Cathay General Bancorp
NASDAQ:CATY
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Good afternoon, ladies and gentlemen and welcome to Cathay General Bancorp's Second Quarter 2022 Earnings Conference Call. My name is Andrew and I'll be your coordinator for today. At this time, all participants are in a 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.cathay generalbancorp.com.
Now, I would like to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp.
Thank you, Andrew 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, 2021 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 statements speak only as of the date on 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 second quarter 2022 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 2022 second quarter earnings conference call. This afternoon, we reported net income of $89 million for the second quarter of 2022, a 15.3% increase as compared to a net income of $77.2 million for the second quarter of 2021.
Diluted earnings per share increased 21.6% to a $1.18 per share for the second quarter of 2022, compared to $0.97 per share for the same quarter a year ago. In the second quarter of 2022, our gross loans increased $389.5 million or 9.5% annualized. The increase in loans for the second quarter of 2022 was primarily driven by increases of $94.6 million or 13.1% annualized in commercial loans, excluding PPP loans, $161.3 million or 7.9% annualized in commercial real estate loans, $210.6 million or 20.1% annualized in residential mortgage loans.
The overall loan growth for 2022 is expected to range between 10% to 12%, including approximately $646.1 million of loans from the acquisition of certain HSBC West Coast branches. Excluding the HSBC acquisition, we project loan growth to be between 6% and 8% in 2022. During the second quarter of 2022, $25.3 million of PPP loans were forgiven. We continue to monitor our commercial real estate loans.
Turning to Slide 8 of our earnings presentation, as of June 30, 2022, the average loan to value of our CRE loans was 52%. As of June 30, 2022, our retail property loan portfolio comprises 23% of our total commercial real estate loan portfolio and 9% of our total loan portfolio. The majority 90% of the $1.94 billion in retail loans is secured by retail store buildings, neighborhood mixed use or strip centers and only 9% is secured by shopping centers.
For the second quarter of 2022, we reported net recoveries of $0.2 million compared to net recoveries of $0.3 million in the first quarter of 2022. Our non-accrual loans were 0.35% of total loans as of June 30, 2022 increased by $25.7 million to $60.6 million as compared to the end of first quarter of 2022.
Turning to Slide 11, classified loans increased slightly during the quarter from $219 million to $244 million as of June 30, 2022 and our special mention loans increased during the quarter from $289 million to $295 million as of June 30, 2022. We quartered a provision for credit loss of $2.5 million in the second quarter of 2022, as compared to an $8.6 million provision for credit losses in the first quarter of 2022 and a $9 million reversal of provision for credit losses in the second quarter of 2021. Total deposits increased by $227.1 million were 5% annualized during the second quarter of 2022.
On Slide 12 average money market deposits increase $465 million or 38.6% annualized during the second quarter of 2022, compared to the first quarter of 2022. Average time deposit increased by $408 million or 30.9% annualized due to migration of CDs to money market deposits and deposit runoff.
For 2022, the overall deposit growth is expected to range between 9% and 12%, which includes approximately $0.6 billion of low cost deposit from the HSBC acquisition. Excluding the acquired deposits from HSBC, we project deposit growth to be between 5% and 8% in 2022. In May 2022, the board of directors adopted 125 million new share repurchasing program. We repurchased 750,000 shares of our stock at an average cost of $40.78 per share following $30.6 million in the second quarter of 2022 with $94.4 million remaining in the May 2022 stock repurchase program.
I will now turn the floor to our Executive Vice President and Chief Financial Officer, Mr. Heng Chen to discuss the first quarter -- the second quarter '22 financial results in more detail.
Thank you, Chang and good afternoon, everyone. For the second quarter of 2022, net income increased by $11.8 million or 13.3% to $89 million compared to the second quarter of 2021. The increase was primarily attributable to net interest margin expansion and continued strong long growth in the second quarter of 2022. Our net interest margin was 3.52% in the second quarter of 2022 as compared to 3.24% for the second quarter of 2021.
