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spk06: Good afternoon, ladies and gentlemen, and welcome to CAFE General Bancorp's first quarter of 2023 Earnings Conference Call. My name is MJ, 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 1 at any time during the conference. If assistance is needed 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.cafegeneralbankcorp.com. Now, I would like to turn the call over to Georgia Lowe, Investor Relations of Cafe General Bancorp.
spk04: Thank you, MJ, and good afternoon. Here to discuss the financial results today are Mr. Chang Nu, 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, 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 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 first quarter of 2023 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.
spk03: Thank you, Georgia, and good afternoon, everyone. Welcome to our 2023 first quarter earnings conference call. This afternoon, we reported a net income of $96 million for the first quarter of 2023, a 1.6% decrease as compared to a net income of $97.6 million for the fourth quarter of 2022. Net income for the first quarter of 2023 included a $3 million pre-tax write-off, or 3 cents per share for Senator Bank corporate securities. Diluted earnings per share decreased 0.8% to $1.32 per share for the first quarter of 2023, compared to $1.33 per share for the fourth quarter of 2022. In the first quarter of 2023, our gross loans increased 63.3 million, or 1.4% annualized. The increase in loans for the first quarter of 2023 was primarily driven by increases of 123 million or 5.6 percent annualized in commercial real estate loans, 131 million or 10 percent annualized in residential mortgage loans, offset by a decrease of 165 million in commercial loans, mostly due to seasonal factors. Due to the uncertain economy, we have reduced our guidance for overall loan growth for 2023 to between 1 percent to 3 percent from our previous guidance of 3 percent to 5 percent. We continue to monitor our commercial real estate loans. Turning to slide seven of our earnings presentation, as of March 31st, 2023, the average loan to value of our CRE loans was 50%. As of March 31st, 2023, our retail property loan portfolio at slide eight comprises 22% of our total commercial real estate loan portfolio and 11% of our total loan portfolio. 89% of the 1.97 billion in retail property loans is secured by retail store, building, neighborhood, mixed-use, or strip centers, and only 10% is secured by shopping centers. At Site 9, office property loans represent 16% of our total commercial real estate loan portfolio and 8% of the total loan portfolio. Only 38% of the $1.44 billion in office property loans is collateralized by pure office buildings. Another 33% of office property loans are collateralized by office retail stores, office mixed-use, and medical offices. The remaining 29% in office property loans is collateralized by office condos. For the first quarter of 2023, we reported net charge-offs of $4.9 million compared to net charge-offs of $2.5 million in the fourth quarter of 2022. The net charge-offs were primarily due to the $3.8 million collateral write-down of a CRE loan in Northern California and $2 million write-off of a CNI loan resulted from a bankruptcy filing. offset by a 2.5 million recovery on CRE loan. Our non-accrual loans were 0.4% of total loans as of March 31st, 2023, which increased by 6.9 million to 73.6 million as compared to the end of fourth quarter 2022. Turning to slide 12, as of March 31st, 2023, classified loans decreased slightly to 240 million from 256 million as of December 31st, 2022. And our special mention loans decreased to $251 million from $321 million as of December 31, 2022. We recorded a provision for credit loss of $8.1 million in the first quarter of 2023 as compared to a $1.4 million provision for credit losses in the fourth quarter of 2022. We are pleased that total deposits increased by $143.6 million or 3.1% annualized during the first quarter of 2023. Total uninsured deposits were 8.7 billion as of March 31, 2023, decreased approximately 0.5 billion from 9.2 billion as of December 31, 2022. Excluding 0.8 billion in collateralized deposits, the uninsured and uncollateralized deposits of 7.9 billion was 42.6% of total deposits as of March 31, 2023. Our unused borrowing capacity from the Federal Home Loan Bank as of March 31st, 2023 was 6.5 billion, and unplanned securities at March 31st, 2023 was 1.4 billion. These sources of available liquidity were more than 100% of uninsured and uncollateralized deposits as of March 31st, 2023. Total time deposits increased 2.9 billion or 222% annualized during the first quarter of 2023. compared to the fourth quarter of 2022, due to a Chinese New Year promotional campaign in January of 2023. Total money market deposits decreased by $1.4 billion, or 119% annualized, due primarily to a migration back to CDs from money market deposits and deposit runoff. On March 31st through April 19th, total deposits have increased by $152 million to $18.8 billion, and have almost recovered to the pre-banking crisis level on March 9, 2023. For 2023, the overall deposit growth is expected to range between 2% and 4%. During the first quarter of 2023, we repurchased 375,000 shares of our common stock at an average cost of $44.20 for $9.3 million, which completed the May 2022 stock repurchase program. I WILL NOW TURN THE FLOOR OVER TO OUR EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER HENG CHENG TO DISCUSS THE FIRST QUARTER OF 2023 FINANCIAL RESULTS IN MORE DETAIL.
