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Cathay General Bancorp (CATY 0.35%)
Q2 2022 Earnings Call
Jul 25, 2022, 6:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's second 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.

[Operator instructions] 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 -- Investor Relations

Thank you, Andrew, 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 such forward-looking statements. Any forward-looking statements speak 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 an unanticipated event.

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This afternoon, Cathay General Bancorp issued an earnings release outlining its second quarter 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 by 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 -- President and Chief Executive Officer

Thank you, Georgia, and good afternoon, everyone. Welcome to our 2022 second quarter earnings conference call. This afternoon, we reported net income of $89 million for the second quarter of 2022, a 15.3% increase as compared to a net income of $77.2 million for the second quarter of 2021. Diluted earnings per share increased 21.6% to $1.18 per share for the second quarter of 2022 compared to $0.97 per share for the same quarter a year ago.

In the second quarter of 2022, our gross loans increased $389.5 million or 9.5% annualized. The increase in loans for the second quarter of 2022 was primarily driven by increases of $94.6 million or 13.1% annualized in commercial loans, excluding PPP loans; $161.3 million or 7.9% annualized in commercial real estate loans; $210.6 million or 20.1% annualized in residential mortgage loans. The overall loan growth for 2022 is expected to range between 10% to 12%, including approximately $646.1 million of loans from the acquisition of certain HSBC West Coast branches. Excluding the HSBC acquisition, we project loan growth to be between 6% and 8% in 2022.

During the second quarter of 2022, $25.3 million of PPP loans were forgiven. We continue to monitor our commercial real estate loans. Turning to Slide 8 of our earnings presentation. As of June 30, 2022, the average loan-to-value of our CRE loans was 52%.

As of June 30, 2022, our retail property loan portfolio comprises 23% of our total commercial real estate loan portfolio and 9% of our total loan portfolio. The majority, 90% of the $1.94 billion in retail loans is secured by retail store buildings, neighborhood, mixed-use, or strip centers and only 9% is secured by shopping centers. For the second quarter of 2022, we reported net recoveries of $0.2 million compared to net recoveries of $0.3 million in the first quarter of 2022. Our nonaccrual loans were 0.35% of total loans as of June 30, 2022, decreased by $25.7 million to $60.6 million as compared to the end of first quarter of 2022.

Turning to Slide 11. Classified loans increased slightly during the quarter from $219 million to $244 million as of June 30, 2022, and our special mention loans increased during the quarter from $389 million to $295 million as of June 30, 2022. We recorded a provision for credit loss of $2.5 million in the second quarter of 2022 as compared to an $8.6 million provision for credit losses in the first quarter of 2022 and a $9 million reversal of provision for credit losses in the second quarter of 2021. Total deposits increased by $227.1 million or 5% annualized during the second quarter of 2022.

On Slide 12, average money market deposits increased $465 million or 38.6% annualized during the second quarter of 2022 compared to the first quarter of 2022. Average time deposit decreased by $408 million or 30.9% annualized due to migration of CDs to money market deposits and deposit runoff. 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.

In May 2022, the Board of Directors adopted a $125 million new share repurchasing program. We repurchased 750,000 shares of our stock at an average cost of $4.78 per share, totaling $30.6 million in the second quarter of 2022, with $94.4 million remaining in the May 2022 stock repurchase program. I will now turn the floor over to our executive vice president and chief financial officer, Mr. Heng Chen, to discuss the first quarter -- the second quarter '22 financial results in more detail.

Heng Chen -- Executive Vice President and Chief Financial Officer

Thank you, Chang, and good afternoon, everyone. For the second quarter of 2022, net income increased by $11.8 million or 13.3% to $89 million compared to the second quarter of 2021. The increase was primarily attributable to net interest margin expansion and continued strong loan growth in the second quarter of 2022. Our net interest margin was 3.52% in the second quarter of 2022 as compared to 3.24% for the second quarter of 2021.

