Earnings Call: Q2 2021

Jul 26, 2021

Good afternoon, ladies and gentlemen, and welcome to the Caffeine General Bancorp Second Quarter 2021 Earnings Conference Call. My name is Paul, 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. Call. Today's call is being recorded and will be available for replay at www.capaygeneralbancorp dot com. Now, I would like to turn the call over to Georgia Lo, Investor Relations of Cote General Bancorp. Thank you, Paul, 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 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, Cathay General Bancorp issued an earnings release outlining its Q2 2021 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. Thank you, Georgia, and good afternoon, everyone. Welcome to our 2021 Q2 earnings conference call. This afternoon, we reported net income of $77,200,000 for the Q2 of 2021, a 5.2% increase as compared to a net income of $73,400,000 for the Q1 of 2021. Diluted earnings per share increased 42.6 percent to $0.97 per share for the Q2 of 2021 compared to $0.68 per share for the same quarter a year ago. In the Q2 of 2021, our gross loans excluding PPP loans increased by $134,400,000 to $15,500,000,000 which represents an annualized growth rate of 3.4%. The increase in loans for the Q2 of 2021 was primarily driven by increases of $72,300,000 or 11.1 percent annualized in commercial loans, excluding PPP loans, and $65,600,000 or 3.5 percent annualized in commercial real estate loans. We continue to expect full year loan growth excluding PPP loans of between 3% 5%. During the Q2 of 2021, dollars 118,500,000 of PPP loans were forgiven. As of June 30, 2021, our deferred PPP loan fees were 8,800,000 dollars We continue to monitor our commercial real estate loans. Turning to Slide 7 of our earnings presentation. As of June 30, 2021, the average loan to value of our CRE loans was 51%. As of June 30, 2021, CRE loans with an aggregate balance of $92,000,000 or approximately 1.2% of our CRE loan portfolio remain on loan modifications to provide relief on repayment terms. All loans under loan modification are continued to make interest payments. As of June 30, 2021, our retail property loan portfolio comprises 23% of our total commercial real estate loan portfolio and 11% of our total loan portfolio. The majority, 61 percent of the $1,720,000,000 in retail loans is secured by neighborhood, mixed use or strip centers and only 10% is secured by shopping centers. For the Q2 of 2021, we reported net charge offs of $7,300,000 compared to net charge offs of $7,800,000 in the Q1 of 2021. Our 2nd quarter charge offs included an oil and gas loan charge off of $4,400,000 and a commercial loan charge off of $1,700,000 from our Hong Kong office. Our non accrual loans were 0.42 percent of total loans as of June 30, 2021, decreased by $26,700,000 to $67,800,000 as compared to the end of the Q1 of 2021. The decrease was primarily due to a sale of an $18,800,000 oil and gas loan at a discount of $4,400,000 and a payoff of a $10,100,000 commercial real estate loan in April 2021. Our total oil and gas loan portfolio was $113,000,000 as of June 30, 2021, and no loan was rated substandard. Please see Page 11 of our earnings presentation. We recognized a reversal for credit loss of $9,000,000 in the Q2 of 2021 as compared to a $13,600,000 reversal provision for credit losses in the Q1 of 2021. The reversal for credit losses of $9,000,000 reflected the continued improvement in the economic forecast made in June 2021 compared to the forecast made in March 2021 by the economic forecaster used in our CECL process. Turning to Slide 12. Total average deposits increased by $348,700,000 or 8.7 percent during the Q2 of 2021. Average time deposit decreased by $369,500,000 or 23.1 percent due mainly to the runoff of broker CDs. Under the company's $75,000,000 April 1, 2021 buyback program, we repurchased 1,500,000 shares of our stocks at an average cost of $41,460, totaling $63,500,000 in the Q2 of 2021. We continue to work on the integration and 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 requiring $1,000,000,000 in low cost deposits and $800,000,000 in residential loans. 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, Hen Chang, to discuss the Q2 2021 financial results in more detail. Thank you, Cheng, and good afternoon, everyone. For the Q2 of 2021, net income increased by 3,800,000 dollars or 5.2 percent to $77,200,000 compared to the Q1 of 2021. This increase was primarily attributable to the reversal of provision for credit losses and higher net interest income. Our net interest margin was 3.24% in the Q2 of 2021 as compared to 3.20% in the Q1 of 2021. In the Q2 of 2021, interest recoveries and prepayment penalties added 3 basis points to the net interest margin as compared to 2 basis points for the Q1 of 2021. There were $2,900,000,000 on loans at the flow rate as of June 30, 2021. Approximately 1,600,000,000 and 1,400,000,000 of our CDs mature during the 3rd Q4 of 2021 with average rates of 0.82% and 0.68%, respectively. We are targeting renewing retail CDs in the 40 to 50 basis point range. Given the results of the Q2 of 2021, we are maintaining our expectations of our net interest margin for 2021 to be between 3.2% to 3.3%. Net interest income during the Q2 of 2021 increased by $2,600,000 to $12,600,000 when compared to the Q1 of 2021, primarily due to reduced losses in equity securities and a one time BOE benefit of $1,200,000 Non interest expense decreased by $1,700,000 or 2.4 percent to $69,700,000 in the Q2 of 2021 when compared to $71,400,000 in the Q1 of 2021. The decrease was primarily due to a decrease of $900,000 dollars in amortization of low income housing and solar tax credit funds and $700,000 in costs associated with debt redemption. The effective tax rate for the Q2 of 2021 was 22.7% as compared to 21.9% for the Q1 