Cathay General Bancorp (CATY) 2020 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Cathay General Bancorp's First Quarter 2020 Earnings Conference Call. My name is Justin, and I will 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 General Bancorp.

Ma'am, please begin.

Thank you, Justin. And good afternoon. Here to discuss the financial results today are Mr. Pin Tai, our Chief Executive Officer; Mr. Chang Liu, Cathay Bank's President and Chief Officer -- Operating 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 results and uncertainties are further described in the company's annual report on Form 10-K for the year ended December 31, 2019, 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 speaks only as of the date of which it is made, and except as required by law. We make -- 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 first quarter 2020 results. To obtain a copy, 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 Chief Executive Officer, Mr. Pin Tai.

Thank you, Georgia. And good afternoon. Welcome to our 2020 First Quarter Earnings Conference Call. While we acknowledge our first quarter operating results, our commitment and focus today is on supporting our clients, team members and commodities during the COVID-19 pandemic. This afternoon, we reported net income of $46.9 million for the first quarter of 2020, a 29.7% decrease when compared to a net income of $66.7 million for the first quarter of 2019.

Diluted earnings per share decreased 29% to $0.59 per share for the first quarter of 2020 compared to $0.83 per share for the same quarter a year ago. The first quarter 2020 results include a special loan loss provision of $22 million for loans losses due to deteriorations in economic conditions in the closing weeks of the quarter related to COVID-19. This special provision reduced earnings per share by $0.19.

In the first quarter of 2020, our gross loans grew by $458.7 million to $15.5 billion or an increase of 12.2% on an annualized basis. The increase in loans for the first quarter of 2020 was primarily driven by the growth in commercial loans of $194.3 million, due in part to higher drawdown by our borrowers or 28% annualized. Commercial mortgage loans of $147.3 million or 8.1% annualized, and residential mortgage loans of $85.3 million or 8.3% annualized.

For the first quarter of 2020, our total deposits increased $397.8 million or 10.8% annualized to $15.1 billion, primarily as a result of new depositors and additional wholesale deposits.

We continue our stock buyback program and repurchased 400,000 shares of our stock at an average cost of $32.20 per share in the first quarter of 2020. We will not be buying back any additional shares until further notice. We will continue to monitor the impact of the COVID-19 pandemic on our financial results as well as demand for our loans, deposits, services and products during the second quarter of 2020 and beyond.

With that, I will turn the floor over to the Bank's President and Chief Operating Officer, Chang Liu, to discuss our first quarter asset quality in more detail and our COVID-19 initiatives for our borrowers.

Thank you, Pin, and good afternoon, everyone. With respect to the COVID-19 pandemic, we have implemented several lending initiatives to assist borrowers that are impacted by the pandemic. We launched the mortgage assistance program on April 1 for our residential mortgage borrowers, who are experiencing financial hardship as a result of COVID-19, to provide short-term payment relief for up to 90 days. As of April 24, 2020, we have approved 987 payment deferment requests with an aggregate balance of $434.7 million or approximately 9.8% of our residential mortgage loan portfolio, with weighted average current loan-to-value ratio of approximately 53%.

We began working with our CRE and C&I borrowers that have been adversely impacted by COVID-19 to provide relief. When we can do so prudently through a modification of repayment and/or covenant terms, through 21st 2020, 118 CRE loans with an aggregate balance of $435.5 million as of March 31, 2020, or approximately 6% of our CRE loan portfolio and 2.8% of our total loan portfolio have been modified to provide relief on repayment terms. The average loan-to-value ratio at origination for these loans was 50%.

In addition, 10 C&I loans with an aggregate balance of $50.4 million as of March 31, 2020, or approximately 1.7% of our C&I loan portfolio and 0.32% of our total loan portfolio have been modified to provide relief on repayment terms.

We launched our SBA Payment Protection Program on April 6. As of April 27, 2020, we are in the process of submitting over 900 PPP loans with an aggregate balance of approximately $220 million to the SBA portal. We also launched a micro loan program, the smart relief loan program, which is independent and separate from any SBA or government-backed loan relief programs. The purpose of the program is to help small business owners affected by the COVID-19 pandemic in our 9-state footprint with loans between $5,000 to $10,000.

