Q3 2020 Cathay General Bancorp Earnings Call
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We like Www Dot Cathay General Bancorp back Oh.
Now, let's turn the call over Meghan <unk> Investor Relations Cathay General Bancorp.
Thank you for salary and good afternoon here to discuss the financial results today are Mr. Chang <unk>, Oh, President and Chief Executive Officer, and Mr. Han Chen our executive Vice President and Chief Financial Officer equally.
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 this risks and uncertainties. A further described in the company's annual report on form 10-K for the year ended December 31st 2019, and I don't want to be in particular, and nothing reports and filings with the Securities and Exchange Commission them time to.
Hi.
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 we view any forward looking statements to reflect future circumstances.
If I wouldn't names or events or the occurrence of unanticipated events.
This afternoon, Cathay General Bancorp issued an earnings release outlining <unk> third quarter 2020, we felt.
Upping a copy of our earnings release, as well as well as our third quarter earnings presentation.
Visit our website at Www Dot kept the general Bancorp Dotcom after comments by management today, we will open up this call for questions.
I'll now turn the call over to our President and Chief Executive Officer Mr. Chang.
Thank you Megan and good afternoon, everyone welcome to our 2023rd quarter earnings Conference call.
While we acknowledge our third quarter operating results like commitment focus today is on continuing to support clients team members and communities during the call the 19 pandemic.
This afternoon, we reported net income of 56.8 million for the third quarter up 2028, 22% decrease when compared to a net income of 72.8 million for the third quarter of 2019.
Earnings per share decreased 22% to 71 cents per share for the third quarter up 2020.
Care to 91 cents per share for the same quarter a year ago.
In the third quarter of 2020, our gross loans decreased by 42.5 million to 15.6 billion.
The decrease in loans for the third quarter sales 2020 was primarily driven by a decrease of 164 million or 6% in commercial loans due to unusually high pay downs from our commercial borrowers, resulting from the strong cash flows.
Commercial real estate loans increased by 67.8 million or 0.9% as a result of the origination of new loans construction loans increased by 50.9 million or 88.2% as a result of construction programs.
During the third quarter, we again conducted credit reviews of our borrowers industries, particularly impacted by the economic impact of the condemning.
We are encouraged because 68.6% of our commercial real estate and single family mortgage is that weren't paying people have returned to full schedule payment status as of September Thirtyth 2020.
Well so many of our borrowers are reporting increased cash flows and many of our whole toll borrowers are reporting higher occupancy levels during the third quarter.
We're also encouraged by the low loan to value for these review loans and the L. started liquidity that is helped by the guarantors of these loans, which we expect could be used to support these rooms.
As of September Thirtyth 2020, I called the 19 go modifications were as follows.
48, C.N.I. loans with an aggregate balance of 45.3 million as of September Thirtyth, 2020, or approximately 1.8% of our commercial loan portfolio or still modified to provide relief on payment bond repayment terms.
Turning to slide seven of our earnings presentation.
30 as of September Thirtyth, 20, 2090, Fives, you argue loans with an aggregate balance of 428 million or approximately 5.7% of RCR your loan portfolio or sue on loan modifications to provide relief on the payment terms.
The average loan to value ratio at origination for these loans was 52%.
All told we're 20 2020, the balance of CRD loan still under loan modifications have further decreased to only 146 million or approximately 2% of RCR your loan portfolio.
We will provide some specifics about cathy's hotel and retail loan portfolios of the two segments more impacted by the downturn.
As of September Thirtyth 2020, Kathy has 64 hotel loans that totaled 351.6 million, including 49.2 million of SB eight loans.
As of September 30, or 2020, the remaining loans with Walmart were at 229 million or 37% of the total hotel portfolio.
Among the 64 whole telephones 59 or limited service and five are full service three in southern California, and two in Texas.
Turning to slide eight we.
We note that we view, 81% of the launching our retail loan portfolio, which COVID-19% of our total commercial real estate loan portfolio and 9% of our total loan portfolio as of September Thirtyth 20 Twond.
