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spk10: 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'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. If you would like to participate in this portion of the call, please press star followed by one at any time during the conference. If assistance is needed at any time during the call, please press star followed by zero, and a 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 Georgia Lowe, Investor Relations of Cathay General Bank Corp.
spk04: 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. Hang 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, 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 obligations 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.
spk01: 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 98 cents 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% 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 31st, 2022, the average loan-to-value of our CRE loans was 51%. As of December 31st, 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% is 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 runoff. 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, Chief Financial Officer, Mr. Heng Cheng, to discuss the fourth quarter 2022 financial results in more detail.
spk06: Thank you, Cheng, 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 pre-payment penalties added one basis point to the net interest margin as compared to three basis points for the third quarter of 2022 and six basis points for the same quarter a year ago. Based on that fund's 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 a 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 in gain on venture capital investment, distributions and a decrease of 1.7 million in derivative Z income. Non-interest expense increased by 8 million or 11% to 81.1 million in the fourth quarter of 2022 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 solo 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 of 2022 once again included a $1.3 million catch-up adjustment for impairment of low-income housing investments and $0.9 million additional CDI amortization. We expect core non-interest expense excluding tax credit and or deposit in tangibles 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 solo 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 a total risk-based capital ratio increase to 13.71% from 13.59% as of September 30, 2022. Thank you, Heng. We will now proceed to the question and answer portion of the call.
spk10: Ladies and gentlemen, if you have a question at this time, please press the star then one key on your touch tone telephone. We ask that you please limit yourself to one question and one follow up. You may then return to the queue. If your question has been answered or you wish to remove yourself from the queue, please press star then two. To prevent any background noise, we ask that you please place yourself on mute once your question has been stated.
spk02: Your first question comes from Chris McGrady with KBW.
spk10: Please go ahead.
spk07: Oh, great. Good evening. Hang on. I want to make sure I understand the expenses. Just make sure I'm buttoned up on the expenses. The 3.5% growth, is that off the – it looks like the 255, and then I'm adding on top of that 30 on solar. Is that right? Yeah.
spk06: Yes, yes, and you've got to add $40 million in low-income housing amortization. It's roughly $10 million and a quarter now.
spk07: Okay, so solar is $30, and low-income is how much? I missed that. Okay, so $70 in total amortization.
spk06: Okay. Yes, and that's why the tax rate is lower, projected to be lower in 2023. Okay.
spk07: 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 proportionally to get to that 375, 385 margin? Thank you. Yeah, we...
spk06: Pre-COVID, we used to do Chinese New Year promotions. And so we were 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'll get net new funds into the bank of at least $600 million. And so in terms of context, one-year broker CDs would be at 4.85. So our rate is 4.20. And we were... 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's going to help, for lack of a better word, deliver a good margin in Q1, plus that 3.1 million interest recovery would add to the basis points to that. But once again, we had one quarter. On our slide 15, it shows the average FED funds versus our 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, you know, That's why we think we'll be in the range where we're going to be.
spk07: Okay. If I could just make sure I'm totally buttoned up. The interest recovery, is that in the 375 full-year guide, 385? Yes.
spk06: Yes.
spk07: Okay. 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?
spk06: Oh, I think that's too far. But, you know, if the Fed's not done, it's going to help us NIM-wise and net interest income-wise in 2023. And we're going to be focusing on 2024 when we have to reprice these CDs downward, which we think we can.
spk11: Got it. Thanks, man. Appreciate it all the time. Sure.
spk02: The next question comes from Matthew Clark with Piper Sandler.
spk10: Please go ahead.
spk05: Hey, good afternoon. How are you doing? I just want to round out the NIM discussion a bit here. Do you have the spot rate on interest-bearing deposits at the end of the year to give us some visibility going into 1Q?
spk06: Yes. Let me find it. I have it as 1.97.
spk05: Okay, makes sense. Okay, and it sounded like the expectation is the overall NIM kind of hangs in there in the current range, so I don't need necessarily a monthly NIM, but if you have the December monthly NIM, I'll take it.
spk06: Yeah, yeah, it's down slightly from the full quarter NIM. So the December NIM, that's a 31-day month. So that was 3.81. Okay, thank you.
spk05: Got it. And then just on the overall reserve, dipping down a little bit here, 80 basis points, can you give us a sense for what you considered In terms of macro factors, what's your overall unemployment rate outlook for this year and how you might be weighing the baseline versus adverse scenarios?
spk06: Matthew, as I might have mentioned in the past, we use a blended rate until the fourth quarter we were at this 30, 40, 30 Moody's waiting for the 30% is the S1, the Moody's S1, which is their most favorable forecast. The base is their base. And Moody's in their December base forecast shows no recession in the next eight quarters. And then the S3, the Moody's S3 has a decline. Well, that's basically the modest recession forecast. So that has three quarters of negative GDP. The maximum decline is 3.6% in Q2 this year. And unemployment goes up to 7.8% in Q1 2024 and declines to 7.3% in Q4 2024. So what we did is we were, since we adopted CISO, we were at the 30, 40, 30, 40, 30. So this quarter, CISO, we changed that to where the moderate recession is now 55% of our CECL calculation. And the base is 35 and the optimistic is 10%. So we think for 2023, you know, We're expecting 3% to 5% loan growth, primarily single-family residential, which requires very little reserving, about 30 basis points for us. That our provision for 2023 would be basically net charge-offs, plus a modest amount for loan growth.
