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spk03: Good afternoon, ladies and gentlemen, and welcome to Cathay General Pancart's second quarter of 2023 Earnings Conference Call. My name is Vaishnavi, 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 one 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.capigeneralbankcorp.com. Now, I would like to turn the call over to Giorgio Lowe, Investor Relations of Capigeneral Bank Corp. Please go ahead.
spk02: Thank you, Vaishnavi, and good afternoon. Here to discuss the financial results today are Mr. Cheng 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 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 of unanticipated events. This afternoon, Cathay General Bancorp issued an earnings release outlining its second quarter 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. 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 2023 second quarter earnings conference call. This afternoon, we reported net income of $93.2 million for the second quarter of 2023, a 2.9% decrease as compared to a net income of $96 million for the first quarter of 2023. Earnings per share decreased 2.3% to $1.28 per share for the second quarter of 2023, compared to $1.32 per share for the first quarter of 2023. In the second quarter of 2023, our gross loans increased $635.5 million or 13.9% annualized. The increase in loans for the second quarter of 2023 was primarily driven by increases of $377 million or 17.1% annualized in commercial real estate loans, $158 million or 12.1% annualized in residential mortgage loans, and $165 million or 19.9% annualized in commercial loans, offset by a decrease of $38 million in construction loans. With the strong loan growth in the second quarter, 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 second quarter 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 loans. Turning to slide seven of our earnings presentation, as of June 30th, 2022, the average loan to value of our CRE loans was 50%. As of June 30th, 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. 88% of the $2.1 billion 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 represent 17% of our total commercial real estate loan portfolio and 8% of the total loan portfolio. Only 34% of the $1.6 billion 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. The remaining 28% of office property loans are collateralized by office condos. For the second quarter of 2023, we reported net charge-offs of $2 million compared to net charge-offs of $4.9 million in the first quarter of 2023. Our non-accrual loans were 0.36% of total loans as of June 30th, 2023, which decreased by 4.6 million to 69 million as compared to the end of the first quarter of 2023. Turning to slide 12, as of June 30th, 2023, classified loans decreased to 193 million from 240 million as of March 31st, 2023. And our special mention loans increased slightly to 260 million from 251 million as of March 31st, 2023. We recorded a provision for credit loss of $9.2 million in the second quarter of 2023 as compared to an $8.1 million in provision for credit losses for the first quarter of 2023. We are pleased that total deposits increased by $448.1 million or 9.7% annualized during the second quarter of 2023. Total uninsured deposits were $8.4 billion as of June 30th, 2023. Excluding $0.9 billion in collateralized deposits, the uninsured and uncollateralized deposits of $7.5 billion was 39.2% of total deposits as of June 30, 2023. Our unused borrowing capacity from the Federal Home Loan Bank as of June 30, 2023 was $6.1 billion, and unplaced securities at June 30, 2023 was $1.3 billion. These and other sources of available liquidity were more than 100% of uninsured and uncollateralized deposits as of June 30th, 2023. Total time deposits increased 325 million or 18.6% annualized during the second quarter of 2023 compared to the first quarter of 2023. Total saving deposits increased by 241 million or 196.2% annualized primarily due to a promotional campaign. For 2023, the overall deposit growth is expected to range between 5% and 7%. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Chang, to discuss the second quarter 2023 financial results in more detail.
spk06: Thank you, Chang, and good afternoon, everyone. For the second quarter of 2023, net income decreased by $2.8 million, or 2.9% to $93.2 million, compared to $96 million in the first quarter 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 second quarter was from fixed rate loans. Our net interest margin was 3.44% in the second quarter of 2023 as compared to 3.74% of the first quarter of 2023. In the second quarter of 2023, interest recoveries and prepayment penalties added two basis points to the net interest margin as compared to eight basis points for the first quarter of 2023. 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 second quarter of 2023 increased by 8.9 million to 23.1 million when compared to the first quarter of 2023. due to an increase of $5.8 million in gain on equity securities and from a $3 million write-off of a corporate bond security in the first quarter. Non-interest expense increased by $9.6 million or 11.6% to $92.8 million in the second quarter of 2023 when compared to $83.2 million in the first quarter of 2023. The increase was primarily due to $6.5 million in higher amortization, solar tax credit investments, $1.6 million of seasonally higher marketing expenses, $1.5 million in higher professional expenses offset by $1.5 2 million in lower salaries and bonuses due mainly to higher FICA taxes paid in the first quarter. We expect or non-interest expense excluding tax credit and core deposit intangible amortization and HSBC innovation expenses to increase 3.5% from 2022 to 2023. The effective tax rate for the second quarter of 2023 was 9.2% as compared to 21.4% of the first quarter of 2023 due mainly from additional investments in solar tax credit funds. For 2023, we expect an effective tax rate of between 13 and 14%. We expect 2023 solar tax credit investment amortization of $42 million, including $16 million for Q3 and $11 million in Q4 of 2023. As of June 30th, 2023, our Tier 1 leverage capital ratio increased to 10.45% as compared to 10.27%. as of March 31, 2023. Our Tier 1 risk-based capital ratio decreased to 12.38% from 12.42% as of March 31, 2023. And our total risk-based capital ratio decreased to 13.88% from 13.94% as of March 31, 2023.
spk01: Thank you, Hank. We will now proceed to the question and answer portion of the call.