spk09: THANK YOU, CHENG. AND GOOD AFTERNOON, EVERYONE. THE FIRST QUARTER OF 2023 NET INCOME DECREASED BY 1.6 MILLION OR 1.6% TO 96 MILLION COMPARED TO 97.6 MILLION FOR THE FOURTH QUARTER OF 2022. primarily attributable to net interest margin compression due to the increase in the cost of deposits. Our net interest margin was 3.74% in the first quarter of 2023 as compared to 3.87% for the fourth quarter of 2022. In the first quarter of 2023, interest recoveries and prepayment penalties added eight basis points to the net interest margin as compared to one basis point for the fourth quarter of 2022. With an anticipated Fed rate hike in May and no rate cuts until late Q4, we have revised our net interest margin expectation for 2023 to be between 3.6% to 3.7%. Non-interest income during the first quarter of 2023 increased by $2.2 million to $14.2 million when compared to the fourth quarter of 2022 due to an increase of $5.8 million in gain on equity securities offset by a $3 million write-off of a corporate bond security. Non-interest expenses increased by $2 million or 2.4% to $83.2 million in the first quarter of 2023 when compared to $81.2 million in the fourth quarter of 2022. The increase was primarily due to $3.1 million in higher salaries and bonuses, $1 million in higher amortization solar tax credits, solar tax credit investments, $1.1 million in higher FDIC assessments due to the general FDIC insurance rate increase for 2023, offset by $2.9 million in lower marketing and other operating expenses. We expect core non-interest expense, including tax credit and core deposit intangibles amortization and HSBC integration expenses to increase 3.5% from 2022 to 2023. The effective tax rate for the first quarter of 2023 was 16.8% as compared to 25.7% for the fourth quarter of 2022. For 2023, we expect an effective tax rate of between 16.5 and 17.5%. We expect 2023 solar tax credit investment amortization of $30 million, including $10 million for Q2 and $13 million in Q3 of 2023. All set. As of March 31, 2023, our Tier 1 leverage capital ratio increased to 10.27% as compared to 10.08% as of December 31, 2022. Our Tier 1 risk-based capital ratio increased to 12.42% from 12.19% as of December 31, 2022. And our total risk-based capital ratio increased to 13.94% from 13.71% as of December 31, 2022.
spk03: Thank you, Hang. We will now proceed to the question and answer portion of the call.
spk06: 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.
spk05: Your first question comes from Brandon King with Truist. Please go ahead.
spk08: Good afternoon. Hi.
spk07: Hey, so I wanted to get a sense of there's going to be any changes in your deposit strategy given what has gone on recently and as far as how you want to gather deposits and how you want to control your concentrations?
spk09: I think like many other banks, we have been offering products that spread deposits, individual depositors deposit through ICF or CEDARS so that they're fully insured. So, I mean, that's reassuring to our depositors that have concerns. Aside from that, I think change, I mean, we're looking at more CNI-related deposits.
spk03: Yeah, so on that part of it, you know, we'll continue to focus on business deposits and bringing in core and non-interest bearing deposits. And, you know, we certainly have a base of CDs that we continue to use, but the business deposits and leveraging that, our CNI clients and CNI base is also a key part of that.
spk07: Got it. And I guess, Now that, you know, slower loan growth, you don't need to grow deposits as much, what are you expecting as far as deposit betas from here on out?
spk09: Well, I think, you know, like many other banks that announced this last week, there's been a catch-up in deposit betas. I think that's typically the case when we get to the end of a Fed – rate hike cycle in that more depositors become aware that there's higher rates if you go to the CDs and so forth. But, you know, we think there's only one more rate hike, which is going to be in early May. So we think we're well positioned in that our Chinese New York promotion locked up over a billion five of our CDs. So they won't be priced till Q1 in 2024. So that should help support our NIM short term. But that's pretty much it, Brandon.
spk07: Okay. And just to follow up, could you remind us what the rate is on those CDs, the average rate for the CDs you raised in the first quarter?
spk09: Yeah, about, well, I'll come again, the CDs for the Chinese New Year promotion or the upcoming maturity?
spk07: Yeah, the average rate on those.
spk09: About 420. Okay.
spk07: All right, I'll hop back in the queue. Thank you for taking my questions. Thank you.
spk06: The next question comes from Matthew Clark with Piper Sandler. Please go ahead.
