Cathay General Bancorp Q2 2023 Earnings Call Transcript

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July 24, 2023

There are 7 speakers on the call.

Operator

Afternoon, ladies and gentlemen, and welcome to Cathay General Pancorp's Second Quarter of 2023 Earnings Conference Call. My name is Vaishnavi, and I will 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. Today's call is being recorded and will be available for at www.cathegeneralbancorp.com.

Operator

Now I would like to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp. Please go ahead.

Speaker 1

Thank you, Vaishnavi, and good afternoon. Here to discuss the financial results today are Mr. Cheng Vu, our President and Chief Executive Officer and Mr. Heng Cheng, 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 Actual results to differ materially.

Speaker 1

These risks and uncertainties are further described in the company's annual report on Form 10 ks 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 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 This afternoon, Cathay General Bancorp issued an earnings release outlining its Q2 2023 results. To obtain a copy of our earnings release as well as earnings presentation, please visit our website at www.cathaygeneralbancorp.com. After comments by management today, we will open up this call for questions.

Speaker 1

I will now turn the call over to our President and Chief Executive Officer, Mr. Chang Liu.

Speaker 2

Thank you, Georgia, and good afternoon, everyone. Welcome to our 2023 Second Quarter Earnings Conference Call. This afternoon, we reported net income $93,200,000 for the Q2 of 2023, a 2.9% decrease as compared to a net income of $96,000,000 for the Q1 of 2020 3. Diluted earnings per share decreased 2.3 percent to $1.28 per share for the Q2 of 2023 compared to $1.32 per share for the Q1 of 2023. In the Q2 of 2023, our gross loans increased $635,500,000 or 13.9% Annualized, the increase in loans for the Q2 of 2023 was primarily driven by increases of $8,000,000 or 12.1 percent annualized in residential mortgage loans and $165,000,000 or 19.9 percent annualized in commercial loans, offset by a decrease of $38,000,000 in construction loans.

Speaker 2

With a strong loan growth in the Q2, we have revised our Guidance for overall loan growth for 2023 to between 5% to 7% from our previous guidance of 1% to 3%. Our strong loan growth during the Q2 included advances from a handful of commercial loan borrowers. In addition, we have increased the loan spreads for fixed rate commercial real estate loans to help improve the returns. We continue to monitor our commercial real estate Turning to Slide 7 of our earnings presentation. As of June 30, 2022, the average loan to value of our CRE loans was 50%.

Speaker 2

As of June 30, 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. 88% of the $2,100,000,000 in retail loans is secured by retail store, building, Neighborhood, mixed use or strip centers and only 11% is secured by shopping centers. At Slide 9, office property loans represents 17% of our total commercial real estate loan portfolio and 8% of the total loan portfolio. Only 34% The $1,600,000,000 in office property loans are collateralized by pure office buildings and only 3% of the office property loans are in Central Business Districts. Another 38% of office property loans are collateralized by office, retail stores, office mixed use and medical offices.

Speaker 2

The remaining 28% of office property loans are collateralized by office condos. For the Q2 of 2023, We reported net charge offs of $2,000,000 compared to net charge offs of $4,900,000 in the Q1 of 2023. Our non accrual loans were 0.36 percent of total loans as of June 30, 2023, which decreased by 4,600,000 to $69,000,000 as compared to the end of the Q1 of 2023. Turning to Slide 12. As of June 30, 2023, Classified loans decreased to $193,000,000 from $240,000,000 as of March 31, 2023.

Speaker 2

And our special mention loans increased slightly to $260,000,000 from $251,000,000 as of March 31, 2023. We recorded a provision for credit loss of $9,200,000 in the Q2 of 2023 as compared to an $8,100,000 in provision for credit losses for the Q1 of We are pleased that total deposits increased by $448,100,000 or 9.7 percent annualized during the Q2 of 2023. Total uninsured deposits were $8,400,000,000 as of June 30, 2023. Excluding $900,000,000 in collateralized deposits, The uninsured and uncollateralized deposits of $7,500,000,000 was 39.2 percent of total deposits as of June 30, 2023. Our unused borrowing capacity from the Federal Home Loan Bank as of June 30, 2023 was $6,100,000,000 and unplaced Securities at June 30, 2023 was $1,300,000,000 These and other sources of available liquidity were more than 100% of Uninsured and uncollateralized deposits as of June 30, 2023.

Speaker 2

Total time deposits increased $325,000,000 or 18.6 percent annualized During the Q2 of 2023 compared to the Q1 of 2023, total saving deposits increased by 241,000,000 196.2 percent annualized, primarily due to a promotional campaign. For 2023, the overall deposit growth is expected to range between 5% 7%. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Chang, to discuss the Q2 2023 financial results in more detail.

