sure this is 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 occur just as we're thinking about kind of the starting point for low yields going into the second quarter?
Heng Chen (EVP and CFO)
Yes. Yes, it happened in January. It's part of our 8 basis NIM pickup from non-accrual and pre-payment fees.
Andrew Terrell (SVP and Senior Equity Research Analyst of Regional Banks)
Okay. Gotcha. Last question for me, is just on office around 8% of total loans or so. I see the average outstanding in the slide deck is around $2.9 million average size. Can you just help us think about the distribution around that average, specifically to the larger end? 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 kind of metro type exposure. Just any incremental color there on the largest credits would be helpful.
Chang Liu (President and CEO)
Our kind of geographic split on sort of central business district is about 19% or so, and the rest of it is what we consider urban and suburban. Urban really being, you know, not your downtown core, but you know, for example, if you use L.A., that would be Pasadena, West L.A., South Bay and those kind of things. That's kind of what we tend to focus on. As far as the largest size of credits, our largest size office is probably off memory between $10 million-$15 million. And that's sort of the on just on the higher end of it. You know, as you noted on the deck, it's about 2.9.
Andrew Terrell (SVP and Senior Equity Research Analyst of Regional Banks)
Yep. Okay. Still even at the largest end of the spectrum is still pretty small and pretty granular relative to your balance sheet.
Chang Liu (President and CEO)
Right. Right, right.
Andrew Terrell (SVP and Senior Equity Research Analyst of Regional Banks)
Well, very good. Thank you for taking the questions.
Heng Chen (EVP and CFO)
Thank you.
Operator (participant)
The next question comes from Christopher McGratty with KBW. Please go ahead.
Nick Moutafakis (Assistant VP of Equity Research)
Hi, this is Nick Moutafakis on for Christopher McGratty. Good afternoon, guys.
Heng Chen (EVP and CFO)
Afternoon.
Nick Moutafakis (Assistant VP of Equity Research)
Most of my questions have already been hit on. Like, maybe we can just touch on the provision. See how it ramps up this quarter, kind of looking at a run rate going forward. Should we expect it to go higher from here? Maybe you can speak to where you see reserve levels headed as we move through 2023.
Heng Chen (EVP and CFO)
Yeah. During this quarter we had that one larger CRE charge-off. You know, my crystal ball is not perfect, but we hope we don't get large charge-offs again in the second quarter. If loan growth is, let's say 2% and mostly residential mortgage. You know, you wouldn't need very much in the way of reserves. We reserve residential mortgage at about 35 basis points. Lastly, our reserve for unfunded went up by about $4.5 million this quarter. Seasonally our loan usage is lower at the end of March. We'll see a shift more of that onto the on-balance sheet allowance for loan losses in the second quarter. You know, the trend I think it should be lower than the first quarter. You can see.
Nick Moutafakis (Assistant VP of Equity Research)
Sure.
Heng Chen (EVP and CFO)
Sub-stand went down a little bit this quarter.
Nick Moutafakis (Assistant VP of Equity Research)
Maybe just switching gears on the, on the guide, I guess. Do you guys have a deposit beta assumption for your guidance for the NIM?
Heng Chen (EVP and CFO)
We think it's gonna be closer to 40. I mean, 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. That's what we're thinking.
Nick Moutafakis (Assistant VP of Equity Research)
For interest bearing.
Heng Chen (EVP and CFO)
Yeah, interest bearing.
Nick Moutafakis (Assistant VP of Equity Research)
Yeah.
Heng Chen (EVP and CFO)
That's total. For CDs, that would be much higher. Money market would be kind of in the middle. For like savings accounts, you know, we didn't increase the rate at all throughout.
Nick Moutafakis (Assistant VP of Equity Research)
Okay. I think that's all I got. I mean, everyone else hit on most of the points. I appreciate that. Thanks, guys.
Heng Chen (EVP and CFO)
Okay. Sure.
Operator (participant)
Again, to ask a question, you may press star, then one. The next question is a follow-up from Matthew Clark with Piper Sandler.
Matthew Clark (Principal of Equity Research)
Hey. Just wanted to close the loop on the tax credit amortization. You gave the $30 million for the year for solar, can you update us on the low income housing? I think we were looking for $40 million for the year.
Heng Chen (EVP and CFO)
Yeah. Yeah. That's still the same, Matthew. It's $10 million a quarter.
Matthew Clark (Principal of Equity Research)
Okay. great. Thank you.
Heng Chen (EVP and CFO)
Thank you.
Operator (participant)
Thank you for your participation. I will now turn the call back over to Cathay General Bancorp's management for closing remarks.
Heng Chen (EVP and CFO)
I wanna thank everyone for joining us on our call, and we look forward to speaking with you on our next quarterly earnings release call.
Operator (participant)
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.