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spk01: Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp's first 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. If you would like to participate in this portion of the call, please press star followed by 1 at any time during the conference. If assistance is needed at any time during the call, please press star followed by zero, and the coordinator will be happy to assist you. Today's call is being recorded and will be available for replay at www.cathegeneralbankcorp.com. Now I would like to turn the call over to Megan Chang, Investor Relations of Cathay General Bancorp.
spk03: Thank you, Andrew, and good afternoon. Here to discuss the financial results today are Mr. Chang Lui, our President and Chief Executive Officer, and Mr. Hang Chan, 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, 2021, as item 1A in particular, and in other reports and filings of 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 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 Bankrupt issued an earnings release outlining its first quarter 2022 results. To update a copy of our earnings release as well as our first quarter earnings presentation, please visit our website at www.capitalgeneralbankup.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 Lui.
spk06: Thank you, Megan, and good afternoon, everyone. Welcome to our 2022 first quarter earnings conference call. This afternoon, we reported net income of $75 million for the first quarter of 2022, a 2.2% increase as compared to the net income of $73.4 million for the first quarter of 2021. Diluted earnings per share increased 7.6% to $0.99 per share for the first quarter of 2022, compared to $0.92 per share for the same quarter a year ago. In the first quarter of 2022, our growth loans increased 1.1 billion, or 25.8 percent annualized. Organic loan growth, excluding PPP loans and HSBC acquired loans, increased by 431.8 million to 16.8 billion, which represents an annualized growth rate of 10.6 percent. The increase in loans for the first quarter of 2022 was primarily driven by increases of 181.6 million or 25.1 percent annualized in commercial loans excluding PPP and HSBC loans, 258.5 million or 12.7 percent annualized in commercial real estate loans, 33.4 million or 3.2 percent annualized in residential mortgage loans. That excludes HSBC acquired loans. The overall loan growth for 2022 is expected to range between 9 percent to 13 percent. including approximately 646.1 million of loans from the acquisition of certain HSBC West Coast branches. Without the HSBC acquisition, we project loan growth to be between 5% and 8% in 2022. During the first quarter of 2022, 37.4 million of PPP loans were forgiven. As of March 31st, 2022, our deferred PPP loan fees were 49,000. We continue to monitor our commercial real estate loans Turning to slide eight of our earnings presentation, as of March 31st, 2022, the average loan-to-value of our CRE loans was 51%. As of March 31st, 2022, our retail property loan portfolio, shown on slide nine, comprises 23% of our total commercial real estate loan portfolio and 11% of our total loan portfolio. The majority, 88% of the $1.93 billion in retail loans, is secured by retail store buildings neighborhood, mixed-use, or strip centers, and only 11% is secured by shopping centers. For the first quarter of 2022, we reported net recoveries of 100,000 compared to net charge-offs of 300,000 in the fourth quarter of 2021. Our non-accrual loans were 0.5% of total loans as of March 31, 2022, increased by $20.5 million to 86.3 million as compared to the end of the fourth quarter of 2021. A 14 million commercial loan was placed on non-accrual. Turning to slide 12, we were pleased to see that our classified loans decreased during the quarter from 266 million to 219 million at March 31st, 2022. And our special mention loans decreased during the quarter from 499 million to 389 million at March 31st, 2022. We recorded a provision for credit loss of $8.6 million in the first quarter of 2022, as compared to a $3.5 million provision for credit losses in the fourth quarter of 2021, and a $13.6 million reversal of provision for credit losses in the first quarter of 2021. The provision for credit losses of $8.6 million reflected the growth in loans during the first quarter, which included a $2.3 million A2 CISO charge for the loans acquired from the HSBC acquisition. Turning to slide three, excuse me, turning to slide five, total average deposits excluding HSBC acquired deposits increased by 218.6 million or 7.4% annualized during the first quarter of 2022. On slide 13, average money market deposits increased 421.8 million or 35.6% annualized during the first quarter of 2022 compared to the fourth quarter of 2021. Average time deposit decreased by $314.8 million, or 17.4% annualized, due partly to the runoff of broker CDs and partly due to a migration of CDs to money market deposits. For 2022, the overall deposit growth is expected to range between 9% and 12%, which includes approximately $0.6 billion of low-cost deposits from the HSBC acquisition. Excluding the acquired deposits from HSBC, we project deposit growth to be between 5% and 8% in 2022. We repurchased 704,927 shares of our stock in an average cost of $46.67, totaling $32.9 million in the first quarter of 2022, completing the September 2021 stock repurchasing program. We are working on a new stock buyback program. The acquisition of certain West Coast branches from HSBC was successfully completed on February 7, 2022. We welcome the new customers and the HSBC associates in the 10 branches. We acquired $646 million in loans, $575 million in deposits, and 10 branches expanding our Northern and Southern California branch network. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Han Chang, to discuss the first quarter 2022 financial results in more detail.