Speaker 3

Thank you, Chang, and good afternoon, everyone. For the Q2 of 2023, net income decreased by $2,800,000 or 2.9 percent to $93,200,000 compared to $96,000,000 for the Q1 of 2023. The decrease was primarily attributable to net interest margin compression Due to the increase in the cost of deposits and because most of the loan growth during the Q2 was from fixed rate loans. Our net interest margin was 3.44 percent in the Q2 of 2023 as compared to 3.74% for the Q1 of 2023. In the Q2 of 2023, interest recoveries and prepayment penalties Added 2 basis points to the net interest margin as compared to 8 basis points for the Q1 of 2023.

Speaker 3

With an anticipated Fed rate hike in July 2023 and no rate cuts after that during 2023, We have revised our net interest margin expectations for 2023 to be between 3.5% to 3.6%. Non interest income during the Q2 of 2023 increased by $8,900,000 It's $23,100,000 when compared to the Q1 of 2023 due to an increase of $5,800,000 in gain on And from a $3,000,000 write off of a corporate bond security in the Q1. Non interest expense increased by $9,600,000 or 11.6 percent to $92,800,000 in the quarter of 2023 when compared to $83,200,000 in the Q1 of 2023. The increase was primarily due to $6,500,000 in higher amortization, Solar tax credit investments, dollars 1,600,000 of Seasonally higher marketing expenses, dollars 1,500,000 in higher professional expenses, offset by $1,200,000 in lower salaries and bonuses due mainly to higher FICA taxes paid in the Q1. We expect all non interest expense, excluding tax Credit and core deposit intangible amortization and HSBC Innovation Expenses to increase 3.5 percent from 2022 to 2023.

Speaker 3

The effective tax rate for the Q2 of The Q1 of 2023 due mainly from additional investments And solar tax credit funds. For 2023, we expect an effective tax rate of between 13% 14%. We expect 2023 solar tax credit investment amortization of $42,000,000 including $16,000,000 for Q3 $11,000,000 in Q4 of 2023. As of June 30, 2023, our Tier 1 leverage capital ratio increased to 10 point 4% as compared to 10.27% as of March 31, 2023. And our total risk based capital ratio decreased to 13.88% From 13.94 percent as of March 31, 2023.

Speaker 3

Thank you, Heng.

Speaker 2

We will now proceed to the question and answer portion of the call.

Operator

And then number 1 on your touchtone telephone. We ask that you please limit yourself to 1 question and one follow-up question. You may then return to the queue. The first question comes from Matthew Clark with Piper Sandler. Please go ahead.

Speaker 4

Hi, good afternoon. Hi, Eric. First one for me On the margin, if you can give us the spot rate on interest bearing At the end of June and the average margin in the month of June?

Speaker 3

Yes. The average margin for the month of June was 3.41 percent. So it was up slightly from the margin for the month of May. And then, the spot rate of total interest bearing deposits at June 30 was 3%.

Speaker 4

Okay, great. And then getting from that 341 back up to that 350 to Well, you have the benefit, I guess, year to date of 3.59% in terms of the first half margin.

Speaker 3

Right. So it

Speaker 4

seems like you expect that 3.41 June margin to hang in there. Can you speak to what you're assuming On deposit costs and any kind of pay down borrowings?

Speaker 3

Yes. We think the loan growth In Q3 and Q4 will be quite a bit lower than in Q2. So that will make it easier for us to fund the loans. So I think between that and the additional Fed rate hike that we assume Will happen on Wednesday, will help improve the margin and we do expect Interest recovery between now and the end of the year, slightly over $1,000,000 So That's kind of added to that.

Speaker 4

Okay, great. And then, just around expenses, The core or adjusted expense outlook of 3.5%, which is unchanged Off the $255,000,000 last year, that implies some relief here in the second half. Can Speak to what do you expect to come out of the expense run rate?

Speaker 3

Well, Matthew, in Q2, we had As we mentioned in our comments, we make most of our contributions In the Q2. And then we had probably about $1,000,000 plus of One time items, that's in the Q2. And then I'll ask the We think we might accrue lower bonus expenses in the second half. But If it's slightly higher than 3.5%, I don't think it will be much higher than that.

Speaker 4

Okay. And then the low income housing Tax credit amortization for the 3rd Q4, do you have those numbers?

Speaker 3

It should be about $10,000,000 per quarter.

Speaker 4

Okay. Thank you.

Speaker 3

Yes. Thank you.

Operator

The next question comes from Andrew Terrell with Stephens. Please go ahead.

Speaker 5

Hey, good afternoon. Hi. Just a follow-up on Matt's question there. On the expenses, I guess to get to 3.5 percent core expense growth for 2023, it implies the core expense run rate steps down to about Just a little over $63,000,000 per quarter in the back half of the year. Does that sound right to you?

Speaker 3

No. We kind of think it should be close to the $67,000,000 I guess.