The majority 62% of the 1.42 billion in retail loans reviewed a secure by neighborhood community neighborhood community or strip centers, and only 12% secure by regional malls power or lust lifestyle or factory older properties.
Among the 161 million of CRD retail loans still under loan modifications as of September 30, or 2020, approximately 38% or paying interest on it.
Turning to slide nine as of September Thirtyth, 2020, 367 payment Beeferman request with an aggregate balance of 180.6 million were approximately 4.3% of our residential mortgage loan portfolio remain on payment deferral status.
As of October Twentyth 2020, the balance of our residential mortgage loans still under loan modifications have decreased 239 million or approximately 3.3% of our residential mortgage loan portfolio.
For the third quarter of 2020, we reported net charge offs of 3.1 million compared to net charge offs of 2.6 million in the second quarter of 2020.
Our non accrual loans increased by 20.7 million or 77.
Point 2 million or 0.5% of period end loans as compared to the end of the second quarter up from each one.
The increase is a result of the placement of our only two movie theater loans acquired through the acquisition of far East National Bank going to non accrual status during the third quarter up 20 Twond.
We recognized a 2.5 million loan loss provision in the third quarter of 2020 compared to 25 million in the second quarter of 2012.
The 12.5 million loan loss provision in the third quarter of 2020 include a qualitative adjustments under the incurred loss model due to the impact of the COVID-19 can dynamic.
We have elected to before the implementation of the Cecil standard well recognizing credit losses as permitted under the recently enacted Cures Act.
Based on preliminary calculations, the see saw allowance for credit losses for the third quarter of 2020 will be approximately 15 to 25 million less than the 12.5 million incurred loss loan loss provisions.
The lower Hcl provision is primarily a result of the improvement in the forecasted economic sectors, showing the Moody's September a baseline case forecast compared to Moody's juice baseline forecast.
We also continue to monitor and evaluate the potential impact of the continuing tariffs from the partially result treat dispute between the U.S. in China to our loan portfolio.
Paul was that we believe could be adversely impacted by the current tariffs constitute approximately 1.6% of our total loans.
Turning to slide 12 total.
Total average deposits increased by 363 million or 2.3% during the third quarter.
Average money market deposits increased by 263 million or 13.2% in part as a result of marketing efforts to large corporate depositors.
Average time deposits decreased by 235 million or 4.4% due to the one off of wholesale deposits.
We plan to further address the excess liquidity brought by the growth in core deposits by reducing broker deposits during the fourth quarter of 2012.
With that I'll turn the floor over to our executive Vice President and Chief Financial Officer, and Chang to discuss the third quarter 2020 financial results in more detail.
Thank you Chad and good afternoon, everyone.
Third quarter 21, net income increased by 16 million or 22%.
6.8 million come true so quarter 29.
Which was primarily attributable to 12.5.
<unk>.
Uh huh.
[noise], our net interest margin was 3.2 in the third quarter of 2020.
That's true.
In the second quarter.
There were 2.4 billion alone that's performing assets it tends to be on one.
In the so called of 21.
Interest recoveries in the penalties added <unk>.
0.2.
The net interest margin.
So thats the basis points from the second quarter of 2000.
Approximately 1.5 billion.
One.
One night Boston.
Well I'm not sure I've been in the fourth quarter of 2020 in the first.
And second quarter's 2021.
With average rates of 1.51.
1.47% and 0.88% respectively.
We are targeting <unk> sales.
In the 50 to 60 basis points.
Non interest income during the quarter we won.
5.4 million to 10 million.
Compared to the same quarter.
Non interest expense increased by 10 million or 15.9%.
76 no.
20 Twond.
When compared to 65.6 million in the same quarter a year ago.
Excluding the amortization of low income housing.
Mm Hmm okay.
Non interest expense increased by 1.2 million or 2%.
Two quarters 20 Twond.
So hold on.
Hmm.
For the quarter of 2020 that increase in non interest expense was primarily due to a 7.5 million.
