Cathay General Bancorp (CATY) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's First Quarter of 2023 Earnings Conference Call. My name is Anjay, and I'll be your coordinator for today. [Operator Instructions] 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.

Thank you, Anjay, 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, 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, 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 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.cathaygeneralbancorp.com. 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 Liu.

Thank 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 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 pretax 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 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% to 3% from our previous guidance of 3% to 5%. We continue to monitor our commercial real estate loans. Turning to Slide 7 of our earnings presentation. As of March 31, 2023, the average loan to value of our CRE loans was 50%. As of March 31, 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 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 the CRE loan in Northern California, and $2 million write-off of a C&I loan resulted from a bankruptcy filing, offset by a $2.5 million recovery on CRE loan. Our nonaccrual loans were 0.4% of total loans as of March 31, 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 31, 2023, classified loans decreased slightly to $240 million from $256 million as of December 31, 2022. And our special mention loans decreased to $251 million from $321 million as of December 31, 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 reduced by $143.6 million or 3.1% annualized during the first quarter of 2023. Total uninsured deposits were $8.7 billion as of March 31, 2023, decreased approximately $0.5 billion from $9.2 billion as of December 31, 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 31, 2023. Our unused borrowing capacity from the Federal Home Loan Bank as of March 31, 2023, was $6.5 billion; and unpledged securities at March 31, 2023, was $1.4 billion. These sources of available liquidity were more than 100% of uninsured and uncollateralized deposits as of March 31, 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 or money market deposits and deposit runoff. On March 31 through April 19, total deposits have increased by $152 million to $18.8 billion (sic) [ $18.6 billion ] and have almost recovered to the pre-banking crisis level on March 9, 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 for $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.

Thank you, Chang, and good afternoon, everyone. For 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. The decrease was 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 prepaid 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% to 3.7%. 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 an increase of $5.8 million in gain on equity securities, offset by a $3 million write-off of a corporate bond security. Noninterest 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 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 noninterest expense, excluding tax credit and core deposit intangibles and 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 between 16.5% and 17.5%. We expect 2023 solar tax credit investment and amortization of $30 million, including $10 million in 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.

Thank you, Heng. We will now proceed to the question-and-answer portion of the call.

[Operator Instructions] Your first question comes from Brandon King with Truist.

So I wanted to get a sense of if there's going to be any changes in your deposit strategy given what has gone on recently and as far as how you want to from gather deposits and now you wanted to control your concentrations.

I think, like many other banks, we have been offering products that spread deposits, individual depositors' deposits, through ICS procedures so that they're fully insured. So I mean that's reassuring to our depositors that have concerns. Aside from that, I think, Chang, I mean we're looking at more C&I-related deposit.

Yes. So on that part of it, we'll continue to focus on business deposits and 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 and C&I base is also a key part of that.

Got it. And I guess now that you noted slower loan growth, you don't need to grow deposits as much, what are you expecting as far as deposit betas from here on now?

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 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. But we think there's only one more rate hike, which is going to be in early May. So 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 be priced till Q1 in 2024. So that should help support our NIM short term. But that's pretty much it, Brandon.

And just a follow-up, could you remind us what the rate is on most CDs, the average rate for CDs you raised in the first quarter?

Come again, the CDs for the Chinese New Year promotion or the upcoming maturity?

Yes, the average rate on those.

About 4.20%.

The next question comes from Matthew Clark with Piper Sandler.

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 the capacity you have to borrow relative to your uninsured deposits of $8.7 billion, I see the $252 million of cash, but just wanted to get the latest and greatest at the end of March.

Chang, it was in your remarks. I can cover that. 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. So in our first quarter, we had residential mortgage growth of about $150 million. So that would add to the Federal Home Loan Bank borrowing capacity. So we're slightly over 100% coverage, not counting cash, not counting about $900 million of cash that we have on balance sheet. And we did not borrow from the Fed. And to us, it's really the lender of last resort for us.

Got it. Okay. And then 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.

Yes, I have it. 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. So the margin for March was 3.55%. And you wanted the period-end rate for loans and deposits?

No, just deposits is fine.

Oh, yes. Let me try to find it.

So the spot rate for the end of March for NOW accounts, the total is about total is about 2.65%.

Okay. And is that interest bearing? Or is that total deposits, including noninterest?

That's interest bearing.

Okay, that makes sense. Okay, great. And then 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 criticize in that portfolio?

Yes. On the reserve, it's our standard CRE reserve which, I'm doing this from memory, is probably about 70 basis points. We don't have much in criticize. And on non-accruals, I think it's only $5 million, that's for office. But I'll get back to you on that. I'll e-mail you on the office non-accrual. It could be even zero.