In the second quarter of 2022, interest recoveries and prepayment penalties added 2 basis points to the net interest margin compared to 4 basis points for the first quarter of 2022 and 3 basis points in the same quarter a year ago. Based on the year-end Fed funds target range between 3.25% and 3.5%, we have increased our net interest margin expectation for full year 2022 to be between 3.5% to 3.65%. Noninterest income during the second quarter of 2022 increased by $2 million to $14.6 million when compared to the second quarter of 2021, primarily due to increases of $0.9 million in loan fees. Noninterest expense increased by $4.4 million or 6.3% to $74.1 million in the second quarter of 2022 when compared to $69.7 million in the second quarter of 2021.

The increase was primarily due to $4.5 million in higher salaries and bonuses due in part to the acquisition of certain HSBC West Coast branches. $1.9 million of higher professional and legal expenses partially offset by a $3.4 million decrease in amortization of solar tax credit investments. The effective tax rate for the second quarter of 2022 was 21.4% as compared to 22.7% for the second quarter of 2021. For the second half of 2022, we expect an effective tax rate of between 21.5% and 22.5%.

We expect solar tax credit amortization of $1.5 million in the third quarter of 2022 and $7.5 million in the fourth quarter of 2022. As of June 30, 2022, our Tier 1 leverage capital ratio increased to 10.15% as compared to 10.11% as of March 31, 2022. Our Tier 1 leverage -- our Tier 1 risk-based capital ratio decreased to 12.18% from 12.37% as of March 31, 2022, and our total risk-based capital ratio decreased to 13.74% from 13.97% as of March 31, 2022.

Chang Liu -- President and Chief Executive Officer

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

Questions & Answers:


Operator

[Operator instructions] We ask that you please limit yourself to one question and one follow-up question. [Operator instructions] Please stand by while we compile the Q&A roster. And our first question comes from the line of Matthew Clark with Piper Sandler. [Inaudible] Matt.

Matt Clark -- Piper Sandler -- Analyst

Hey. Good afternoon. Maybe first on the fee income, the core fee income, the other noninterest income. Can you give us a sense for what drove the increase from last quarter and other noninterest income?

Heng Chen -- Executive Vice President and Chief Financial Officer

It's very low. It's $900,000 in loan fees. That includes some regular loan fees, and we collected $350,000 from the Far East National loan, and we booked that in the other income category.

Matt Clark -- Piper Sandler -- Analyst

OK. I'm just making sure. I thought the comparison was from a year ago.

Heng Chen -- Executive Vice President and Chief Financial Officer

Matthew, are you -- you're comparing it to the last year or the first quarter?

Matt Clark -- Piper Sandler -- Analyst

The first quarter.

Heng Chen -- Executive Vice President and Chief Financial Officer

Yeah. We also had only debt benefit here in the second quarter. So that was -- yes, I'm sorry, that was on a linked quarter basis, that was about $1.5 million.

Matt Clark -- Piper Sandler -- Analyst

OK. Great. And then I guess a similar question in expenses linked quarter, the increase in other operating expense, again from last quarter?

Heng Chen -- Executive Vice President and Chief Financial Officer

Yeah. It's -- we had a few one-time items. Our marketing expense was a little bit higher. So that's -- that was higher by about 800,000.

It gets lumpy between the quarters, and then we also had an all other -- we have an annual director fee retainer, which -- for a director group, so that's about $700,000, $800,000.

Matt Clark -- Piper Sandler -- Analyst

OK. Great. Sounds good. And then shifting -- also within expenses, you gave the guidance on solar tax credit amortization.

Can you just fine-tune what you expect for low-income housing in the third and fourth quarters?

Heng Chen -- Executive Vice President and Chief Financial Officer

We keep on making new investments. So probably $7.5 million per quarter would be good for low-income housing.

Matt Clark -- Piper Sandler -- Analyst

OK. Great. And then the -- do you have the spot rate on interest-bearing deposits at the end -- as of June 30?

Heng Chen -- Executive Vice President and Chief Financial Officer

It's not precise. I give a quick calculation because so many people seem to be asking for it. Let me try to find that piece. Once again, we normally don't produce this.

I just got to sell [Inaudible] but it -- I think it's the June -- well, I think it was about 46 basis points.