Yeah amortization of investments.
<unk> housing.
Awesome shops.
1.1 million increase in salaries and benefits.
One.
In the reserve for.
On Friday alone.
The effective tax rate for the so called the 20, 21.7%.
Compared to 22.4% <unk> quoted on HM.
We compete with and that's why you know over half was launched in the second quarter.
Which we project will lower our full year effective tax rate to.
Approximately 8%.
So look that's where the amortization was 10.8 million in sales order point 20, and you expect it to be 10 million in the fourth.
Fourth quarter 2020.
As of September until you.
20, Twond tier one leverage capital initial decreased to 10.51%.
As compared to 10.3% as.
Something somebody one one.
Our tier one risk based capital ratio.
Okay.
For Sun.
From 12.51% as of December 31, 2019.
And our total risk based capital ratio.
15 point <unk>.
From 14.11 per se.
As of December 31 on.
We expect to resume our stock buyback program during the fourth quarter of 2020.
Thank you Hank will now proceed to the questions and answer portion of the call.
Thank you.
Ladies and gentlemen, see other question at this time. Please press Star then one when you keep.
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We ask that you please limit yourself to one question and a follow up.
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Our first question comes from Michael Yon Truest Security Your line is open.
Hey, Thanks for taking the question.
Hi, Michael.
I appreciate the commentary on the share buyback reinstatement could you maybe help size or frame that for us and kind of your expectations given there's not a lot standing on me.
Remaining program and how you guys would think about your kind of future programs and how much capital to deploy.
Yeah, Michael right now our plan is.
Hopefully.
Complete.
<unk> point Sevenmillion meeting.
Here in the fourth quarter.
And then we would go to Rob was before you awesome.
In 2021.
Absolutely.
How's that.
Oh in the January call.
We hope that you know base.
They saw not.
Excess capital generation that.
The fact that our credit quality seems to have stabilized.
We could start buying back at a higher end 2021.
Then the 10.7.
Okay.
Q4.
They will be to look at it every quarter.
So that.
We don't Uh huh.
We maintain our strong capital ratios.
Okay that makes sense and I guess, the other side of that equation would be organic growth.
Can you maybe provide any outlook on.
Yeah.
Organic growth expectation.
Maybe the contributing factors, whether residential or commercial outlook.
Outlook on pipelines et cetera.
Well, Michael you know in light of the current economic uncertainties caused by Copel, 19th and dynamic.
Well no longer able to update our our kind of current growth guidance, but we're hopeful that 2021 wall well, we will have some more recoveries and we love to see more see a nice growth in the future in our loan portfolio and we continue to do fairly well with some CRD loan growth with our existing customer in existing ones.
Jason ships.
Okay.
I mean, I guess, just overall, maybe I know that's kind of point in time, maybe not.
2021, but are you are you seeing kind of a return of demand from customers.
Any pipeline building and construction.
Anything else like that would be helpful. If you have any color.
Yeah.
Yeah as far as the construction side of the portfolio and we actually saw a slight decrease in the commitment to increasing deconstruction outstanding balances. So it's a result of the actual drawdowns from previously approved commitments.
So that's where you where we saw some of that increase in those numbers.
Yeah, Hi, Michael.
He had been adding.
A number of new lenders Ah yes.
Yeah, we added we added a a team commercial banking team in the San Fernando Valley area.
Through an external hire and put a team to small team together and were looking and they've got a pretty decent pipeline. So we're looking for that pipeline to get to some closings both by fourth quarter and well into 2000 2021.
Okay I'll step back.
Yeah. Thank you.
Our next question comes from Chris Mcgratty of KBW. Your line is open.
Great. Thanks for question and can we.
Putting the amortization in the quarter could you talk about how you're thinking about expense growth in the environment that we're in right now relative to that.
Adjusted number that you are that you referenced in the deck.
Yeah, I mean, the third quarter was a little bit harder because oh, we got higher bonus accruals.
Also.
Because.
We got some.
Loan pay downs on the loan growth was a little bit we true we had lower before loan.