As of April 24, 2020, we are processing over 100 applications with an aggregate balance of over $1 million. For the first quarter of 2020, we reported net recoveries of $49,000 compared to net recoveries of $2.3 million in the fourth quarter of 2019 and net recoveries of $200,000 in the first quarter of 2019.

Our nonaccrual loans increased by $13.2 million to $53.7 million or 0.35% of period-end loans as compared to the end of the fourth quarter of 2019. The increase was due to 1 loan to a chain of tire stores, which is secured by real estate. We recognized a $25 million loan loss provision in the first quarter of 2020 compared to a loan loss reversal of $5 million in the fourth quarter of 2019, and no loan loss provision in the first quarter of 2019.

The $25 million loan loss provision in the first quarter of 2020 included qualitative adjustments under the incurred loss model due to the impact of the COVID-19 pandemic of $22 million. We have elected to defer the implementation of the CECL standard for recognizing credit losses as permitted under the recently enacted CARES Act, which based on preliminary results, would have resulted in additional loan loss provision in the range of $5 million to $15 million in the first quarter of 2020, if CECL has been adopted.

We also continue to monitor and evaluate the potential impact of the continuing tariffs from the partially resolved trade dispute between the U.S. and China to our loan portfolio. Borrowers that we believe could be adversely impacted by the current tariffs hold approximately 2.9% of our total loan portfolio.

With that, I'll turn the floor over to our Executive Vice President and Chief Financial Officer, Heng Chen, to discuss the first quarter 2020 financial results in more detail.

Thank you, Chang, and good afternoon, everyone. For the first quarter 2020, net income decreased by $19.8 million or 29.7% to $46.9 million compared to the first quarter of 2019. Diluted earnings per share was $0.59 for the first quarter of 2020, a decrease of $0.24 or 29% compared to the first quarter of 2019, which was reduced by $0.19 per share due to the $22 million special loan loss provision related to COVID-19.

Our net interest margin was 3.34% in the first quarter of 2020 as compared to 3.7% in the first quarter of 2019 and 3.34% for the fourth quarter of 2019. There were $2.1 billion of loans at their loan floor rate as of March 31, 2020, compared to $822 million of loans at their floor rates as of December 31, 2019.

In the first quarter of 2020, interest recoveries and prepayment penalties added only 1 basis point to the net interest margin compared to 2 basis points for the first quarter of 2019 and 4 basis points for the fourth quarter of 2019. Approximately $1.2 billion and $1.7 billion of our savings mature during this second and third quarters of 2020, with average rates of 1.9% and 1.8%.

Noninterest income during the first quarter of 2020 decreased by $7.1 million to $5.8 million when compared to the first quarter of 2019. The decrease was primarily attributable to a $10.3 million swing in the valuation of equity securities, partially offset by a $1.4 million increase in wealth management fees and a net change of $1.3 million from the valuation of interest rate swaps.

Noninterest expense decreased by $5.8 million or 8.2% to $65.2 million in the first quarter of 2020 when compared to $71 million in the first quarter a year ago. For the first quarter of 2020, the decrease in noninterest expense was primarily due to a $4.5 million gain recognized from the sale of foreclosed real estate, a $1.2 million decrease in salaries and employee benefit expense and a $2.4 million change in the provision for unfunded commitments, partially offset by a $3.1 million increase in amortization of investments in loan from housing and alternative energy partnerships.

The effective tax rate for the first quarter of 2020 was 16.2% compared to 21.8% for the first quarter of 2019. We completed an investment in the total tax credit fund last week, which we project will lower our full year effective tax rate to approximately 12% to 13%. Solar tax credit amortization was $7.9 million in the first quarter of 2020 and is expected to be $7 million in the second quarter and $4.5 million a quarter in each of the last 2 quarters of 2020.

At March 31, 2020, our Tier 1 leverage capital ratio decreased to 10.82% as compared to 10.83% at December 31, 2019. Our Tier 1 risk-based capital ratio decreased to 12.38% from 12.51% at December 31, 2019, and our total risk-based capital increased to 14.12% from 14.11% at December 31, 2019.

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

(Operator Instructions) And our first question comes from Chris McGratty from KBW.

Heng, maybe if I could start on the expenses just for a moment. Could you help us with kind of a reasonable run rate that we should be thinking about the core expenses, excluding the amortization for the next several quarters, given the environments turned a little bit more challenging from a revenue perspective?