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

A little bit of a follow-up to Brandon's question regarding some assumptions around the NIM. Just as you think about the NIM -- 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 base expectation for kind of ongoing shift of deposits to help support the NIM guide that you provided?

We think we're pretty much done. We typically offer 12-month CDs. And so because there's a term structure to it, we think we've got the people that have the quarter that they could afford to lock up for a year.

Okay. All right. So basically, your assumption for the NIM is that your deposit mix is relatively unchanged from here.

Right, right. Well, there was a shift during the quarter. So we're starting off from the March deposit mix, the period-end deposit.

Got you. Okay, great. 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. Can you kind of sort of update us on the potential for that? Is that still, given the economic concerns, something that management would recommend and the Board would authorized?

It's on hold for now, Gary. We may restart that late in the year. But like many other banks, we want to see how things shake out.

Okay. And then my last question, if I could. Just post the failed banks and everything happening beginning kind of early mid-March, was there any thoughts about building liquidity more than you did? I mean cash is up just a little bit year-end to March 31. Obviously, you had a lot of CDs that you have brought in. So was there some more liquidity on the balance sheet at that point that kind of normalized? Or was that never really a consideration in that kind of mid-March time frame?

Well, yes, we didn't feel the need to build up a lot of liquidity because one thing about the Federal Home Loan Bank, which should have called by 11:00, but we actually weren't called by 2:00 or 2:30, it was just the Fedwire deadline, and get hundreds of millions of dollars of funding. So the main thing was we saw a very small amount of depositors that took their money out, very small, it would be $30 million or $40 million over the first week. So it's not like some other banks where they have billions of dollars go out that week after Silicon Valley Bank fail. Because of that, because we have 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.

[Operator Instructions] The next question comes from Andrew Terrell with Stephens.

If I could continue on some of the margin-related questions, how much in CDs do you have that mature during the second quarter? And what's the rate that those are repricing from? And what's the incremental cost of a new CD today? Is it relatively similar to that for 4.20% or so that was the new year promotional rate?

Yes. So the second quarter is a fairly light maturity. We have about $1.45 billion, that's maturing. The average CD rate is 3.32%. So it's not far off from our average blended CD rate of 3.53%. So that's the number. I think in terms of what the renewing rate is, it depends on the deposit side. So we locked up a lot of CD funding in the fourth quarter and the first quarter. So I think the most eager CD depositors, rate-wise, they've been locked up. So these, hopefully, we can renew at something slightly above the 3.32% range.

Okay. Got it. I appreciate it. And then also, I just wanted to make sure this is the case. I think last conference call, we talked about a $3.1 million nonaccrual 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 loan yields going into the second quarter?

Yes. Yes. It happened in January. It's part of our 8 basis NIM pickup from nonaccrual and prepayment fees.

Okay. Got you. And then 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, just specifically to the larger? And I guess, what are the sizes of the largest 2 or 3 office loans in the portfolio? I'm 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.

So 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 not your downtown core. For example, if you use L.A., that would be passing on 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, our largest size office is probably, off of memory, between $10 million to $15 million. And that's sort of just on the higher end of it. But as you noted on the deck, it's about $2.9 million.

Yes. Okay. So even at the largest end of the spectrum, it's still pretty small and pretty granular relative to...

Right, right, right.

The next question comes from Chris McGratty with KBW.

This is Nick Moutafakis on for Chris McGratty. So most of my questions have already been hit on, but maybe we can just touch on the provision. C&I ramped 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 level is headed as you move through 2023.

Yes. So during this quarter, we had that one larger CRE charge-off. But my crystal ball is not perfect, but we hope we don't get large charge-offs again in the second quarter. So if loan growth is, let's say, 2% and mostly residential mortgage, you wouldn't need very much in the way of reserves. We reserve residential mortgage at about 75 basis points. And then lastly, our reserve for unfunded went up by about $4.5 million this quarter, very seasonal, our line usage is lower at the end of March. So we'll see a shift more of that onto the on balance sheet allowance for loan losses in the second quarter. But the trend, I think it should be lower than the first quarter. You can see our substandard went down a little bit this quarter.

And then maybe just switching gears on the guide. I guess, do you guys have a deposit beta assumption for your guidance for the NIM?

We think it's going to be closer to 40%. I mean we'll certainly have a good idea in June when the Fed's done, and we tally up everything from day 1. But that's what we're thinking.

For interest bearing?

Yes, interest. Yes, that's total. So for CDs, that will be much higher. Money market would be kind of in the middle. And for like savings accounts, we didn't increase the rate at all throughout.

[Operator Instructions] the next question is a follow-up from Matthew Clark with Piper Sandler.

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 you were looking for $40 million for the year.

Yes. That's still the same, Matthew, $10 million a quarter.

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.