Matt Clark -- Piper Sandler -- Analyst

OK. OK. And then last one for me on the buyback. Your appetite to continue repurchasing stock and potentially reup another program, just given the increased uncertainty in the economy?

Heng Chen -- Executive Vice President and Chief Financial Officer

We still intend to do about the same amount in the third quarter. Our authorization is -- goes into the first quarter of 2023, and we have $94 million left. So you can probably figure maybe $35 million a quarter about --

Matt Clark -- Piper Sandler -- Analyst

OK, great. Thank you.

Heng Chen -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. And our next question comes from the line of Brandon King with Truist Financial.

Brandon King -- Truist Securities -- Analyst

Hey, Good afternoon. So I wanted to touch on deposits. You were able to generate deposit growth in the quarter. I noticed you didn't change your guidance for the year, which [Inaudible] now relative to peers.

So I just wanted to get a sense of what gives you the confidence of generating deposits along with loan growth for back half of the year?

Heng Chen -- Executive Vice President and Chief Financial Officer

Well, first, yeah, we think our loan growth in the second quarter -- second half of the year, it was -- it's in our guidance or it's implied in our guidance we'll probably drop to 5% annualized in the second half. And then we would match deposit flow to that, including using brokered CDs, as needed.

Brandon King -- Truist Securities -- Analyst

So using brokered CDs to kind of fund that growth. And that's including -- I guess, that's incorporated in the NIM guidance as well. And so I guess you should see kind of a smaller benefit increasing interest rates going forward? Is that the trajectory of that?

Heng Chen -- Executive Vice President and Chief Financial Officer

Yeah. I mean we had a very good increase from Q1 to Q2, and that only has half a month of June, 75 basis points. So that momentum will continue in the second half, but it needs very rapid interest rate increases or unprecedented in recent history. But we do think our NIM for the full year is going to be better than our prior guidance.

Brandon King -- Truist Securities -- Analyst

OK. And do you have it to have on hand what the net interest margin was in the market in June?

Heng Chen -- Executive Vice President and Chief Financial Officer

Yeah. Some of it was affected by May. I think it was at 3.66.

Brandon King -- Truist Securities -- Analyst

OK. And then just lastly, on loan growth, as you're anticipating slower loan growth in the back half of the year. Are there any category that should see slower growth relative to others that you're anticipating?

Chang Liu -- President and Chief Executive Officer

We're not expecting -- I mean, if anything, the residential mortgage might kind of slow down a little bit, given where rates are. I think we've booked the first half, all the applications that was in the pipeline as a result of the sales activities. But I think now the interest rate impact will kind of slow down that segment a little bit going forward.

Brandon King -- Truist Securities -- Analyst

 OK. Thanks for the answers.

Heng Chen -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. And our next question comes from Andrew Terrell with Stephens.

Andrew Terrell -- Stephens Inc. -- Analyst

Hey, good afternoon. I just wanted to follow up on the last point. I was curious on whether you've seen kind of a similar slowdown in commercial real estate volumes as we've worked into the third quarter of this year?

Chang Liu -- President and Chief Executive Officer

We're seeing slower refinance activities, of course, because of the higher rates, but there are still people who, for example, are kind of flipping from a fixed to float that they don't want to see the floating rate. So they're worried about that given where the short-term rates are. So there is still some activity. It's not completely dead.

Purchase activity has slowed as well given where the rates are, particularly on some of the apartment acquisitions. But we're still seeing a fairly healthy pipeline, and we're being selective about -- careful about our current relationships and our current clients. I think we're definitely more careful going forward about kind of what kind of commercial real estate yields that we're doing.

Andrew Terrell -- Stephens Inc. -- Analyst

OK. Got it. And I wanted to ask on just the deposit growth that we saw this quarter. I didn't see it anywhere in the release, but I was curious, was any of the money market growth -- was any of that brokered? 

Heng Chen -- Executive Vice President and Chief Financial Officer

Yeah. It was $100 million out of that total growth. That's period end to period end.