Well, I -- we have our annual merit increases for officers in April that was about typically a 3%. This year, it's about 2%. And that more or less offsets the FICA that we have in Q1. So I think adjusted Q1 would probably be a good run rate for the rest of the year.

Okay. Got it. And then on the amortization, did you have the -- I think you provided the solar. Do you have those low-income housing that you would...

It's plus $6 million a quarter.

Okay. Great. Maybe just a follow-up, my second question would be, there's a lot of discussion this quarter about some of the portfolios that banks have that might be perceived as a bit riskier given the environment we're in. Could you remind us your exposure to several of these portfolios, hotel, restaurants, energy, just a proportion of loans that would be helpful or any others that you see as kind of the higher risk today?

Yes. I think I have mentioned to investors that our hotel motel portfolio is about roughly $300 million. So it's 4.1% of CRE loans or 1.9% of our total loans. Our retail, that's $1.76 billion. It's 24% of our CRE loans and 11.3% of our total loans. So retail, I think we mentioned in the past, a couple, last year when there was interest in retail, it's -- LTVs are very low and the debt service coverage ratios are pretty strong. For restaurants, we have about $170 million that's 2.4% of CRE or 1.1% of total loans. Most of that is to a fast service Chinese restaurant. So well -- yes, anyway, that's -- and then I think those are the categories. If I miss anyone.

We also have $104 million of oil and gas, which is about 0.7% of our total loan portfolio, and all of them are reserve-based lending.

And our next question comes from Gary Tenner from D.A. Davidson.

I was just wondering if you could go into what the ultimate decision was for you guys in terms of deciding to defer the adoption of CECL?

Yes. Gary, I think we feel that we were somewhat unique in that. We've been in net recoveries for 5 years or so, and we haven't had a loan loss provision for those years. And so what we had to do was we had to take losses or charge-offs from 2008, 2009 recession. And the -- so at the -- for the day 1 adjustment, we had an increase in the oil, which we'll mention in our 10-Q. We didn't mention in our 10-K. It was a little bit over 10%. And then when we try to apply these very drastic measures that were -- these economic measures at the end of March, we felt that CECL for us was probably overstates the loan loss provisions, given how our overall low LTV. So like about 15% of the mid-cap banks, we chose to defer. And then we know that whenever the emergency is declared over or December 31 of this year, we will have to restate all of the quarters in 2020. But that -- that's more or less the thinking that we have. We have the choice. We needed more time to really validate our model because our -- of our lack of leasing charge-offs. And so we felt strongly that the improved loss model as we have adjusted to capture the COVID-19 will present a fair picture.

Okay. I appreciate the color on that. And then just to confirm, when you mentioned the maturing CDs in the next couple of quarters, was it $1.1 billion per quarter, did you say?

Per quarter. It is -- I got it here. It was $1.2 billion in the second quarter, $1.7 billion in the third quarter.

Okay. And what's your current 12 months CD rate?

It's about 1%. We hope to get it a little bit lower. Once time goes by, because in the last 6 weeks or so, the market, the wholesale broker CD market has been -- the rates have been pretty high. But as the stimulus proceeds had come into the banking system, including at Cathay, like today, our loan-to-deposit ratio is under 100%. And so we sit now, we could try to be more efficient in terms of the rates we offer to -- for 1-year CD.

And our next question comes from Lana Chan from BMO Capital Markets.

A couple of questions. One, the loan loss provision this quarter of $25 million. How much of that was for potential losses on the one C&I credit that you highlighted?

Yes, that was well secured -- one second, it's been work out, we have its cross-collateralized other real estate. So it's just that it was past 90 days to maturity.

Okay. And of the loans that you mentioned were in modification this quarter or had been modified under CRE and C&I, could you give us a sense of what segments, industries they were in? Is it more retail on the CRE side?

Yes. Chang?

Sure. There's probably a segment of hotels and motels and then retail as well. Those are the 2 biggest categories of the numbers that we talked about.

Okay. I guess when you look across your CRE portfolio, especially on the retail and the hotel, motel sectors and actually these restaurants, I mean, how much liquidity do some of your borrowers have to sustain a pretty significant drop in revenue over the next couple of months?

I mean for us, we're looking at not just the properties cash flow, we're also looking at the sponsors, their liquidity and their entire global cash flow at the same time. The 3 sectors you mentioned, hotel, motel, retail and even restaurants, collectively that the items that we -- the loans that we have actually been working on from a mass standpoint, they make up for just about 2% of the entire loan portfolio.