of 2021. We expect the full year 2021 effective tax rate to be between 22% 22.5%. Solar tax credit amortization was $3,800,000 in the Q2 of 2021 and is expected to be $3,000,000 dollars in the second half of twenty twenty one. At June 30, 2021, our Tier 1 leverage capital ratio decreased to 10.85% as compared to 11.06% as of March 31, 2021. Our Tier 1 risk based capital ratio decreased to 13.77% from 13.94% as of March 31, 2021, and our total risk based capital ratio decreased to 15.47% from 15.84% as of March 31, 2021. Thank you, Heng. We will now proceed to the question and answer portion of the call. Your first question comes from Matthew Clark with Piper Sandler. Hey, good afternoon. Hi. Just first question on the other non interest income, I think it was up to $10,300,000 this quarter from $8,800,000 last quarter. Anything unusual there or is that a good run rate? No, we had a $1,200,000 BOLI death benefit. So that should be non recurring. Okay. Got it. Okay. And then the contribution from PPP revenue in net interest income this quarter? Yes. It's in our press release. Is it okay? Never mind. I'll find it. Okay. And then on the buyback, good to see you guys are pretty proactive this quarter. What are your what's your appetite for re upping another buyback assuming you complete the latest one this quarter? Well, we'll probably discuss request credit approval given the fact that our capital ratios are among the are relatively high and loan growth is moderate, we think buybacks are a good use of our excess capital. Okay. And then just on the reserve ex PPP, I think we're down to 90 basis points. Looking back Yes, 84. Yes. Yes. I guess I'm excluding PPP. But looking back to pre COVID, you guys were in the 80s. I mean, is kind of the low 80s where you think it'll probably stabilize or you think you can dip below that? I think for now, that's probably the number, the range for us. To the extent that our substandard loans or non accrual loans drop significantly, we would see for the model leads us. Okay. Thank you. Thank you. Your next question comes from Gary Tenner with D. A. Davidson. Your line is open. Thanks. Good afternoon. Hi. I just wanted to ask about commercial real estate growth. I know you've guided to the full year loan growth range of 3% to 5%, so unchanged. But in terms of the CRE segment, can you talk about specifically where you saw the growth this quarter and if there were any particular geographic areas that were driving growth? Sure, Gary. We saw, I think, some activities increased activities with mixed use and apartments, and a lot of that with kind of transitional and reposition plays. Geographically, we saw most of that in California. We saw some in the East Coast, but most of that came from the West Coast. Okay. Thank you. And then just to go back on PPP for a second, just to kind of put a fine point on it. In terms of average PPP balances for the 2nd quarter in terms of the outstanding loan balances, Heng, do you have that number? Yes. This is based on the month end balance, it's 304,000,000 dollars I'm sorry, 204,000,000? No, 304,000,000. 304,000,000, okay. Yes. So we had a lot of provisions for the month of June. Okay. Thank you. Yes. Thank you. Your next question comes from Brandon King with Truist Securities. Hey, good afternoon. Hi, Brandon. Hey. So I saw there was a decline in residential mortgage loans. So could you just discuss what your expectations are for residential mortgage going forward? And what type of activity you're seeing in the market and from your customers? In terms of mortgage loans for us, we are continuing to see activities. A lot of it is still on the sales side, although that has slowed down. We're definitely getting hit on the refi side of our portfolio, seeing a higher rate of payoffs as we have seen from a prior year. So from a growth perspective, I think the contribution to the revenue and the loan growth overall from our mortgage portfolio is going to be probably smaller than what we've seen in years past. Okay. And then I saw loan yields are pretty stable. Are you seeing continued stability going into latter half of the year? Or are you still seeing potentially competitive pressures where loan yields haven't bottomed yet? I think there's still competitive pressure. Whether or not it has bottomed or not, I think that remains to be seen. But we do what we can to maintain current existing loan relationships with our clients, even though we'll have to suffer a little bit on the yield side. And for new business, we are as competitive as we can be, obviously keeping an eye on the overall net interest margin for the entire portfolio. Okay. And then lastly, with HSBC deposits coming online early next year, are you are the plans to become more aggressive in running off time deposits or with pricing with customers as we get closer to that close? I think you've talked about R. I mean HSBC, they have a fairly robust deposit franchise. So the time CDs are only 10% of that $1,000,000,000 book. So but on our side, we would between now and the end of the year, we probably have $500,000,000 or $600,000,000 of brokered deposits that we would run off, and that would come out of our excess liquidity at the Fed. Okay. And just even for those time deposits that renew, would you be more aggressive in pricing those potentially? Gradually, I mean, some of the smaller Chinese banks I'm seeing on the promotions, 1 year CDs at 60 basis points. So if I'm seeing it, our customers, our depositors are more likely to see it. So that's from another ethnic Chinese bank. Okay. Thank you. Thanks. Your next question comes from Chris McGratty with KBW. Hi. This is Chris O'Connell filling in for Chris McGratty. I know it's a difficult line to project and I appreciate the color on the solar tax credit. But is it fair to say that the total amortization tax credit line holds going