spk08: Thank you, Chang, and good afternoon, everyone. For the first quarter of 2022, net income increased by 1.6 million or 2.2 percent to 75 million compared to the first quarter of 2021. The increase was primarily attributable to increase in net interest income due to continuing strong loan growth in the first quarter of 2022. Our net interest margin was 3.26 percent in the first quarter of 2022 as compared to 3.2 percent for the first quarter of 2021. In the first quarter of 2022, interest recoveries and prepayment penalties added four basis points to the net interest margin as compared to six basis points for the fourth quarter of 2021 and three basis points for the same quarter a year ago. There were $2.3 billion of loans at the floor rate as of March 31, 2022, reducing from $3.1 billion in December 31, 2021. Based on the year-end fixed funds target of 2.25%, we have increased our net interest margin expectation for 2022 to be between 3.3 percent to 3.40 percent. Net interest income during the first quarter of 2022 increased by $10.2 million to $20.2 million when compared to the first quarter of 2021, primarily due to an increase of $8.7 million in mark-to-market gains on equity securities. and an increase of $1.3 million in swap income. Non-interest expense increased by $1.3 million or 1.8% to $72.7 million in the first quarter of 2022 when compared to $71.4 million in the first quarter of 2021. The increase was primarily due to an increase of $3.2 million in acquisition of the HSBC branches and 2.8 million in higher salaries and bonuses due to additional personnel as a result of the acquisition of the HSBC branches. Offset by 3.3 million decrease in amortization of solar tax credit investments and 1.9 million decrease in marketing expense due to timing. The effective tax rate for the first quarter of 2022 was 23.5% as compared to 21.9% for the first quarter of 2021. For the second quarter of 2022, we expect an effective tax rate of around 19.5%. For the second half of 2022, we expect an effective tax rate of between 21 and 22%. We expect solar tax credit amortization of half a million in the second quarter, 1.5 million in the third quarter, and 7.5 million in the fourth quarter of 2022. As of March 31, 2022, our Tier 1 leverage capital ratio decreased to 10.11% as compared to 10.40%. as of December 31st, 2021. Our Tier 1 risk-based capital ratio decreased to 12.37% and 12.8% as of December 31, 2021. And our total risk-based capital ratio decreased to 13.97% from 14.1% as of December 31, 2021. Thank you, Heng. We will now proceed to the question and answer portion of the call.
spk01: Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then one key on your touchtone telephone. We ask that you please limit yourself to one question and one follow-up question. You may then return to the queue. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. And to prevent any background noise, we ask that you please place yourself on mute once your question has been stated. Our first question comes from the line of Brandon King with Truist Securities. Thank you. Good evening.
spk05: Hi.
spk01: Hi, Brandon.
spk05: So I wanted to first discuss the loan growth guidance. It was pretty strong in the quarter, and it seems that it was such a strong quarter, expecting kind of softer growth throughout the year. So if you could just talk about that, what you're seeing in your markets and what your customer base is. that went into your loan growth updated guidance?