In the second quarter of 2022, interest recoveries and prepay penalties added two basis points to the net interest margin compared to four basis points for the first quarter of 2022 and three basis points in the same quarter a year ago. Based on a yearend fed funds target range between 3.25% and 3.5%, we have increased our net interest margin expectation for full year 2022 to be between 3.5% to 3.65%.
Non-interest income during the second quarter of 2022 increased by $2 million to $14.6 million when compared to the second quarter of 2021, primarily due to increases of $0.9 million in loan fees. Non-interest expense increased by $4.4 million or 6.3% to $74.1 million in the second quarter of 2022 when compared to $69.7 million in the second quarter of 2021. The increase was primarily due to $4.5 million in higher salaries and bonuses due in part to the acquisition of certain HSBC West Coast branches. $1.9 million in higher professional and legal expenses, partially offset by $3.4 million decrease in amortization of solar tax credit investments.
The effective tax rate for the second quarter of 2022 was 21.4% as compared to 22.7% for the second quarter of 2021. For the second half of 2022, we expect an effective tax rate of between 21.5% and 22.5%. We expect solar tax credit amortization of $1.5 million in the third quarter of 2022 and $7.5 million in the fourth quarter of 2022.
As of June 30, 2022, our tier one leverage capital ratio increased to 10.15% as compared to 10.11% as of March 31, 2022. Our tier one leverage -- our tier one risk-based capital ratio decreased to 12.18% from 12.37% as of March 31, 2022, and our total risk-based capital ratio decreased to 13.74% from 13.97% as of March 31, 2022.
Thank you. Hang. We will now proceed to the question-and-answer portion of the call.
[Operator instructions] And our first question comes from the line of Matthew Clark with Piper Sandler.
Maybe first on the fee income, the core fee income in the other noninterest income, can you give us a sense for what drove the increase from last quarter in other noninterest income?
It's very low, it's $900,000 in loan fees that include some regular loan fees and we collected $350,000 from the far east national loan and we booked that in the other income category.
Okay. I'm just making sure, because I thought the comparison was from a year ago.
Are you ask -- you're comparing it to last year or the first quarter?
The first quarter?
Oh yeah. We also had a death benefit here in the second quarter. So that was yeah, I'm sorry that was on the linked quarter basis. That was about $1.5 million.
Okay, great. And then I guess a similar question in expenses linked quarter, the increase in other operating expense again from last quarter.
Yeah, we had a few one-time items. Our marketing expense was a little bit higher. So that was higher by about $800,000. It gets lumpy between the quarters and then we also had in all other -- we have the annual director fee retainer, which for the director group. So that's about 700,000, 800,000.
Okay, great. Sounds good. And then shifting, also within expenses you gave the guidance on solar tax credit amortization, can you just fine-tune what you expect for low income housing in the third and fourth quarter?
We keep on making new investments, so probably $7.5 million per quarter would be good for low income housing.
Okay, great. And then the -- do you have the spot rate on interest bearing deposits at the end of -- as of June 30?
It's not precise. I did a quick calculation because so many people seems to be asking for it. It's hold on, let me try to find that piece of paper. Once again, we normally don't produce this. I just got this out of a GL, but it's -- I think it's -- I think the June, well, I think it was about 46 basis points.
Okay. Okay. And then last one for me on the buyback, your appetite to continue repurchasing stock and potentially re-up another program, just given the increased uncertainty in the economy.
We still intend to do about the same amount in the third quarter. Our authorization goes into the first quarter of 2023 and we have $94 million left. So you can probably figure. It's maybe $35 million a quarter about.
Okay, great. Thank you.
Thank you. And our next question comes from the line of Brandon King with Truist Securities.
So I wanted to touch on deposits. You're able to generate deposit growth in the quarter, and I noticed you didn't change your guidance for the year, which expands our relative to peers. So I just want to get a sense of what gives you the confidence of generating deposits along with loan growth for the back half of the year?
