Cathay General Bancorp
NASDAQ:CATY
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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. At this time, all participants are in listen-only mode. Following the prepared remarks, there will be a question-and-answer session. [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 31st, 2022, and 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. [Operator Instructions]
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 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 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 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, our retail property loan portfolio at 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% is secured by shopping centers.
At slide nine, 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 resulting -- 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 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 31st, 2023, classified loans decreased slightly to $240 million from $256 million as of December 31st, 2022. The 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 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 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 unpriced 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 or 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 275,000 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. 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 eight basis points to the net interest margin as compared to one basis point for the fourth quarter of 2022. With that anticipated Fed rate hike in May and no recuts until late Q4, we have revised our net interest margin expectation for 2023 to be between 3.6% to 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 higher in higher salaries and bonuses, $1 million in higher amortization solar tax credits -- solar tax rate 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 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 the effective tax rate between 16.5% and 17.5%. We expect 202 solar tax per day investment and 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.
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. Please go ahead.
Good afternoon.
Hi.
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 gather deposits and how you want to control your concentrations?
Yes, I think like many other banks, we have been offering products that that spread deposits -- individual depositors, deposit through ICFC 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 non-interest bearing deposits, and we certainly have a pace of CDs that we continue to use, but the business deposits and leveraging that our C&I clients and C&I base is also a key part of that.
Got it. And I guess now that 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 price 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 the CDs average rate for CDG raised in the first quarter?
Yes, about -- or come again, the CDs for the Chinese New York promotion or the upcoming maturity?
Yes, the average rate on those.
About 4.20%.
Okay. I'll hop back in 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.
Hi.
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, he wants your remarks. I can cover that. So, 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. 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 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 in the spot rate at the end of March in terms of deposits.
Yes. Yes. 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. So, the margin for March was 3.55% and you wanted the period-end rate for loans and deposits?
No, just deposits is fine.
Yes. Let me find it.
So, the spot rate for the end of March for now accounts is 0.--
Total. Just give him the total.
The total is about $2.65.
Okay. And that's is that interest-bearing? Or is that total deposits, including non-interest.
That's interest bearing. That's doesn't--
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 criticized in that portfolio?
Yes. On the reserve, it's our standard CRE reserve, which I'm doing this from memory is -- it's probably about 70 basis points. We don't have much in their size. And on non-accruals, I think it's only $5 million, that's 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.
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 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 it's not the -- because there's some 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.
All right. So basically, your assumption for the NIM is that your deposit mix is rental down can shrink.
Right, right.
Okay. Okay. And then -- sorry, go ahead.
Well, no, there was a shift during the quarter. So, we're starting off from the March deposit mix of the period end deposit.
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 can you kind of sort of update us on the potential for that? Is that still -- given the economic inserting something that management would recommend and the Board would authorize?
We -- 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 last question, if I could. Just post the failed banks and everything, I think, 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 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 that kind of mid-March timeframe?
Well, yes, we didn't feel the need to build up a lot of liquidity because one thing about the Federal Home Loan Bank. We should call by 11 o'clock. We actually we then called by 2 o'clock or 2:30 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. They saw it would be $30 million or $40 million over space over the first week.
So, it wasn't -- it's not like some other banks where they have billions of dollars go out that week after Silicon Valley Bank. So, we -- because of that, because we have won 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.
[Operator Instructions] 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? And what's the 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 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 depositors -- CD depositors rate wise, they've been locked up. So, these are -- 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 eight basis NIM pickup from non-accrual and prepayment fees.
Okay, got you. And then last question for me, 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 and, I guess, what are the sizes of the largest two or three office loans in the portfolio? I'm just trying to get a sense of whether you have any through 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. But for example, if you use L.A., I'll be passing out 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 memory between $10 million to $15 million. And that's sort of the -- just on the higher end of it. But as you noted on the deck, it's about 2.9%.
Yes. Okay. So, still even at the largest end of the spectrum is still pretty small and pretty granular relative to then?
Right, right, right.
Very good. Thank you for taking the questions.
Thank you.
The next question comes from Chris McGratty with KBW. Please go ahead.
Hi, this is Nick Moutafakis on for Chris McGratty. Good afternoon guys. Most of my questions have already been hit on, but maybe we can just touch on the provision. So, I ramped up this quarter. Kind of looking 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 you move through 2023?
Yes. So, during this quarter, we had that one larger CRE than job. But my crystal ball is not perfect, but we hope we don't get large charge-offs again in the second. 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 in about 35 basis points.
And then lastly, our reserve for unfunded went up by about $4.5 million this quarter very seasonal in the prior line usage is lower at the end of March. So, we'll see a shift more of that onto the 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 and 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 the -- 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 the June when the Fed is done, and we tally up everything from day 1. But that's what we're thinking.
For interest bearing?
Yes, interest bearing. 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.
Okay. I think that’s all. I mean everyone else hit on with most of the points. So, appreciate the help. Thanks guys.
Okay. Sure.
[Operator Instructions]
The next question is a follow-up from Matthew Clark with Piper Sandler.
Hey. 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 -- you were looking for $40 million for the year?
Yes. That's still the same, Matthew, $10 million in 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 in 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.