Capitalize but so.
You know I mean, that's where we are.
Could you could you rephrase the question because I I think I answered part of it.
If I'm looking at the [noise] the trend on slide 15 of your core noninterest expense over the past several quarters I'm just trying to get a sense of what the right base rate is either into Q4 and into next year, how much how much growth will we see off of either you know the average of the last few quarters in this quarter specifically.
Yeah, I mean, you know we have that million dollar provision.
All right.
Loan commitments.
Hmm savings.
Under cease all that bad.
<unk> expense is going to be in the.
In the loan loss provision line.
But you know.
Our goal is.
Uh huh.
During school, we love it we know it.
Huh.
Yeah.
So we're doing many things such as.
I think increasing the span of control happen you will learn from managed funds.
Trying to avoid.
Replacing.
Style.
Staff people I mean, if that work could you split out so we're not in a position to give guidance as to 2021, but.
We have a history of.
Working hard on expenses.
And then maybe on the margin I guess two part question number one could you repeat the maturity schedule I got the race, but I missed the maturity of Cds that occur in the next [noise].
Yes, it's about 1.5 billion will mature.
Order.
2.6 billion of Cds will mature.
This quarter and point.
Point 9 billion one.
Second.
Okay and as it relates to just the outlook for margin you know it seems like you've got additional downward repricing on the liabilities.
You know loan growth, obviously, not great at the industry level.
How do we think about margin from from here from from the three up to level over the next quarter. So.
Well I I'm optimistic.
Juan the excess cash we have in the fab.
That is it just in the fourth quarter it added seven basis.
Good good.
Yeah.
He had.
Yeah.
We had a small composite.
Our average I said.
Amanda.
About Gorgon formats.
That's excess.
And.
So.
We have 400 million brokered Cds that are maturing.
Most of them.
Most of them in October.
And that is just going to reduce the assets.
I should have said so.
Not only will you have the benefit of.
Reducing that <unk> expense you also frame.
That's not lost that asset.
And then.
We are we have some.
Federal home loan bank borrowings.
Couple of hundred million, which will mature in June of next year or so we've.
We may like many banks.
In.
A portion of that.
The cost is relatively low.
And Chris if I could speak to the asset side of the equation Weve got approximately 2.4 billion or 15% of our total loans have a floating rate loans that are at their floor rates, our residential mortgages, which is about 27% of our loan portfolio. They are generally fixed rate well hybrid arms that are still in the fixed rate period, yes.
No. So most of our C. O U loans are fixed so the majority of our loans are either fixed rate loans were at their full rates.
Okay. So maybe just the margin the message you're sending those margins going to likely expand from here if I'm hearing you right.
We hope so [laughter].
Got it thanks for all the color.
Thank you. Our next question comes from the.
Gary Tenner Davis from D.A. Davidson Your line is open.
Thanks, Good afternoon.
A couple of questions I guess first of.
The 400 million and brokered Cds that you just mentioned is that included in that 1.5 billion for several different about the that's putting them on one thought yes, yes.
Okay. Thanks, and then.
Have you mentioned I think that you know per the thought process around you know reinstating the buyback.
You know it was kind of stabilization on the credit side and.
You know it is up a little bit classified loans, you know sequentially higher.
Just curious kind of what the markers are what what what you are seeing behind the numbers that gives you increased comfort.
Yeah, I think we kind of mentioned that for the last couple of quarters.
<unk> anyone so how far do you kill alone.
Yeah.
All of our hotel.
And Uh huh.
Awesome awesome orderly and personal Hmm.
Yes. So we looked at you know we do we do a deeper dive in both of the last two quarters on a retail wholesale portfolios and it kind of really looked at just in addition to beyond that beyond the rent roll and what the Collectability of the rentals are in and and kinda. It also looked at the principal guarantors financials and their liquidities.
Oh really quite a major the burn rate and of how long do you Steve properties can continue to go and support that that service and we came away with some some pretty positive feedback and so that's some some color for you in terms of what we've been able to do behind the scenes.