Well, first we think our loan growth in the second quarter, second half of the year, it's in our guidance or it's implied. We'll probably drop to 5% annualized in the second half and then we would match deposit flow to that including using brokerage CDs as needed. Brandon?
Oh, sorry. Just say using broker CDs to kind of fund that growth and that's included, I guess that's incorporated in the new guidance as well. So I guess should see kind of a smaller benefit to increasing interest rates going forward. Is that projecting in that?
Yeah, we had a very good increase from Q1 to Q2 and that only has half a month of the June 75 basis point. So that momentum will continue in the second half. But it's these very rapid interest rate increases are unprecedented in recent history, but we do think our NIM portfolio is going be better than our prior guidance.
Okay. And do you have hand the [indiscernible] in the month of June?
Yes. Some of this affected by the -- oh, sorry that was May. I think it was 3.66.
Okay. All right. And then just lastly, on loan growth, as you're anticipating slower loan growth in the back half of the year, are there any categories that should see slower loan growth relative to others that you participate in?
We're not expecting, if anything, the residential mortgage might kind of slow down a little bit given where rates are. I think we've booked the first half all the applications that was in the pipeline as a result of the sales activities, but I think now the interest rate impact will kind of slowdown that segment a little bit going forward.
Okay. Thanks for all the answers.
Thank you. And our next question comes from Andrew Terrell with Stephens.
Hey, just wanted to follow up on the last point. I was curious on whether you've seen kind of a similar slowdown in commercial real estate volumes as we've worked into the third quarter of this year?
We're seeing slower refinance activities of course, because of the higher rates. But there are still people who for example, are kind of flipping from a fixed to float that they don't want to see the floating rate. So they're worried about that given where the short term rates are. So there is still some activity it's not completely dead.
Purchase activity have flowed as well, given where the rates are particularly on some of the apartment acquisitions, but we're still seeing a fairly healthy pipeline and we're being selective about, careful about our current relationships and our current clients. I think we're definitely more careful of going forward about what kind of commercial real estate deals that we're doing.
And one last on jut the deposit growth that we saw this quarter. I didn't see it anywhere in the release, but I was curious was any of the -- any of the money market growth was any of that brokered?
Yes. It was a $100 million out of that total growth.
Okay.
That's period end to period end.
Yep. Okay. Got it. Thank you. And then one last one for me, I think last quarter, we, a little bit about, I think it was around a $14 million commercial credit that was placed on non-accrual. Was just curious, any kind of status update that you can share on this loan?
We don't like to talk about specific customers, but I understand its public knowledge. There's been a receiver appointed. So we feel we have better control that credit and ultimately, we'll get some collection from the assets of the business and then the rest will come from the house on the West side that's securing it. And then we have also reserved for the loan for a reasonable amount.
Okay. understood. Well, I appreciate you taking my questions.
Yeah. Thank you.
Thank you. Our next question comes from the line of Chris McGratty with KBW.
Heng or Chang, last quarter, you talked about I think a 30% through the cycle beta. Do you feel any different about this, given the speed at which the fed is now moving? Is that number is moving higher?
We don't know. We still think it's 30%. In the second quarter, it was much less than that in part, because we had a shift in our deposit mix where our customers are also uncertain as to whether they should renew for one year CDs, which is a traditional term, versus staying in money market. But we did get, Chang it was about 90% retention of maturing CDs.
And I thought I heard it was the -- one year of CD renewal rate was around 1%. So that is much better than our beta of that 30%. We assume for CDs, the beta will be a 100%. So, this rate hikes is very unusual. So far, we're doing better than our hours of beta and…
Yeah, for sure. And just on the expense, I just want to make sure I fully understand the expense guide, which hasn't changed. Can you just provide what the -- what the starting level of expenses are for 2021? Is that your reported expenses? Is that reported ex amortization? Just so I want to make sure I get it right.
Yeah. It's reported full year 2021 ex amortization.
[Operator instructions] Our next question comes from the line [indiscernible] with DA Davidson.
