Cathay General Bancorp (CATY) 2021 Q3 法說會逐字稿

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.

(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 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. 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, 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 the third quarter 2021 results.

To obtain a copy of our earnings release as well as our third quarter 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.

Thank you, Georgia, and good afternoon, everyone.

Welcome to our 2021 third quarter earnings conference call.

This afternoon, we reported net income of $72.4 million for the third quarter of 2021, a 6.2% decrease as compared to a net income of $77.2 million for the second quarter of 2021.

Diluted earnings per share increased 31% to $0.93 per share for the third quarter of 2021 compared to $0.71 per share for the same quarter a year ago.

In the third quarter of 2021, our gross loans, excluding PPP loans, increased by $355.6 million to $15.8 billion, which represents an annualized growth rate of 9.1%.

The increase in loans for the third quarter of 2021 was primarily driven by increases of $73.8 million or 11.2% annualized in commercial loans, excluding PPP loans, $220.4 million or 11.6% annualized in commercial real estate loans, $23.7 million or 14.3% annualized in real estate construction loans, and $41.1 million or 4% annualized in residential mortgage loans.

Our fourth quarter loan growth continues to be strong and will likely exceed that of the third quarter.

The overall loan growth for 2021 is expected to be close to 5%.

During the third quarter of 2021, $73.9 million of PPP loans were forgiven.

As of September 30, 2021, our deferred PPP loan fees were $3.8 million.

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 $1.74 billion in retail loans, is secured by neighborhood mixed-use or strip centers and only 9% is secured by shopping centers.

For the third quarter of 2021, we reported net charge-offs of $2.3 million compared to net charge-off of $7.3 million in the second quarter of 2021.

Our third quarter charge-offs included a commercial loan charge-off of $1.3 million from our Hong Kong office.

Our nonaccrual loans were 0.43% of total loans as of September 30, 2021, increased slightly by $0.9 million to $68.7 million as compared to the end of the second quarter of 2021.

We recorded a provision for credit loss of $3.1 million in the third quarter of 2021 as compared to a $9 million reversal of provision for credit losses in the second quarter of 2021.

The provision for credit losses of $3.1 million reflected the net charge-offs of $2.3 million and provisions for the loan growth during the third quarter.

We expect the provision for credit losses in the fourth quarter as a result of the expected loan growth in the fourth quarter.

Turning to Slide 12.

Total average deposits increased by $517.2 million or 12.6% annualized during the third quarter of 2021.

We were especially pleased by the $233 million increase or 25.6% annualized in average demand deposits during the third quarter compared to the second quarter.

Average time deposit decreased by $152.6 million or 10.1% annualized due mainly to the runoff of broker CDs.

We repurchased 942,613 shares of our stock at an average cost of $39.40, totaling $37.1 million in the third quarter of 2021.

There is $98.6 million remaining under our September 2021 $125 million stock buyback program.

We continue to work on the integration and conversion plan for our purchase of the 10 branches in 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 billion in low-cost deposits and $800 million in residential mortgages.

The transaction is expected to be completed during the first quarter of 2022.

I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Heng Chen, to discuss the third quarter 2021 financial results in more detail.

Thank you, Chang, and good afternoon, everyone.

For the third quarter of 2021, net income decreased by $4.8 million or 6.2% to $72.4 million compared to the second quarter of 2021.

The decrease was primarily attributable to a provision for credit losses of $3 million in the third quarter as compared to a $9 million reversal of provision for credit losses in the second quarter.

Our net interest margin was 3.22% in the third quarter of 2021 as compared to 3.24% in the second quarter of 2021.

In the third quarter of 2021, interest recoveries and prepayment penalties added 4 basis points to the net interest margin as compared to 3 basis points for the second quarter of 2021.

There were $3.1 billion of loans at the floor rate as of September 30, 2021.

Approximately $1.4 billion of our CDs mature during the fourth quarter 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 third quarter of 2021, we continue to expect our net interest margin for 2021 to be between 3.2% to 3.3%.

Noninterest income during the third quarter of 2021 decreased by $360,000 to $12.2 million when compared to the second quarter of 2021, primarily due to a onetime BOLI income of $1.2 million in the second quarter.

Noninterest expense increased by $2.5 million or 3.6% to $72.2 million in the third quarter of 2021 when compared to $69.7 million in the second quarter of 2021.