through year end, which is coming down a bit in the silver tax credit that you mentioned in the opening comments? Yes. It's we send a copy of our investor slides to Chris and you can also get it on the Internet, I think. But on Page 15 of our investor slides, We have it broken out by quarter for the last 5 quarters. So the long term housing has been in the last three quarters, it averaged about $6,500,000 And then the solar, it's running down. It was $5,000,000 in Q1, dollars 3,800,000 in Q2. And then we think $1,500,000 in Q3 and the same in Q4. Now we're planning to get back into that field next year because there's more clarity as to the Biden administration's stance on the corporate minimum tax. So then so that expense will start to ramp up again in 2022. Got it. Appreciate the color there. Thank you. And then given the earlier comments around the reserve and credit, so it sounds like it's fair to say that pending any major changes that the reserve levels sound like they'll hold from here. Do you see any scenario where the reserve begins to drop down kind of below where it was in 4Q 'nineteen around that 82 basis point or so level? We might. It's like if there's a mix change where our residential mortgage loans become a higher percentage, but more importantly, if our substandard loans drop to very low levels and our non accruals drop, then that we would view that as justification to use the model number. So model is going to continue to pull us down a little bit every quarter. Understood. Thank you. Thank you. Your next question comes from David Chiaverini with Wedbush Securities. Hi, thanks. A couple of questions for you. Starting with C and I loan growth, can you talk about the demand environment and if possible utilization rates of your borrowers? Yes, I think on the C and I side, we're seeing some increased activities from different industries. We had, as we mentioned in prior calls, brought on a new team that has added to some new relationships with the bank. As far as utilization rates, at the moment, I think through the 1st couple of quarters of the year, they're modest, but we've talked to some customers where we believe that the utilization rates will move up in the 3rd Q4. Great. And then on the deposit side, can you talk about the deposit environment? You guys put up pretty decent core deposit growth this quarter. Can you talk about the outlook on deposits? The focus there is to reduce our reliance on CDs and try to focus more on business commercial account and transactional deposits. And that's really that's 1, that will increase our core deposits and 2, that will continue to hopefully drive down the cost of deposits. Great. And then looking at you guys have been able to pay down your borrowings to a pretty low level and at the same time add to the securities portfolio in the most recent quarter, so low, should we expect securities purchases to pick up? I think, Bill, it's hard to be a fixed income investor. I mean, on the last call, it looked like the tenure was going to go to 2% in 3, 4 months. Now it's at 128. So we're trying to every quarter buy a certain amount, but we're going to be cautious because I think this inflation debate, there's merit for it becoming embedded in people's expectations and in labor costs. So at some point, the Fed may have if they ever fall behind the ball in terms of controlling inflation. They're going to have to increase rates rapidly to keep inflation in check. So we're looking at every quarter and trying to buy about the same amount that we have been in the 1st 2 quarters. Yes. And I think last quarter you were talking about how you were getting, I think it was $50,000,000 or so of maturities per quarter and you were purchasing maybe $75,000,000 per quarter. Is that still the case or is it really dependent on the rate environment? No, it was we bought $150,000,000 dollars That's what we said and the maturities of MBS and the maturities were $75,000,000 And for the Q3, that's still our plan. Got it. Great color. Thanks very much. Thank Your next question comes from Gary Tenner with D. A. Davidson. Your line is open. Thanks. I just wanted to clarify on your deposit comments. The broker deposits, I think you mentioned $500,000,000 to $600,000,000 that run off, I'm sure, the back half of this year. Is that included in the $3,000,000,000 or so time deposits you mentioned previously? Mostly, we have some brokered money market. So in that number is $150,000,000 of brokered money market. Okay. And of those brokered deposits, what's the rate on those as compared to the rate you gave us on the CDs? Well, of the brokered money market, we are fortunate, we got $100,000,000 at one basis point, Alex, in last December. And then the other $50,000,000 dollars that's 18 basis points. And then the broker CD rates, they tend to be in the 150% range because they were made a year ago. Thank you. Thank you. Your next question comes from Matthew Clark with Piper Sandler. Hey, just want to follow-up on the core expense run rate. You guys have done a good job of holding that run rate pretty flat since last year, just under 59,000,000 dollars What are your thoughts on that run rate going forward and any kind of reinvestment needs or savings? Yes. We're trying to maintain that. We might get we might have to increase our bonus accruals, particularly when we get to the Q4, when we see how we compare to budget. But aside from that, I mean, we still have process improvement. We did close 2 branches in June. So the I think for 2022, if inflation is 3%, we'd probably be at 2.5% or something like that. Got it. Okay. Thank you. Yes. Thank you. Thank you for your participation. I will now turn the call back over to Cathay General Bancorp's management for closing remarks. 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. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.