Cathay General Bancorp (NASDAQ:CATY) Q4 2022 Earnings Call Transcript

Cathay General Bancorp (NASDAQ:CATY) Q4 2022 Earnings Call Transcript January 25, 2023

Operator: Good afternoon, ladies and gentlemen and welcome to Cathay General Bancorp’s Fourth Quarter and Full Year 2022 Earnings Conference Call. My name is Sarah and I will be your coordinator for today. 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: Thank you, Sarah 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 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 fourth quarter and full year 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 from management today, we will open this call up for questions. I will now turn the call over to our President and Chief Executive Officer, Mr. Chang Liu.

Chang Liu: Thank you, Georgia and good afternoon everyone. Welcome to our 2022 fourth quarter earnings conference call. This afternoon, we reported net income of $97.6 million for the fourth quarter of 2022, a 29.6% increase as compared to a net income of $75.3 million for the fourth quarter of 2021. Diluted earnings per share increased 35.7% to $1.33 per share for the fourth quarter of 2022 compared to $0.98 per share for the same quarter a year ago. In the fourth quarter of 2022, our gross loans increased $147.2 million or 3.6% as annualized. The increase in loans for the fourth quarter of 2022 was primarily driven by increases of $116 million or 5.3% annualized in commercial real estate loans, $122.3 million or 9.5% annualized in residential mortgage loans.

The overall loan growth for 2023 is expected to range between 3% to 5%. We continue to monitor our commercial real estate loans. Turning to Slide 8 of our earnings presentation, as of December 31, 2022, the average loan-to-value of our CRE loans was 51%. As of December 31, 2022, our retail property loan portfolio, at Slide 9, comprises 22% of our total commercial real estate loan portfolio and 11% of our total loan portfolio. The majority, 89% of the $1.96 billion in retail loans, is secured by retail building, neighborhood, mixed use or strip centers and only 10% secured by shopping centers. For the fourth quarter of 2022, we reported net charge-offs of $2.5 million, which included $2 million that were fully reserved as of September 30, 2022 compared to net charge-offs of $0.6 million in the third quarter of 2022.

Our non-accrual loans were 0.38% of total loans as of December 31, 2022 increased by $3 million to $68.9 million as compared to the end of the third quarter of 2022. Turning to Slide 12, as of December 31, 2022, classified loans increased slightly to $256 million from $240 million as of September 30, 2022 and our special mention loans increased to $321 million from $305 million as of September 30, 2022. We recorded a provision for credit loss of $1.4 million in the fourth quarter of 2022 as compared to a $2 million provision for credit losses in the third quarter of 2022 and $3.5 million provision for credit losses in the fourth quarter of 2021. Total average deposits increased by $387.5 million or 9% annualized during the fourth quarter of 2022.

Average time deposits increased $1.4 billion or 99.2% annualized during the fourth quarter of 2022 compared to the third quarter of 2022. Average money market deposits decreased by $802.8 million or 73.1% annualized due primarily to a migration back to CDs from money market deposits and deposit runoffs. For 2023, the overall deposit growth is expected to range between 3% and 5%. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Chen, to discuss the fourth quarter 2022 financial results in more detail.

Heng Chen: Thank you, Chang and good afternoon everyone. For the fourth quarter of 2022, net income increased by $22.3 million or 29.6% to $97.6 million compared to the fourth quarter of 2021. The increase was primarily attributable to net interest margin expansion in the fourth quarter of 2022 compared to the year ago quarter. Our net interest margin was 3.87% in the fourth quarter of 2022 as compared to 3.23% for the fourth quarter of 2021. In the fourth quarter of 2022, interest recoveries and prepayment penalties added 1 basis point to the net interest margin as compared to 3 basis points for the third quarter of 2022 and 6 basis points for the same quarter a year ago. Based on Fed Funds target range of between 4.75% and 5%, we have increased our net interest margin expectation for 2023 to be between 3.75% to 3.85%.

Our 2023 net interest margin expectations included the impact of the $3.1 million interest recovery from a full repayment of a non-accrual loan last week. Our non-interest income during the fourth quarter of 2022 decreased by $7.7 million to $12.1 million when compared to the fourth quarter of 2021 due to an increase of $3.2 million in loss on equity securities, a decrease of $3.1 million and the gain on venture capital investment, distributions and a decrease of $1.7 million in derivative fee income. Non-interest expense increased by $8 million or 11% to $81.1 million in the fourth quarter of 2022 when compared to $73.2 million in the fourth quarter of 2021. The increase was primarily due to $1.2 million in higher salaries and bonuses; $3.8 million in higher amortization of low income housing and solar tax credit investments, which included a $1.3 million catch-up adjustment in the first quarter; $1 million in higher amortization of core deposit intangibles, which included approximately $900,000 in accelerated write-downs; and $1.1 million in higher professional and marketing expenses.