spk06: Sure. You know, as the economy continues to improve, I think you saw that we had experienced a surge of our loan demand, which was also caused by the perceived interest rate hikes for the remaining of 2022. We expect that the overall loan growth for 2022 continues to range between the 9 to 12 percent. That includes the growth from HSBC with a 5 to 8 percent excluding HSBC. But we also expect the loan demand to soften or slow later in the year as a result of the higher interest rates.
spk05: Okay. And did you benefit from any increase in CNI utilization?
spk06: Slightly. We looked at utilization rate. It probably increased by 2% or 3%. Okay.
spk05: And then for deposits, it seems like you're matching your loan growth with deposits. And a lot of banks that have reported already are experiencing slower deposit growth. So could you talk about what you're seeing in your ability to grow deposits and what gives you confidence that you can grow deposits at the same pace of long growth?
spk06: On the deposit side, I think it's a little bit of both. It's both the Fed increased the rates. We have to kind of look at that. But I think we have a tendency to lag behind our beta expectation on that. It's been about 30%. And also, at the same time, I think we're continuing our business promotions, so we're marketing for business deposits and continue to look for growth there as well.
spk05: Okay. And within that deposit guidance and for your strategy for the year, do you plan on doing any more CD specials or locking in any sort of long-term funding?
spk08: No, no. We may... We may start going back to the broker CD market, but we're not going to run any specials in our relationship CD market. I think our customers are uncertain as to how fast the Fed will increase, so they're going to be reluctant to jump at anything being offered because Many people think rates will be much higher.
spk01: Thank you very much.
spk08: Thank you.
spk01: Thank you. Our next question comes from the line of Matthew Clark with Piper Sandler.
spk04: Hey, good afternoon. Maybe just starting with the increase in non-accruals, the $20 million increase in CNI, it looks like. I think you mentioned CNI. $14 million credit was added. Can you just give us more color on what drove that increase and specific situation?
spk06: Sure. It's a CNI loan. It's collateralized for the assets of the business, and we also have a residential home that's part of the collateral in the Pacific Palisades of Southern California, which is a strong area. We provided a small reserve for the loan. The loan is substantially collateralized in our opinion at this point.
spk04: Okay. And then you built reserves in the quarter. I think part of that, at least within SFR, was related to HSBC, but there was some additional build in commercial real estate. Can you give us a sense for, you know, what drove the increase in reserves? How much of it was kind of macro-driven versus more specific or any other kind of Q factors?
spk08: Yeah, yeah, Matthew. It's mostly MACL driven. You know, we looked at the Moody's forecast very closely, and it was prepared, as we understand it, on March 10th. So for example, in their base case, they're projecting a year-end set funds rate of 85 basis points. And so we have a fairly strong overlay on top of Moody's for us to to factor in the higher interest rates that, you know, it will affect. We expect them to have, in the June forecast, to have much relatively lower GDP, which is one of the variables in our econometric equations. And so we think we captured much of that. And then there's credit improvement, as Chang mentioned. but we did reserve for the non-accrual that went on in the first quarter.
spk04: Okay, great. And then just switching gears to the tax credit amortization, you gave the solar, and I think the low-income housing tends to be a little more stable, but can you provide your expectations for low-income housing? Housing tax credit scimitization for the upcoming quarter in the second half of the year?
spk08: Yeah, it should be about $6.5 million a quarter for each of the next three quarters.
spk04: Okay, great. Thank you.
spk08: Thank you.
spk01: And our next question comes from the line of David Chiaverini with Wedbush Securities.
spk02: Hi, thanks. I wanted to follow up on that. the $14 million credit where it sounds like it's well-covered. Just curious, you know, if you're able to share what industry that was in and if you're seeing any kind of systemic issues in the industry where it was coming out of.
spk06: Sure. It's an office furniture industry, and the principal of the company was trying to launch a new... I think we want to be... Okay.
spk08: That's as general as we want to get, yeah.
spk02: Yep, that's helpful. Yeah, and it seems very COVID-specific, the office market, so that makes sense. Thank you for that. And then over on the loan growth front, you mentioned about your expectations and assumptions of slower growth kind of towards the back half of the year with higher rates. Are you seeing any signs of an economic slowdown or any signs of a slowdown in loan demand as you sit here today?