Heng, I just wanted to kind of go back over that loan and deposit guide. You kind of mentioned in your answer to a question that you were looking to sort of match loan growth with deposit growth, but even at the low end of that deposit guide of 9%, it would suggest, I think second half of the year deposit growth that far on strip the projected loan growth based on your guidance. So is that accurate or am I misunderstanding something in your comments?
Yeah. We try to keep the -- you'll see our loan to deposit ratio is 96% for the last two quarters. So we're trying to maintain that at quarter end and if we have to, we'll go through the wholesale broker CD or broker money market to maintain that. So our intention is to keep up with the loan growth for the rest of the -- rest of the year in that, and try to keep that loan deposit short right around 96%. It might drift up a little bit, but hopefully not too much.
Okay. All right. Thank you. And then in terms of just overall balance sheet management, you're down to, I don't know, $1 billion or so of liquidity versus $2.5 billion at the end of 2021. So, is that a level that you'd like to maintain from a balance sheet liquidity perspective? Would you run it tighter than that and deploy some of that cash to loans or securities at this point?
It should be right around $1 billion. We have about $120 million of treasuries, which are less than -- the final maturity is less than one year. So those count as cash equivalents for the regulatory ratios, but we may if that $1 billion cash to the fed drop is because we deploy some into treasury, but overall we're maintaining -- we're not going to run that balance down much slower.
You're going to run the short term investment balance, then that's a $1 billion.
No, no,
I thought you said that's where you -- you're not going to, you're going to keep it there.
Yes, sir.
Thank you. And our next question comes [indiscernible].
Hi. Thanks. I wanted to follow up on the brokered CD topic. I was curious, what's the rate on the brokerage CDs versus your core CD portfolio rate?
Oh well, we just, that's some this month it's for three month brokerage CD, that gets about two and a quarter two and three eights, and then our -- this is June. The rate on our core time deposits for June was the about 45 basis points.
And can you talk about the competitiveness in the market for core CDs? Are you seeing some competitors push that up? Do you guys plan on doing any kind of specialists, because it seems like you'll get a better sort of deal with your core CDs versus the brokerage CDs. Can you talk about that a bit?
Yeah. Well, one, we don't think we need to do any sort of CD specials. We don't see anybody in the marketplace doing that because banks in general have a lot of -- still have a lot of excess liquidity. In terms of earlier in the second quarter, we lost some larger deposit customers. They were leaving for deposits and below twos, I can say early June.
Today, if those same customers came to us and said they would want 2% for one year of CD, we would take that, but it's very -- we have a service that looks for the published rates for all of our Southern California peers and nobody has raised any rates in any product since the fed increase. So my assumption is everybody is customizing for the larger depositors, the rate that they want to offer.
Got it. Thanks for that. And then shifting to credit quality, can you talk about, the health of your borrowers, clearly, your LTVs are very, very low. But I'm curious about the healthier borrowers and then related to that, can you talk about what you are seeing based on talking to customers, the economic outlook, and if you're seeing anything recessionary in your outlook.
So David I'll take that first. On the CRE side, we've done a deeper dive into not just the LTV side, but into the cash flow side and the debt service side, assuming higher interest rates and higher debt service payments what the portfolio will look like from a debt cover standpoint. So we've done a pretty significant review of that and we feel pretty good, pretty comfortable about those.
On sort of the economic and recession side, I think it's the GDP numbers, I think later in the week will kind of tell us a little bit more, but the unemployment numbers are still very low. The last, I think hiring report was something about $400,000 and was the total of $1.1 million over three quarters with and so those are all strong numbers that I think we've seen.
In addition to that, our C&I customers, I think, we were also looking at them and kind of looking at their balance sheet and their aging more carefully kind of looking at some of their inventory just to make sure that their numbers are strong. We don't have any concerns there at this point. So if there is one, there's probably a mile one, there was, I think a report in Wall Street about how there is an expectation for fed cuts that may come as quickly as the next 12 months.
Great. Thanks very much.
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 at 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.