Earnings Call: Q3 2021

Oct 25, 2021

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's Third Quarter 2021 Earnings Conference Call. My name is Sadie, 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. Today's call is being recorded and will be available for replay at www.cathegeneralbancorp.com. Now, I would like to turn the call over to Giorgio Do, Investor Relations of Cathay Bancorp. Thank you, Sadie, and good afternoon. Here to discuss the financial results today are Mr. Chang Liu, our President and Chief Executive Officer and Mr. Hang Chen, our Executive Vice President and Chief Financial Officer. Before we begin, we wish to remind you that the speakers on this call may make forward looking statements within the meaning of 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 ks for the year ended December 31, 2020, 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 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, Cafe General Bancorp issued an earnings release outlining the Q3 2021 results. To obtain a copy of our earnings release as well as our Q3 earnings presentation, please visit our website at www.cafegeneralbancorp.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. Thank you, Georgia, and good afternoon, everyone. Welcome to our 2021 Q3 earnings conference call. This afternoon, we reported net income of $72,400,000 for the Q3 of 2021, a 6.2% decrease as compared to a net income of $200,000 for the Q2 of 2021. Diluted earnings per share increased 31 percent to $0.93 per share for the Q3 of 2021 compared to $0.71 per share for the same quarter a year ago. In the Q3 of 2021, our gross loans excluding PPP loans increased by $355,600,000 to $15,800,000,000 which represents an annualized growth rate of 9.1%. The increase in loans for the Q3 of 2021 was primarily driven by increases of $73,800,000 or 11.2 percent annualized in commercial loans, excluding PPP loans, $220,400,000 or 11.6 percent annualized in commercial real estate loans $23,700,000 or 14.3 percent annualized in real estate construction loans and $41,100,000 or 4 percent annualized in residential mortgage loans. Our 4th quarter loan growth continues to be strong and will likely exceed that of the Q3. The overall loan growth for 2021 is expected to be close to 5%. During the Q3 of 2021, dollars 73,900,000 of PPP loans were forgiven. As of September 30, 2021, our deferred PPP loan fees were $3,800,000 We continue to monitor our commercial real estate loans. Turning to Slide 7 of our earnings presentation. As of September 30, 2021, the average loan to value of our CRE loans was 51%. As of September 30, 2021, our retail property loan portfolio comprises 22% of our total commercial real estate loan portfolio and 11% of our total loan portfolio. The majority, 62% of the $1,740,000,000 in retail loans is secured by neighborhood mixed use or strip centers and only 9% is secured by shopping centers. For the Q3 of 2021, we reported net charge offs of $2,300,000 compared to net charge off of $7,300,000 in the Q2 of 2021. Our Q3 charge offs included a commercial loan charge off of $1,300,000 from our Hong Kong office. Our non accrual loans were 0.43 percent of total loans as of September 30, 2021, increased slightly by $900,000 to $68,700,000 as compared to the end of the Q2 of 2021. We recorded a provision for credit loss of $3,100,000 in the Q3 of 2021 as compared to a $9,000,000 reversal of provision for credit losses in the Q2 of 2021. The provision for credit losses of $3,100,000 reflected the net charge offs of $2,300,000 and provisions for the loan growth during the Q3. We expect the provision for credit losses in the 4th quarter as a result of the expected loan growth in the 4th quarter. Turning to Slide 12. Total average deposits increased by $517,200,000 or 12.6 percent annualized during the Q3 of 2021. We were especially pleased by the $233,000,000 increase or 25.6 percent annualized in average demand deposits during the Q3 compared to the Q2. Average time deposit decreased by $152,600,000 or 10.1 percent annualized due mainly to the runoff of broker CDs. We repurchased 942,613 shares of our stock at an average cost of $39,400,000 totaling $37,100,000 in the Q3 of 2021. There is $98,600,000 remaining under our September 2021, dollars 125,000,000 stock buyback program. We continue to work on the integration and conversion plan for our purchase of the 10 branches and select West Coast loans and deposits from HSBC. This transaction will broaden the reach of our Northern and Southern California branch network in addition to acquiring $1,000,000,000 in low cost deposits and $800,000,000 in residential mortgages. The transaction is expected to be completed during the Q1 of 2022. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Peng Chang, to discuss the Q3 2021 financial results in more detail. Thank you, Chang, and good afternoon, everyone. For the Q3 of 2021, net income decreased by $4,800,000 or 6.2 percent to $72,400,000 compared to the Q2 of 2021. The decrease was primarily attributable to a provision for credit losses of $3,000,000 in the 3rd quarter as compared to a $9,000,000 reversal of provision for credit losses in the 2nd quarter. Our net interest margin was 3.22% in the Q3 of 2021 as compared to 3.24% in the Q2 of 2021. In the Q3 of 2021, interest recoveries and prepayment penalties added 4 basis points to the net interest margin as compared to 3 basis points for the Q2 of 2021. There were $3,100,000,000 of loans at the floor rate as of September 30, 2021. Approximately $1,400,000,000 of our CDs mature during the Q4 of 2021 with an average rate of 0.68%. We are targeting renewing retail CDs in the 40 to 50 basis point range. Given the results of the Q3 of 2021, we continue to expect our net interest margin for 2021 to be between 3.2% to 3.3%. Non interest income during the Q3 of 2021 decreased by $360,000 to $12,200,000 when compared to the Q2 of 2021, primarily due to a one time BOLI income of $1,200,000 in the second quarter. Non interest expense increased by 2,500,000 dollars or 3.6 percent to $72,200,000 in the Q3 of 2021 when compared to $69,700,000 in the Q2 of 2021. The increase was primarily due to an increase of $1,700,000 in amortization in low income housing and solar tax credit funds, including a $3,200,000 catch up adjustment for 2020 low income housing losses resulting from the receipt of 2020 K1s and an increase in $700,000 in salary and employee benefits, mainly from higher bonus accruals. The effective tax rate for the Q3 of 2021 was 19.1% as compared to 22.7% for the Q2 of 2021. The decrease in effective tax rate resulted from a $1,700,000 catch up adjustment recorded in the Q3 of 2021 for 2020 solar tax credits for higher 2020 solar tax credits resulting from the receipt of 2020 K-1s. We expect the full year of 2021 effective tax rate to be between 21.5% 22%. Solar tax credit amortization was $1,400,000 in the Q3 of 2021 and is expected to be $1,500,000 in the Q4 of 2021. As of September 30, 2021, our Tier 1 leverage capital ratio decreased to 10.67% as compared to 10.35% as of June 30, 2021. Our Tier 1 risk based capital ratio decreased to 13.29 percent from 13.77% as of June 30, 2021, and our total risk based capital ratio decreased to 14.93% from 15.47% as of June 30, 2021. Thank you, Heng. We will now proceed to the question and answer portion of the call. For our first question, we have Brandon King from Trish Securities. Brandon, your line is open. Hey, good afternoon. Hi, Brandon. Hey. So loan growth was pretty strong in the quarter, kind of ahead of guidance of 3% to 5%. How do you think that will shake out going into 2022? And do you think you're kind of on a sustainable trajectory when it comes along with, especially on the commercial side? So far, we're looking at 4th quarter pipelines and 4th quarter pipelines are pretty strong. So I think we're kind of staying on our sort of the target growth range in the 5% range for 2021. As far as 2022, I think it really comes down to a lot has to do with sort of the economic recovery, some of the shipping and freight delay costs and what's going on at the ports. I think our commercial growth, C and I growth on the Q3 was pretty strong, the $73,000,000 range. We're talking to some of our clients, we believe that 2022 will hopefully show a strong growth as well, but not completely certain where some of that growth will come from and in which segment, whether that's C and I side or the commercial real estate side. Yes. Well, Brandon, we'll give firmer guidance in January when we report the Q4 earnings. But I want to also add that we think in 2022, the residential mortgage loan portfolio will start to increase faster because with higher interest rates, we think the prepayments on that portfolio will be much lower. So it will have a higher growth rate in 2022. But once again, more we'll update in January. Okay. Thanks for that. And then on the liability side with deposit repricing, could you tell us or give us an update on running off those broker deposits and what do you expect from a CDU pricing picture in 4Q and potentially early 1Q 2022? Yes. We have probably $200,000,000 of wholesale deposits that we will be running off in the Q4. Of that $100,000,000 will be very late. It will be in late December, so you won't see the full quarter effect. And in Q1 2022, we'll probably have another $150,000,000 of brokered CD runoff. But as we get into 2022, if our loan growth resumes to be stronger than it has been in 2021, we may even start to have to renew some brokered CDs. And then lastly, as interest rates are increasing, we're going to we are buying more securities given that the yields are more attractive. So anyway, those are some of the background on how we're thinking there. Okay. And for those broker deposits, if you do renew those, what would be the delta in the cost based off of what they