spk10: Hey, good afternoon, guys. Can you update us on the amount of liquidity available? I didn't see it in your deck or in the press release as it relates to, you know, the capacity you have to borrow relative to your uninsured deposits of $8.7 billion. I see the $252 million of cash, but just wanted to get the latest and greatest at the end of March.
spk09: I wish, you know, in your remarks, I can cover that. So we have, at the Federal Home Loan Bank, we have, as of the end of March, $6.5 billion that was available. And Unplugged Securities was $1.4 billion. So in our first quarter, we had... residential mortgage growth of about $150 million. So that would add to the federal home loan bank borrowing capacity. So we're slightly over 100% coverage, not counting cash, not counting about $900 million of cash that we have on balance sheet. And we... We did not borrow from the Fed. To us, it's really the lender of last resort for us. Got it.
spk10: Okay. And then if you happen to have the average margin in the month of March, I'll take it, and the spot rate at the end of March in terms of deposits? Yeah. Let me...
spk09: I have it, but the margin in March was a little bit low because it was a 31-day month, and we only had half a month of the Fed increase. So the margin for March was 3.55, and you wanted the period end rate for loans and deposits? No, just deposits is fine. Oh, yeah. Let me find it.
spk03: So the spot rate for the end of March for now accounts is 0. The total is about 2.65. Okay.
spk10: And that's, is that interest-bearing or is that total deposits, including non-interest? That's interest-bearing. Okay. That makes sense. That makes sense. Okay. Great. And then on the office CRE exposure that you have, can you give us the reserve that you have set aside for that exposure and if you have anything uncriticized in that portfolio?
spk09: Yeah. On the reserve, it's It's our standard CRE reserve, which I'm doing this from memory is probably about 70 basis points. We don't have much in criticize. And on non-accruals, I think it's only 5 million. That's off us. But I'll get back to you on that, Matthew. I'll email you on the office non-approval. It could be zero. Okay. No worries.
spk08: Thank you.
spk06: The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
spk08: Thanks. Good afternoon.
spk02: A little bit of a follow-up to Brandon's question regarding some assumptions around the NIM. Just, you know, as you think about the NIM and you mentioned what your rate assumptions are, so that's helpful. But from a deposit mix perspective, obviously a lot of kind of migration within the deposit buckets over the last couple of quarters. What's your base expectation for kind of ongoing shift of deposits to help support the NIM guide that you provided?
spk09: You know, we think we're pretty much done. You know, we typically offer 12-month CDs, and so it's not the – because there's a term structure to it, we think we've got the people that have the liquidity that they could afford to lock up for a year. okay all right so basically your your assumption for the name is that your deposit mixes roles will be unchanged right here right right okay okay and then uh march yeah go ahead sorry go ahead well no well there was a shift during the quarter so you know we're we're uh starting off from the march deposit mix or the period end deposit.
spk02: Gotcha. Okay. Great. Thanks. And then just in terms of capital, you know, you've completed the prior repurchase program, you know, last quarter, you had indicated that when you did that, you would be looking for, you know, another 125 million or so authorization. Can you kind of, you know, sort of update us on The potential for that, is that still, given the economic concern, something that management would recommend and the board would authorize?
spk09: It's on hold for now, Gary. We may restart that late in the year, but like many other banks, we want to see how things shake out.
spk02: Okay. And then last question, if I could. Just, you know, post the, you know, the failed banks, you know, and everything happened beginning kind of early, mid-March. Was there any thoughts about building liquidity more than you did? I mean, cash was up just a little bit year-end to March 31. Obviously, you had, you know, a lot of CDs that you had brought in. So was there some more liquidity on the balance sheet at that point that kind of normalized, or was that never really a consideration, you know, in that kind of mid-March time frame?
spk09: Well, yeah. We didn't feel the need to build up a lot of liquidity because one thing about the federal home loan bank, you know, we should call by 11 o'clock actually was called by 2 o'clock or 2.30, which is the Fedwire deadline, and get hundreds of millions of dollars of funding. So the main thing was we saw a very small amount of depositors that took their money out. If they small, it would be 30 or 40 million over the space of over the first week. So it wasn't, it's not this, you know, it's not like some other banks where they had billions of dollars go out that week after a Silicon Valley bank sale. But so, so we, because of that, because we had one, the billion dollars of cash on balance sheet, as well as the federal home loan bank, uh, same-day availability. We didn't feel the need to build up cash.
spk08: That's helpful. Thank you. Yeah.
spk06: As a reminder, to ask a question, you may please press star and then one. The next question comes from Andrew Terrell with Stevens. Please go ahead.