Okay and just.
Sure.
Just some background numbers in terms of PTP I can see it in your press release, but what the what the actual net fees that were created and I work on PPP this quarter.
5 million to we're amortizing the.
Let's be honest.
On a two year.
That's just a.
That's that's why.
We show less tough spot.
From Michigan for in terms of PPP forgiveness submissions, we started that process and out of the <unk> about 1200, <unk> loans, we haven't at both.
By the middle of the week, we probably will be about 12% into into the forgiveness of sort of the application process.
[noise] great. Thank you.
Thank you.
Question comes from Matthew Clark of Piper Sandler Your line is open.
That's right.
[laughter].
Just on the other income.
One of them looks like a decent uptick.
Pick from Twoq to Threeq you can you just quantify what that was.
[laughter] driven by.
And we are not sustainable.
Well and be a good.
One we have to X.
Excuse me.
Mark to market for the.
Equity secure.
But in terms of.
In the third quarter.
We booked a million gain from a.
Low income housing partnership that yeah.
The investment lets me.
Tim.
2004, yeah.
And.
And so that was that one time and I'd say.
That's the primary reason why.
Yes.
September and we don't expect that to be.
Recurring most low income housing partnerships.
Particularly the new village design.
They they close out at no gain.
Yes.
Yeah Yeah.
With each.
Okay, I'm, sorry, I see it on slide 14, now and then just on the amortization.
For Q I think you mentioned 10 million, but that's just the energy piece.
So what was the what do you what do you expect from low income housing is should be the same I think were about 6 million the corner.
Okay.
Okay.
And then just the increase in classified I think there was some mention of a couple of commercial real estate properties can you give us some.
Some more color on the types of projects those are yeah.
Yeah. So on those they were to theater loans that was acquired as part of the far East National Bank acquisition.
They we believe dollars lead us up they aside the majority of the theaters have now we opened a doing secondary markets, but there are limited to a certain 25% capacity. They also have recently I believe liquid they did an asset that gave them more cash and liquidity as well. So I believe they have more of a.
Carrying power in terms of being able to continue to support the business.
And then the other Ah, we had 14 million down.
Oh for <unk>.
C N I loan that was made by Hong Kong branch.
Okay got it thank you.
Sure.
[laughter].
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press Star then one on your Touchtone telephone.
One moment please.
Our next question comes from David Gianni of Wedbush Securities. Your line is open.
Hi, Thanks, the first question.
He is on the residential mortgage portfolio.
In terms of loan growth you know does the mortgage market has been booming low rates clearly are leading to pay downs given rifai just curious as to what you're seeing in.
In resi resi mortgage and if you guys are experiencing heavy let a level of pay downs and what the outlook is for resi mortgage growth.
We're definitely seeing a a higher level of pay down compared to prior year at this at the same same time period, we're seeing however, an uptick in the demands as well. Its the question is really a bit of you know more about resourcing and applying sort of the right resource to the team. So that they can be able to turn around and fund the loans quicker at a quicker pace.
Case, we were hopeful that the residential mortgage group will be able to continue to contribute to the slightly to the loan growth for the fourth quarter and going forward.
Okay. Thanks for that and in terms of your markets is there anything that you're seeing that could lead to an increase in demand clearly we're in the midst of a recession or coming out of a recession or.
Going into a double dip depending on who you who you talk to what a stimulus package help or is it really ultimately you know seeing the case numbers come down in the vaccine being distributed and that's when we would see in your view and increase in loan demand on the commercial side.
I think it's a little bit of both I think it's really you know if you look at even the markets today Mark is down substantially over 600 point. The last time I check is because the vaccine cases are up there as you all know a certainty about excuse the Dakota cases were up and this is no certainty about vaccine yet.
So I think it's a combination of both that you know the people got to have more confidence in the economy to continue to get back to executing their business plan. We've had as you've noticed substantial pay downs in our see an eyeball goods because they've had some of them being included some furniture or some some medical supplies and and other.