spk03: Ladies and gentlemen, if you have a question at this time, please press the star key and then number one on your touch-tone 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 star then two. to prevent any background noise. We ask that you please place yourself on mute once your question has been stated. The first question comes from Matthew Clark with Piper Sandler. Please go ahead.
spk08: Hey, good afternoon. First one for me on the margin. if you can give us the spot rate on interest-bearing deposits at the end of June and the average margin in the month of June.
spk06: Yeah, the average margin for the month of June was 3.41%. 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 30th was 3%.
spk08: Okay, great. And then getting from that 341 back up to that 350, well, you have the benefit, I guess, year-to-date of 359 in terms of the first half margin. Right. So it seems like you expect that 341 June margin to hang in there. Can you speak to what you're assuming on deposit costs and any kind of pay down borrowings?
spk06: Yeah, 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 a million. So that's kind of added to that.
spk08: Okay, great. Just around expenses, the core or adjusted expense outlook at 3.5%, which is unchanged off the $255 million last year. That implies some relief here in the second half. Can you just speak to what do you expect to come out of the expense run rate?
spk06: Well, Matthew, in Q2, we had... As we mentioned in our comments, we made most of our contributions in the second quarter. And then we had probably about a million plus of one-time items. That's in the second quarter. And then last year, Well, we think we might accrue lower bonus expenses in the second half. But, you know, if it's slightly higher than three and a half, I don't think it will be much higher than that.
spk08: Okay. And then the low-income housing tax credit amortization for the third and fourth quarter, do you have those numbers?
spk06: It should be about $10 million per quarter. Okay. Thank you. Yeah, thank you.
spk03: The next question comes from Andrew Terrell with Stevens. Please go ahead.
spk07: Hey, good afternoon. Hi. Just to follow up on Matt's question there on the expenses, I guess to get to 3.5% core expense growth for 2023, it implies the core expense run rate steps down to about just a little over $63 million per quarter in the back half of the year. Does that sound right to you?
spk06: No, we kind of think it should be close to the 67, I guess.
spk07: Okay. Got it. So similar to the first quarter run, right?
spk06: Yeah.
spk07: Okay. Understood. Okay. 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 quarter, just surprised to see such strong loan growth here in the second quarter. I guess have your views around certainty in the economy improved, and where do you see growth opportunities in the second quarter, and just what gives you confidence in the growth put on in the second quarter?
spk01: So Andrew, during our second quarter, the C&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 the case in the first quarter. In addition, we had 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 the second quarter. 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 second quarter. We think there's going to be more of a muted sort of pickup on any loan growth in the second half of the year.
spk07: Yeah, understood. Okay.
spk06: And then in terms of... Yeah, of that, Chang mentioned we had an infrequent tech borrower that... that drew down on their line, they have since paid that off in the third quarter. So that will help. It will make the third quarter loan growth lower just from the payoff.
spk07: 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?
spk06: Yeah. I mean, we're going to try to target a 90% loan-to-deposit ratio. One reason it crept up is we had very strong 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 million of those federal home loan bank borrowings to where it's now a more stable level for the second half.
spk07: Okay. Got it. Thank you for taking the questions.
spk00: Thank you. Thanks.
spk03: Again, a reminder to limit yourselves to one question and one follow-up question. Our next question comes from Christopher McGrady with KBW. Please go ahead.
spk05: Hey, how's it going? This is Andrew Leischner on for Chris McGrady. I was just wondering, have you started to see any stabilization in your non-interest-bearing deposit outflows? And I guess, should we continue to expect further mix shift from here? Thank you.
spk06: Yeah, we think it's stabilized just giving you the month-end balances. It was $3.7 billion at the end of April, $3.7 billion rounded at the end of May, and then 3.6 billion at the end of June. So, yeah. Chang, do you?
spk01: Yeah, we're not seeing any additional sort of outflows. I think at this point, given the rate hikes and, you know, some of the sensitive clients with the cash and liquidity that had them in checkings or money market, 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.
spk05: Okay, great. Thank you. That's truly 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?
spk01: Sure. Just kind of on the credit portfolio a little bit, there's a page on page nine of the deck. It's all-encompassing. It's about $1.55 billion in total. Um, and, uh, the, the average loan size of these is about 2.1 million. Average property size is only about 12, a little over 12,000 square feet. Um, 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. Um, and, and if you exclude some of the portion of that 28% that was in office condos, um, which might skew the balance towards lower balance and lesser of a square footage. But even if we exclude the office condos, the average loan size is still just about a little over 3 million 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. 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.
spk06: 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, you know, 0.8% of loans. We did build up our reserve this quarter by about $7 million. But that wasn't for office. It was for general reserving.
spk05: Okay, great. Thank you for the questions.
spk01: Thank you.
spk03: Again, as a reminder, if you have a question, please press star, then want to be joined into our queue. The next question comes from Gary Tanner with DA Davidson. Please go ahead.
spk04: Thanks. Good afternoon. Most of my questions were asked, but just on the capital front, just wondering, you know, given strong capital ratios and, you know, you've beefed up the A-triple-L a little bit this quarter or the ACL this quarter, Any thoughts on resuming buyback at this point?
spk06: Not for a while, Gary. We want to see how the economy shakes out, hopefully very late in the year or early next year.
spk00: Thank you.
spk03: At this time, there are no questions in the queue. Again, to ask a question, please press star, then one. As we see no questions, this ends the Q&A session. I will now turn the call back over to CAPE General Bankers 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.
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