were saying and what you were renewing? I'm doing this from memory. I think that probably about 50 basis points and then we have a broker money market deposit, that's only one basis point. I've talked about that in the past. So that's going to mature in December. Okay. Thanks for answering all the questions. Yes. Thank you. For our next question, we have David Chaveri from Wedbush Securities. David, your line is open. Thanks for taking the questions. The first one is on deposit growth. How are you guys thinking about deposit flows here? It's been pretty decent. For us, we're seeing accumulation of deposit balances from our customers. We're also kind of making a shift away from CDs and focusing more on business operating accounts as much as we can. Some of that CD balances may have transitioned over to money market balances, as we've seen that in our quarterly results. But for the most part, we're driving towards lower cost of deposits and lower cost of funds. Great. Thanks for that. And you mentioned about roughly $100,000,000 remaining on your buyback authorization. I was curious about your appetite for additional purchases from here. I think we'll still be in the market. Compared to our peers, our price to tangible book is somewhat lower and our capital levels are fairly strong. So we will be in the market, but at some point, we may take her back on that depending on the stock price. Yes, that makes sense. Thanks very much. Yes, thank you. For our next question, we have Chris McGrathie from KBW. Chris, your line is open. Hey, good afternoon. Heng, I was wondering if you could repeat the numbers for the branches. I think you said $1,000,000,000 of deposits, dollars 8.50 of loans. I'm wondering associated expenses from that transaction and also just kind of a help with the expense guide near term? Chris, I think this is we said that the HSBC deal is about 2% accretive. In terms of expenses, it's roughly slightly over $10,000,000 and the revenues are in the low 20s. But we're waiting to get all of this information is as of March 2021. And we're waiting for HSBC to give us updated balances. And then when we announce in January, we'll update that. Okay. And so those are annual numbers, the $10,000,000 $20,000,000 Okay. Yes. And then for your modeling, there's going to be one time expenses, maybe in the $3,000,000 I don't know how finally you do that. That's probably $2,000,000 to $3,000,000 And then we have the day 1 CECL charge for those acquired loans. You might want to use 50 basis points on what the loan balance is. But ultimately, we still think it's going to be 2% accretive. Okay, that's great. And then maybe if I could, my follow-up, the little bit of tax on the solar and low income, I think you said 1,500,000 dollars for the solar. What was the low income that we should be modeling for next quarter? Probably $7,000,000 Yes, in Q3, we had the catch up adjustment, as I mentioned, of $3,200,000 but in Q4, it's going to be $7,000,000 Great. Thank you. Yes. Thank you. For our next question, we have Jerry Tanner from D. A. Davidson. Jerry, your line is open. Hi, good afternoon. I just wanted to actually clarify on the cash up adjustment. You said, was it $3,200,000 or I thought it was $2,200,000 And then what was the associated tax impact on that cash up adjustment? Can you repeat the question, Eric? Are you talking about the loan of housing? Yes. The cash up adjustment on the amortization, I had written down 2.2. Was it 3.2 or 2.2? It was 3.2 on the low income housing. Okay. And then the associated tax impact because of the catch up? There was none. Okay. And we had $1,600,000 tax benefit from the solar catch up. Okay. Okay, great. And then just follow-up, in terms of the core loan yields, by my math, down about 12 basis points to 4% or 401%, simply just the kind of pull down effect of new production yields being below portfolio yields? I think you highlighted the prepayment benefit, which was really unchanged versus last quarter. Yes. We you want to cover that? You're asking about the origination yields versus the portfolio yields? Yes. Gary? Yes, effectively, yes. Yes, yes, yes. So for the residential mortgage originations, 3rd quarter, we're probably around 3.82% compared to the weighted average portfolio of about 4.03. On the commercial real estate Q3 origination, we're at about 3.57% compared to the weighted average portfolio at about 4.23%. And on the new C and I loans, our current originations are close to prime versus a weighted Q3 portfolio yield at about 3.61%. At this time, there are no questions in the queue. Thank you for your participation. I will now turn back the call over to Cathay General Bancorp Management for closing remarks. I want to thank everyone for joining us on our call today. We look forward to speaking with you at our next quarterly earnings release call. Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's presentation. You may now disconnect. Good day.