Our parts of our industry that has being able to do quite well during this downturn, but I think that's sort of segment specific so I. It in terms of an overall recovery I think it depends on both.
And last one from me is on on the provision to clearly you know came down nicely. This this quarter when we look out to for Q on Q and clearly.
Of uncertainty out there, but given the really positive trend on the deferral rate.
Is your expectation that we would kind of be in the same neighborhood of just you know low teens or is it too tough to forecast just curious your views there on the provision.
Oh, well I think it's.
It's hard to predict.
Yeah, two or three months I had.
In terms of.
One.
Our incurred loss loan loss provision yes.
Essentially the same as our.
You know ASCII ATCA 17 transition.
Jostling in January so were roughly 200 million for.
Oh for the Hcl.
Asinine.
Based on.
I mean, hopefully we should be.
Well can you just for net charge offs in the next few quarters.
But anyway, that's our hope.
Equally even if we have a.
Even if we have a more.
No downgrade.
Non accrual I mean, the fact that you know <unk>, 50%.
And those personal <unk>.
<unk>.
We're seeing.
In many cases, our guarantors care.
Carrying a problem.
Out of pocket.
So.
When they do go on.
It's not going to be in charge off.
Lpvs are so.
So those are some of the macro factors that will impact.
Q4 perfusion.
Got it and actually that just reminded me about how you guys. Previously said about wind Cecil does get implemented to assume a 20 million bump to the reserve, but I think I heard you say.
15 to 25 million less were you referring to when Cecil is implemented that you know your allowance could come down by 15 to 25 million or did I get that right.
Okay.
Now for the fourth quarter.
Core.
So Pat.
Had we been on seasonal.
Instead of booking 12 and half million dollar expense.
We wouldn't then booking negative provision of five to 15.
I see so is there an update for you know January Onest 2021.
How much of that a bump in allowance or decrease in.
There should be no at 930.
Our incurred loss reserve.
Sure.
Absolutely.
I didn't know 17 million did wonder just one for seasonal January one big one adjustment that goes between.
They should be the same almost the same.
Got it got it okay. Thanks very much.
Okay.
Thank you. Our next question comes from Michael Young of <unk> Securities. Your line is open.
Hey, thanks for the follow up and running and color already.
But I was just curious given that you guys have a pretty broad geographic.
No overlay on the market and some of the major cities across the country. I was just curious if there's anything you could speak to in terms of geographic performance of your clients ended up may not affect your actual loss content given the low loan to values, but have you noticed a wide dispersion in northern California versus New York, Chicago et cetera.
Oh, yeah, the bulk of our kind of business in terms of C. and I are mostly in California.
Well sell up in north the bulk of our commercial real estate is both California, and New York New York. However, there's the the bulk of that business is a lot of mixed use mixed use meaning residential over small retail a in kind of the queens and Flushing area, mostly a we don't have a lot of exposure in the name.
The sitting in Manhattan.
Primarily we just try to stay out of the what we think is a high high high rent than high cost per square foot kind of a segment of the market.
In California, I think it's a mix of mostly apartments retail.
And some industrial we have very limited in terms of.
And you have the exposure to the opt to the office segment.
And then historically, our New York.
Group has had put in strong loan growth, even now because what they are.
Third quarter.
A lot of us.
Well of course in southern California.
And most of that growth thing, so Cal was more multifamily and some owner occupied commercial real estate.
Okay, but no broad yeah, I don't know take rate in terms of where you're seeing more rent collections or.
Just better performance generally between New York versus California at this point.
They're about the same I think from a collection standpoint, I think they both coasts they do fairly well.
Okay. That's helpful.
Thank you I'm showing no further questions at this time I'd like to turn the call back over to management for any closing remarks.
[noise] I want to thank everyone for joining us on the call you had been a challenging time for our country to to the pandemic. We look forward to speaking with you at our next quarterly earnings release call.
Ladies and gentlemen, thank you for participation on today's conference. This concludes the presentation. You may now disconnect have a good day.
[music].