spk06: There's some of that slowdown, for example, in the commercial real estate market. I think as the interest rates go up, some of the bridge or reposition plays in multifamily may not pencil out. So that segment has slowed a bit for us. We're still seeing some, you know, purchases and some other activities in the commercial real estate side, but the other multifamily reposition side has slowed a bit for us.
spk02: Got it. Thanks very much.
spk01: Thank you. Our next question comes from the line of Andrew Terrell with Stevens.
spk09: Hey, good afternoon. Hi, Andrew. Hi. Hey, I just wanted to circle in on the net interest margin guidance, 330 to 340 for the full year 2022. with Fed funds at year-end of two and a quarter. Can you just remind us, I think it was 10 bips up on both sides from the prior guide. Can you just remind us what you were assuming for year-end Fed funds in the prior net interest margin guidance?
spk08: Again, well, the prior net interest NIM guidance was 10 basis points lower. And we haven't, we don't update this NIM forecast all the time. So, That guidance was based on seven 25 basis point Fed increases. Now it looks like May will be 50 basis points, so that would front load the minimum improvement. And then our floors, you know, if it's 50 basis points, by the May Fed meeting, our loans will be all clear of the floors because the average is right around 50 basis points for the loans on floors.
spk09: Yep. Okay. Got it. And then within that kind of margin guidance, do you assume any kind of further earning asset makes change away from cash into securities or loans? And can you just talk about How we should think about just the size of the bond book as we work throughout the year?
spk08: Yeah, I think we'll target about a billion in cash at the Fed. We may move some of that into, let's say, nine-month Treasuries because the yield curve is so flat. And then in terms of the bonds, it's only 5% of our total assets. So our mark-to-market AFS adjustment was relatively light and we're going to be cautious in terms of doing much more investing except in shorter duration securities such as treasuries. We may buy some MBS but we're We want to wait until it's clear that it's closer to the top so we don't get any more unrealized AFS losses.
spk09: Understood. Okay. Thank you for taking my questions.
spk08: Yeah. Thank you. Thank you.
spk01: Thank you. At this time, there are no questions in the queue. Again, to ask a question, please press star 1. And I'm sure we have a question from the line of Chris McGrady with KBW.
spk07: Hey, how's it going? This is Angela. I turn it on for Chris McGrady. Yeah. So on the expense guidance, I was just wondering, or can you remind us where the base starting point is for that 4% expense growth?
spk08: Well, we're guiding to 3.5% and then 4% for the HSBC acquisition. But the guidance is the full year 2021.
spk07: Yes, if you have the actual number that you're basing that off of.
spk08: Oh. Well, you know, if you look at our slide 17, You know, the quarters on the core expense growth, they tend to be right around $60 million. And in Q1, Q4, we were at $61.1. And I'm sorry, Q4. And then Q1, we're at $60.2. But you might as well go on the Q4 number, $61.1, and you annualize that. and how guidance would go from there.
spk07: Okay, great. Thank you. Okay. And then with your loan deposit ratio at 96% and given where your loan and deposit guidance is, should we assume that that loan deposit ratio is staying fairly stable from here? Can you repeat the last part? Should we assume that that 96% loan deposit ratio is going to stay fairly stable?
spk08: Yes, yes. We have an upper limit of 100%, but 96%, 97% is probably the right level for us.
spk07: Okay, thank you. And just for that NIM guidance, can you remind us what the deposit is, where last cycle and what you're assuming for this upcoming cycle? Thank you.
spk08: Well, it was about 30% for the last cycle. And we think it will be about 30% this cycle. We've gotten less dependent on CDs over the last couple of years. So that might provide a little bit of cushion. But the rate of Fed increases is is fairly fast compared to the last 20 years.
spk07: Okay. Thank you. That's all the questions I have. Okay.
spk01: Thank you. Thank you for your participation. I will now turn the call back over to Cathay General Bank Corp's management for closing remarks.
spk06: 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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