The increase was primarily due to an increase of $1.7 million in amortization in low-income housing and solar tax credit funds, including a $3.2 million catch-up adjustment for 2020 low-income housing losses receipt -- resulting from the receipt of 2020 [Tier 1s], and an increase in $0.7 million in salary and employee benefits, mainly from higher bonus accruals.

The effective tax rate for the third quarter of 2021 was 19.1% as compared to 22.7% for the second quarter of 2021.

The decrease in effective tax rate resulted from a $1.7 million catch-up adjustment recorded in the third quarter of 2021 for 2020 solar tax credits -- for higher 2020 solar tax credits resulting from the receipt of 2020 [Tier 1s].

We expect the full year 2021 effective tax rate to be between 21.5% and 22%.

Solar tax credit amortization was $1.4 million in the third quarter of 2021 and is expected to be $1.5 million in the fourth quarter of 2021.

As of September 30, 2021, our Tier 1 leverage capital ratio decreased to 10.67% as compared to 10.85% as of June 30, 2021.

Our Tier 1 risk-based capital ratio decreased to 13.29% 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.

(Operator Instructions) For our first question, we have Brandon King from Truist Securities.

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 to loan growth, especially on the commercial side?

So far, we're looking at fourth quarter pipelines, and fourth quarter pipelines are pretty strong.

So I think we're just 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 cost and what's going on at the ports.

I think our commercial growth -- C&I growth on the -- for third quarter was pretty strong, the $73 million range.

We're -- in 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&I side or the commercial real estate side.

Yes.

Well, Brandon, we'll give formal guidance in January when we report the fourth quarter 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 more, we'll update in January.

Okay.

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 CD repricing picture in 4Q and potentially early 1Q '22?

Yes.

We have probably $200 million of wholesale deposits that we will be running off in the fourth quarter.

Of that, $100 million will be very late -- it will be in late December.

So you won't see the full fourth quarter effect.

And in Q1 2022, we'll probably have another $150 million of broker 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 broker 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 are today and once they were renewed.

I'm doing this from memory.

I think they're probably about 50 basis points, and then we have a broker money market deposit, and that's only 1 basis point.

I talked about that in the past.

So that's going to mature in December.

For our next question, we have David Chiaverini from Wedbush Securities.

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.

And you mentioned about roughly $100 million 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 very strong.

So we will be in the market.

But at some point, we may taper back on that depending on the stock price.

For our next question, we have Chris McGratty from KBW.

Heng, I was wondering if you could repeat the numbers for the branches.

I think you said $1 billion of deposits, $850 million of loans.

I'm wondering, associated expenses from that transaction and also just kind of help with the expense guide on your term...

Chris, I think this is -- we said it that the HSBC deal is about 2% accretive.

In terms of expenses, it's slightly over $10 million and the revenues are 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 probably -- we'll update that.

Okay.

And so those are annual numbers, the $10 million and $20 million?

Okay.

Yes.

And then for your modeling, there's going to be onetime expenses, maybe in the $3 million.

I don't know how finely you do that.

That's probably $2 million to $3 million.

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 $1.5 million for the solar.

What was the low income that we should be modeling for next quarter?

Probably $7 million.

Yes, in Q3, we had this catch-up adjustment, as I mentioned, of $3.2 million.

But in Q4, it's going to be $7 million.

(Operator Instructions) For our next question, we have Gary Tenner from D.A. Davidson.

I just wanted to actually clarify on the catch-up adjustment.

You said $3.2 million, or I thought I heard $2.2 million?

And then what was the associated tax impact on that catch-up adjustment?

Can you repeat the question, Gary?

Are you talking about the low income housing?

Yes.

The catch-up adjustment on the amortization.

I had written down $2.2 million.

Was it $3.2 million or $2.2 million?

It was $3.2 million on the low income housing.

Okay.

And then the associated tax impact because of the catch up?

There was none.

There was none.

And we had a $1.6 million tax benefit from the solar catch-up.

Okay.

Okay.

Great.

And then just a follow-up.

In terms of the core loan yields, by my math, down about 12 basis points to 4% or 4.01%.

Simply just the kind of pull down effect of new production yields being below portfolio yields.

I think you had highlighted the prepayment benefit, which was really unchanged versus last quarter.

Yes.

We -- Chang, you want to cover that?

Are you asking about the origination yields versus the portfolio yields?

Yes.

Gary?

Yes, effectively, yes.

Yes, yes, yes.

So for the residential mortgage originations, third 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&I loans, our current originations are close to prime versus the 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.