spk11: Hey, good afternoon. Hi. Hey, if I could continue on some of the margin-related questions. How much in CDs do you have that mature during the second quarter, and what's the rate that those are repricing from, and what's the incremental cost of a new CD today? Is it relatively similar to that 420 or so that was the new year promotional rate?
spk09: Yeah, so The second quarter is a fairly light maturity. We have about 1.45 billion that's maturing. The average CD rate is 3.32. So it's not far off from our average blended CD rate, 3.53. Yeah, that's the number. I think in terms of what the renewing rate is, it depends on the deposit size. So we locked up a lot of CD funding in the fourth quarter and the first quarter. So I think the most eager CD depositors rate-wise, they've been locked up. So these are hopefully we can renew at... something slightly above the 3.32 range.
spk11: Okay. Got it. I appreciate it. And then also, I just wanted to make sure this is the case. I think last conference call, we talked about a 3.1 million non-accrual interest recovery that would come through in the first quarter. Did that occur just as we're thinking about kind of the the starting point for loan yields going into the second quarter?
spk09: Yes. Yes. It happened in January. It's part of our eight basis NIM pickup from non-accrual and prepayment fees.
spk11: Okay. Gotcha. And then last question for me is just on office around 8% of total loans or so. I see the average outstanding in the slide deck is around 2.9 million average size. Can you just help us think about the distribution around that average, specifically to the larger end? I guess, what are the sizes of the largest two or three office loans in the portfolio? And just trying to get a sense of whether you have any true downtown, kind of metro-type exposure. Just any incremental color there on the largest credits would be helpful.
spk03: So our kind of geographic split on sort of central business district is about 19 percent or so. And the rest of it is what we consider urban and suburban. Urban really being, you know, not your downtown core. But, you know, for example, if you use L.A., that would be Pasadena, West L.A., South Bay and those kind of things. And so that's kind of what we we tend to focus on. And as far as the largest size of credits, our largest size office is Probably off memory between 10 to 15 million. And that's sort of just on the higher end of it. But as you noted on the deck, it's about 2.9. Yeah.
spk11: Okay. So still even at the largest end of the spectrum, it's still pretty small and pretty granular relative to your machine.
spk03: Right, right, right.
spk11: Well, very good. Thank you for taking the questions.
spk09: Of course.
spk11: Thank you.
spk06: The next question comes from Chris McGrady with KBW. Please go ahead.
spk01: Hi, this is Nick Mutafakas on for Chris McGrady. Good afternoon, guys. Good afternoon. Most of my questions have already been hit on. Maybe we could just touch on the provision. See, I ramped up this quarter, kind of looking at a run rate going forward here. higher from here, and maybe you can speak to where you see reserve levels headed as we move through 2023. Yeah.
spk09: So during this quarter, we had that one larger CRE charge-off. But, you know, my crystal ball is not perfect, but we hope we don't get... large charge-offs again in the second quarter. So if loan growth is, let's say, 2% and mostly residential mortgage, you wouldn't need very much in the way of reserves. We reserve residential mortgage at about 35 basis points. And then lastly, Our reserve for unfunded went up by about $4.5 million this quarter. Our line usage is lower at the end of March, so we'll see a shift more of that onto the unbalance sheet allowance for loan losses in the second quarter. The trend, I think, it should be lower than the first quarter. You can see our substandard went down a little bit this quarter.
spk01: And then maybe just switching gears on the guide, I guess, do you guys have a deposit beta assumption for your guidance for the NIM?
spk09: We think it's going to be closer to 40. I mean, we'll We'll certainly have a good idea at the end of June when the Fed's done and we tally up everything from day one. But that's what we're thinking.
spk01: For interest-bearing?
spk09: Yeah, interest-bearing. That's total. So for CDs, that would be much higher. Money market would be kind of in the middle. And for savings accounts, we didn't increase the rate at all throughout.
spk01: Okay, I think that's all I got. I mean, everyone else hit on most of the points, so I appreciate that. Thanks, guys.
spk06: Again, to ask a question, you may press star, then one. The next question is a follow-up from Matthew Clark with Piper Sandler.
spk10: Hey, just Wanted to close the loop on the tax credit amortization. You gave the $30 million for the year for solar, but can you update us on the low-income housing? I think we were looking for $40 million for the year.
spk09: Yeah. That's still the same, Matthew. $10 million and a quarter.
spk10: Okay.
spk08: Great. Thank you. Thank you.
spk05: Thank you for your participation.
spk06: I will now turn the call back over to CAFE General Bancorp's management for closing remarks.
spk03: I want to thank everyone for joining us on our call, and we look forward to speaking with you on our next quarterly earnings release call.
spk06: Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.
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