Special items in the fourth quarter 2022 once again included a $1.3 million catch-up adjustment for impairment of low income housing investments and $0.9 million of additional CDI amortization. We expect core non-interest expense, excluding tax credit or deposit intangibles and amortization and HSBC integration expenses to increase 3.5% from 2022 to 2023. The effective tax rate for the fourth quarter of 2022 was 25.7% as compared to 23.6% for the fourth quarter of 2021. For 2023, we expect an effective tax rate of between 17.5% and 18.5%. We expect 2023 sole tax credit investment amortization of $30 million which is $10 million in each of the first three quarters of 2023. As of December 31, 2022, our Tier 1 leverage capital ratio increased to 10.08% as compared to 10.02% as of September 30, 2022.

Our Tier 1 risk-based capital ratio increased to 12.19% from 12.06% as of September 30, 2022. And our total risk-based capital ratio increased to 13.71% from 15.59% as of September 30, 2022.

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

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Q&A Session

Operator: Your first question comes from Chris McGratty with KBW. Please go ahead.

Chris McGratty: Great. Good evening. Heng, I want to make sure I understand the expenses, just to make sure I’m buttoned up on the expenses. The 3.5% growth, is that off the €“ it looks like the $255 million, and then I’m adding on top of that $30 million on solar. Is that right?

Heng Chen: Yes, yes. And you’ve got to add $40 million in low-income housing amortization. It’s roughly $10 million a quarter now.

Chris McGratty: Okay. So solar is $30 million, and low income is how much? I missed that.

Heng Chen: $40 million.

Chris McGratty: Okay. So $70 million in total amortization. Okay. Great.

Heng Chen: Yes. And that’s why the tax rate is lower €“ projected to be lower in 2023.

Chris McGratty: Okay. Great. And then maybe on the margin guide, you had a pretty decent mix shift this quarter. So I’m interested in what €“ I guess what further remixing you might be forecasting in the CD portfolio. How much more do you have that increasing proportionately to get to that 3.75%, 3.85% margin? Thank you.

Heng Chen: Yes. We €“ pre-COVID, we used to do Chinese New Year promotions, and so we’re in the third week of our Chinese New Year promotions. So the average rate is €“ we have two tiers, but the average rate is probably about 4.20%, and we were very pleased with the results of that. We think we will get net new funds into the bank of at least $600 million. And so in terms of context, one, your broker CDs would be at 4.85%. So our rate is 4.20%. And we’re borrowing from a federal home loan bank. We’re borrowing them short-term. So that rate was about 4.8%. It’ll go up to 5% in February when the Fed increase changes. So we think that to help, lack of better word, deliver a good margin in Q1, plus that $3.1 million interest recovery would add 6 basis points to that.

But once again, we had one quarter, on our Slide 15, it shows the average Fed funds versus a cost of interest-bearing deposits. So for 2022, our deposit beta was 34%, and it jumped up to 61% in the fourth quarter. But once again, we think the first quarter, the deposit beta will not be 61%, and we have two prime rate increases in Q1. So our loan beta is 44%, and that should continue. So once again, that’s why we think we will be in the range where we’re going to be.

Chris McGratty: Okay. And if I could just make sure I’m totally buttoned up. The interest recovery, is that in the 3.75% full year guide, 3.85%?

Heng Chen: Yes, yes.

Chris McGratty: Okay. And then the mix of deposits, right? CDs are 38%. I think pre-COVID, it was north of 40%. I mean the expectation is that we’re perhaps approaching 50% by the time the Fed’s done. Is that reasonable? Or is that too far?

Heng Chen: I think that’s too far. But if the Fed’s not done, it’s going to help us NIM-wise, net interest income-wise, in 2023. And we’re going to be focusing on 2024 when we had to reprice these CDs downward, which we think we can.

Chris McGratty: Got it. Thanks, Heng. Appreciated all the color.

Heng Chen: Sure.

Operator: The next question comes from Matthew Clark with Piper Sandler. Please go ahead.