spk03: Okay, great. That's good color. Thank you. Yeah.
spk02: Again, if you'd like to ask a question, please press star, then one at this time.
spk10: Our next question comes from Gary Tenner with DA Davidson. Please go ahead.
spk08: Thanks. Good afternoon. Hi, Gary. A couple of follow-up questions. In terms of the CD specialty running for the Chinese New Year, 600 million of new funds, as you mentioned, Heng, should we assume that you largely pay down the FHLB borrowings that you had as of 12-31?
spk06: Yes, correct.
spk08: And then in terms of the NIM, again, I think you said it includes 75 basis points of tightening?
spk06: No. We, I think it might have been poorly worded, but we're assuming 25 basis points on February 25 basis points in mid-March. And we're not sure. There might be something in December in terms of a rate cut, but that would have a very minor impact.
spk08: Okay. No, that's fine. I thought I heard you say 75, so I may have misheard. So if you combine... You know, the ability to pay down FHLB, you know, the benefit of the hikes in the first quarter and the interest recovery, it would seem to suggest that the first quarter is kind of peak NIM and then you maybe stay in that range for the full year but trend lower from there. Is that the way that you would expect the year set up?
spk06: Yes. Yes, Gary.
spk08: Okay. And then... I saw you took the loss on sale of securities. Did you reinvest that? And if so, what was the yield pickup of that reinvestment?
spk06: Actually, we had no losses. That was mark-to-market for equity securities. But in the fourth quarter, we had pretty light investing. I think we bought... 75 million of corporates. They were in the 5.5% range, the callable corporates. And then we bought some MBS. They were in the high fours.
spk08: Okay, thanks for that clarification, Hank. I must have misread that in your price release. And then last question I had in terms of capital markets. um and you kind of read through the kind of where capital is at your end uh you did buy some stock back but you know less than you did in the third quarter just just thoughts about um you know buy back in 2023 is there any element of you know kind of economic uncertainty that might keep you on the sidelines or you know would you still be a buyer of your stock uh 20 in 23.
spk06: Yeah, we still have about $16 million left in our current buyback authorization. So we would use that up in the first quarter. And then our plan is to get Fed approval, apply for approval for another $125 million. And given the relatively weak loan growth, we might subject the economic conditions, we might try to use up most of that in 2023. Thanks very much.
spk03: Thank you.
spk02: Our next question comes from Andrew Terrell with Stevens. Please go ahead.
spk03: Hey, good afternoon.
spk09: Hi. If I could maybe start on just the expenses, the guidance for 3.5% expense growth in 2023. It feels like that might be a bit light versus kind of what we're hearing across the industry, just given inflationary impact. So I was hoping you could speak to maybe just some of the puts and takes as we think about expenses through 2023 and kind of the progression of the quarterly expense base.
spk01: Andrew, we've gone through already half, probably significantly more than half of our population during last October's review process. So that's why you saw some of the core non-interest expense increase in the salary section at the Q4 numbers. And then we have a second round of the officers and higher reviews that will come up in March. And our objective is to hold that number to the 3.5% range.
spk09: Understood. Okay. Um, and then maybe if I could go back to the margin, um, just thinking about the spot, I know you had the spot rate on the deposit costs at the end of the quarter. Do you happen to have the spot yield on the securities portfolio at the end of the, end of the quarter?
spk06: Uh, not on the securities. We have it on the loans if you, if you want it, uh, well, uh, on the securities, I have the December securities, uh, It's 2.72. Okay.
spk09: Okay, that works. And then I think I just want to make sure I heard it correctly. It sounds like the new kind of offering rate on CDs is around that low kind of 4% territory, 4.2% or so. I guess just thinking about the duration of the CD book, should we expect CD costs to kind of over the next 12 months, so throughout 2023, kind of fully repriced to that low 4% territory?
spk06: Hopefully not. I mean, this is a promotional rate program, and part of it is you have to bring – If it's a $100,000 CD, you have to bring at least half of it. It has to be non-cafe funds. So outside of a normal promotion environment, I think we would be in the mid threes for CD renewals for retail depositors. For large corporate depositors, you know, we're higher than 4.2, but that's the market. And we've been doing that in the fourth quarter.
spk09: Okay. Got it. Thank you for taking the questions. I appreciate it.
spk03: Thank you.
spk02: There are no further questions at this time.
spk10: Thank you for your participation. I will now turn the call back over to Cathay General Bancorp Management for closing remarks.
spk01: 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.
spk02: Ladies and gentlemen, thank you for your participation in today's conference.
spk10: This concludes the presentation. You may now disconnect.
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