Andrew Terrell -- Stephens Inc. -- Analyst

Yeah. OK. Got it. Thank you.

And then one last one for me. I think last quarter, we talked a little bit about -- I think it was around a $14 million commercial credit that was placed on nonaccrual. I was just curious, any kind of status update that you can share on this loan?

Heng Chen -- Executive Vice President and Chief Financial Officer

We don't like to talk about specific customers, but I understand it's public knowledge. There's been a receiver appointed. So we feel we have better control to that credit, and ultimately, we will get some collection from the assets of the business and then the rest will come from the house on the West side that's securing it. And then we have also reserved for the loan for a reasonable amount.

Andrew Terrell -- Stephens Inc. -- Analyst

OK. Understood. Well, I appreciate you taking my questions. Yeah.

Thank you.

Operator

Thank you. Your next question comes from the line of Chris McGratty with KBW.

Chris McGratty -- KBW -- Analyst

Great. Good afternoon. Heng or Chang, last quarter, you talked about, I think, a 30% through-the-cycle beta. Do you feel any different about this given the speed at which the Fed is now moving? Is that number -- is that number moving higher?

Heng Chen -- Executive Vice President and Chief Financial Officer

We don't know. We still think it's 30%. In the second quarter, it was much less than that in part because we had a shift in our deposit mix where our customers are also uncertain as to whether they should renew for one-year CDs, which is a traditional term versus the staying in money market. But we did get.

Chang, it was about 90% retention of maturing CDs. And Chang, I thought I heard it was the one-year CD renewal rate was around 1% something. So that is much better than our deposit beta of that 30%. We assumed for CDs, the beta would be 100%.

So it's -- this is -- this rate hike is very unusual. So far, we're doing better than our deposit business [Inaudible]

Chris McGratty -- KBW -- Analyst

Yes, for sure. Just on the expenses, I make sure I fully understand the expense guide, which hasn't changed. Can you just provide what the starting level of expenses are for 2021? Is that your reported expenses? Is that reported ex-amortization? Just I want to make sure I get it right.

Heng Chen -- Executive Vice President and Chief Financial Officer

Yeah. It's reported full year 2021 ex-amortization. 

Chris McGratty -- KBW -- Analyst

All right. Thank you.

Operator

[Operator instructions] Our next question comes from the life of Gary Tenner with D.A. Davidson.

Gary Tenner -- D.A. Davidson -- Analyst

Thanks. Good afternoon. Heng, I just wanted to kind of go back over that loan and deposit guide you kind of mentioned in your answer to a question that you were looking to sort of match loan growth with deposit growth. But even at the low end of that deposit guide of 9%, it would suggest, I think, second half of the year, deposit growth that far outstrips the projected loan growth based on your guidance.

So, is that accurate? Or am I misunderstanding something in your comments?

Heng Chen -- Executive Vice President and Chief Financial Officer

Yeah. We try to keep the -- you'll see our loan to deposit ratio was 96% for the last two quarters. So we're trying to maintain that at quarter end. And if we have to, we'll go to the wholesale brokered CD or brokered money market to maintain that.

So our intention is to keep up with the loan growth for the rest of -- rest of the year in that and try to keep that loan-to-deposit ratio right around 96%. It might drift up a little bit, but hopefully not too much.

Gary Tenner -- D.A. Davidson -- Analyst

OK. All right. Thank you. And then in terms of just overall balance sheet management, you're down to, I don't know, $1 billion or so of liquidity versus $2.5 billion at the end of 2021.

So is that a level that you'd like to maintain from a balance sheet liquidity perspective? Would you run it tighter than that and deploy some of that cash to loans or securities at this point?

Heng Chen -- Executive Vice President and Chief Financial Officer

It should be right around $1 billion. We have about 120 million treasuries, which are less than -- the final maturity is less than one year. Those count as cash equivalents for the regulatory ratios. But we may -- if that $1 billion cash that [Inaudible] is because we deployed some into treasury.

And overall, we're maintaining -- we're going to run that balance down much lower.

Gary Tenner -- D.A. Davidson -- Analyst

You're going to run the short-term investment balance then that's $1 billion?