Speaker 5

Okay. Got it. So similar to the Q1 run rate?

Speaker 3

Yes.

Speaker 5

Okay, understood. And then on the loan growth front, it sounded like last quarter on the conference call when the loan growth guidance was lowered, it was Mostly predicated on uncertainty within the economy. I guess I'm surprised that after the revision last Just surprised to see such strong loan growth here in the Q2. I guess have your views around certainty in the economy improved? And where do you see growth opportunities In the Q2 and just what gives you confidence in the growth put on in the second quarter?

Speaker 2

So Andrew, during our second The C and I loan growth was really from just a handful of large clients on the tech side and the pharmaceutical side that drew down on their advances of the line that was not In addition, we have some pull through on the commercial real estate side that really kind of started the process in the latter part of the first quarter, But it didn't close until sometime in Q2. But we don't expect and particularly with the increase in the margins on the CRE side, We're not expecting to see continued demand at that pace in the Q2. We think there's going to be more of a muted Sort of pick up on any loan growth in the second half of the year.

Speaker 5

Yes, understood. Okay. And then in terms of

Speaker 3

Yes, of that, Chang mentioned we had In free tech borrower that drew down on their line, they have since paid that off in the Q3. So that will help well, it will make the Q3 loan growth lower Just from the payoff.

Speaker 5

Understood. Okay. I appreciate it. And then if I'm reading it right, it seems like that the guidance would be for the deposit growth to maybe slightly outpace loan growth in the back half of the year. I guess is the plan going to be to pay down the FHLBs in 3Q or 4Q or at least a portion of them?

Speaker 3

I mean, we're going to try to target a 90% loan to deposit ratio. One reason it crept up is we had very Long loan growth in the month of June. So it was hard for us to match that loan growth In the short time where it happened and then similarly the Federal Home Loan Bank borrowings, They also jumped up in the second half of June. We since paid down about $250,000,000 of those Federal Home Loan Bank borrowings to where it's now a more stable level For the second half.

Speaker 5

Okay, got it. Thank you for taking the questions.

Speaker 3

Thanks. Thanks.

Operator

Our next question comes from Christopher McGratty with KBW. Please go ahead.

Speaker 6

Hey, how's it going? This is Andrew Leichner on for Chris McGratty. I was just wondering, have you started to see any stabilization in your non interest bearing deposit outflows?

Speaker 3

We think it's stabilized. Just Given the month end balances, it was $3,700,000,000 in At the end of April, dollars 3,700,000,000 rounded at the end of May and then $3,600,000,000 at the end of June. So, yes,

Speaker 2

it Chang, do you Yes. We're not seeing any additional sort of outflows. I think at this point, given the rate hikes and some of the Sensitive clients with the cash and liquidity that had them in checkings or money market, they to the extent they wanted to move them into higher yielding accounts, they've already done so at this point. So We believe that the non interest bearing core should remain relatively stable.

Speaker 6

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

Speaker 2

Sure. Just kind of on the credit portfolio a little bit. We kind of there's a page on Page 9 of the deck. It's all encompassing, it's about $1,550,000,000 in total. And the average loan size of these is about $2,100,000 Average property size is only about a little over 12,000 square feet.

Speaker 2

Only 3% of it is in the commercial business district, so truly downtown core. The rest of it is 66% in urban, 31% in the suburban space. And if you exclude some of the portion of that, 28% of that was in office condos, which might have might skew the balance towards lower balance and less service square footage. But even if we exclude the office condos, The average loan size is still just about a little over $3,000,000 with an average property size just a little over 21,000 square feet. So we're not in the big Class A 300,000 downtown core, that's not what we are.

Speaker 2

And some of these a lot of these are sort of office over retail and some of the medical office space as well. As far as the average occupancy, we're about 84% across the board and the average debt cover on these is about 1.8% or higher.

Speaker 3

And then we don't have any special reserves on office. So It's the same as our CRE reserves, which is the CRE reserves are about the same. It's about 0.8% of loans. We did build up our reserve this quarter by about $7,000,000 But that wasn't for office, it was for general reserving.

Speaker 6

Okay, great. Thank you for the questions.

Speaker 2

Yes, thank you.

Operator

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

Speaker 5

Thanks. Good afternoon. Most of my questions were asked, but just on the capital front, just wondering given Sure. And capital ratios and you've beefed up the ALLL a little bit this quarter or the ACL this quarter. Any thoughts On resuming buyback at this point?

Speaker 3

Not for a while, Gary. We want to see how I will the economy shakes out hopefully very late in the year or early next year.

Operator

As we see no questions, this ends the Q and A session. I will now turn the call back over to Cathay General Bancorp's management for closing remarks.

Speaker 2

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.

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Earnings Conference Call
Cathay General Bancorp Q2 2023
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