Heng Chen -- Executive Vice President and Chief Financial Officer

No. No. That's --

Gary Tenner -- D.A. Davidson -- Analyst

I thought you said, that's where you're not going to. You're going to keep it there?

Heng Chen -- Executive Vice President and Chief Financial Officer

Yes, sir.

Gary Tenner -- D.A. Davidson -- Analyst

OK. Thank you.

Heng Chen -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. And our next question comes from David Chiaverini.

David Chiaverini -- Wedbush Securities -- Analyst

Hi, thanks. I wanted to follow up on the brokered CD topic. I was curious, what's the rate on the brokered CDs versus your core CD portfolio rate?

Heng Chen -- Executive Vice President and Chief Financial Officer

Well, we just got some -- this month -- it's -- for a three-month broker CD that it's about 2.25%, 2.38%. And then our -- this is June, the weight on our core time deposits for June -- versus [Inaudible] 45 basis points.

David Chiaverini -- Wedbush Securities -- Analyst

And can you talk about the competitiveness in the market for core CDs? Are you seeing some competitors push that up? Do you guys plan on doing any kind of specials because it seems like you'll get a better sort of deal with your core CDs versus the brokered CDs? Can you talk about that a bit?

Heng Chen -- Executive Vice President and Chief Financial Officer

Yeah. Well, one, we're -- we don't think we need to do any sort of CD specials. We don't see anybody in the marketplace doing that because banks in general have a lot of them, still have a lot of excess liquidity. In terms of -- earlier in the second quarter, we lost some large deposit customers.

They were leaving for deposits in the low 2s as I say, early June. Today, if those same customers came to us and said, they would want 2% for one year CD, we would take that. So -- but it's very -- we have a certain set looks for the published rates for all of our Southern California peers. And nobody has raised any rates in any product since that increase.

So my assumption is, everybody is customizing for the larger depositors. The rate that they want to offer.

David Chiaverini -- Wedbush Securities -- Analyst

Got it. Thanks for that. And then shifting to credit quality. Can you talk about the health of your borrowers? Clearly, your LTVs are very, very low.

But I'm curious about the healthier borrowers and then related to that, can you talk about the -- what you're seeing based on talking to customers, the economic outlook? And if you're seeing anything recessionary in your outlook?

Chang Liu -- President and Chief Executive Officer

So, David, I'll take that first. On the CRE side, we've done a deeper dive into not just the LTV side, but into the cash flow side and the debt service side, assuming higher interest rates and higher debt service payments, what the portfolio will look like from a debt coverage standpoint. So we've done a pretty significant review of that, and we feel pretty comfortable about those. On the -- on sort of the economic and recession side, I mean that's -- I think it's the GDP numbers.

I think later in the week will kind of tell us a little bit more, but the unemployment numbers are still very low. The last, I think, hiring report was something about 400,000, and was a total of $1.1 million over three quarters with the -- and so those are all strong numbers that I think we've seen. In addition to that, our C&I customers, I think the -- we're also looking at them and kind of looking at their balance sheet and their aging more carefully, kind of looking at some of their inventory just to make sure that their numbers are strong. We don't have any concerns there at this point.

So if there is one, there's probably a mild one. There was, I think, a report in Wall Street about how there is an expectation for Fed cuts that may come as quickly as the next 12 months.

David Chiaverini -- Wedbush Securities -- Analyst

Great. Thanks very much.

Operator

Thank you for your participation. I will now turn the call back over to Cathay General Bancorp's management for closing remarks.

Chang Liu -- President and Chief Executive Officer

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.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Georgia Lo -- Investor Relations

Chang Liu -- President and Chief Executive Officer

Heng Chen -- Executive Vice President and Chief Financial Officer

Matt Clark -- Piper Sandler -- Analyst

Brandon King -- Truist Securities -- Analyst

Andrew Terrell -- Stephens Inc. -- Analyst

Chris McGratty -- KBW -- Analyst

Gary Tenner -- D.A. Davidson -- Analyst

David Chiaverini -- Wedbush Securities -- Analyst

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