I want to add that for hotel motel portfolio, our leverage LTV is about 45.6%. And for retail, it's about 56%.

(Operator Instructions) And our next question is going to come from David Chiaverini from Wedbush Securities.

A couple of questions. First, on the provision, as we look out to the second quarter, do you have any sense as to based on how borrowers are performing thus far in the quarter? Do you have any sense whatsoever as to what level of provisioning could occur in the second quarter?

I think it's going to be more on the economic forecast. So if, let's say, many more states at June 30, if the majority of the states that we're in have reopened and unemployment has peaked, under CECL, you would need less of a provision if and when things are improving. And as far as -- because our borrowers that have weak cash flow now, they're under deferment. Under our incurred loss model, we wouldn't -- we don't count those as trouble. That's in the -- both the regulatory guidance and in the SEC guidance. So it would not cause the provisioning by itself. It's very hard to figure out where things are going to be 2 months from now.

Yes, I can appreciate that. And then shifting gears to some of the more traditional categories. So your net interest margin, what are you expecting going forward over the next couple of quarters?

We think it varies. I mean, I think one is the -- it's the level of the PPE and one is because the rate is low, but if they are forgiven, then we get 2 or 3 points of fee income, but as I said about it, our March NIM was 3.12% -- I'm sorry, that was April. Our March NIM was 3.23%. And then preliminary, I think, our April, we book our fees on the last day of the month. So I think our April would be closer to like 3.15% or a little bit higher than that so. And if most of our loans have hit the floors, every month as our CDs reprice, we get a lift from the CDs repricing. So I think over time, if there are no surge of non-accruals and things like that, our NIM should stabilize. But once again, we're not giving guidance as to exactly where it goes. I think one thing, we have increased our floor rate from new loans. So for example, new CRE loans, to the extent we get many in nowadays, the rate would be in the low 4s. So it's very close to our average portfolio. And we pushed up the rate for our residential mortgage loans. So we won't have -- we don't expect much rate compression from new originations.

That's helpful. And then shifting over to loan growth. You mentioned about how C&I saw elevated levels of drawdowns similar to what we've seen across the industry. Just looking forward, what type of loan growth are you expecting in this type of environment?

We can't predict for one because of a PPP. But aside from that, so far in April, the C&I loan growth has been very muted. And then also the same for residential mortgage and CRE.

And our next question comes from Gary Tenner from D.A. Davidson.

I just had one quick follow-up on the PPP loans. Can you tell us what the average fee that you expect on that, the weighted average fee?

2%, yes, probably 2%.

And our next question comes from Michael Young from SunTrust Robinson and Humphrey (sic) [SunTrust Robinson Humphrey].

Heng, just wanted to get an update maybe within the residential mortgage portfolio. And then separately, maybe the commercial portfolios like CRE. Can you just tell us how much of the loan balances are generally already in deferrals? And are you guys granting those? Or are you kind of forcing into a full modification and extension?

So at the moment, the residential mortgage, we mentioned on the call, 987 of the loans have been -- accounts of loans have been granted approval for deferment. That's about $434.7 million. And of that, the actual agreement that's been signed and probably booked on our system is about $143.6 million.

Okay. And Heng, I think you said, obviously, you guys increased the rate on new resi mortgage. I think before you had kind of stated that portfolio may not grow much from here, just given the size of it overall. But in general, do you view that as a safer category to grow at this point in the cycle? Or are you kind of just want to get tamp down growth altogether and preserve capital just in case of credit losses, et cetera?

It's certainly -- I think historically, it's a safer category. And then the risk weighting is only 50% compared to 100% for our CRE. So it's very -- it's relatively labor on capital. But I think for the last month or 2, we -- our staff had been very busy during the late March. And so that's our focus right now is servicing our customers that have been impacted by COVID-19. And then we'll see what June and July, but the more normal months would do.

Okay. And maybe one last one. Just on geographic exposure. I don't know if it's better to tackle each bucket individually, hotel, motel, retail and restaurant. But I would assume the preponderance of that is in Southern California, but maybe you could provide some detail on if any of that's in New York or Dallas, other cities?

Yes. It's in our investors slides, which is on our website, right, Georgia. But anyway, then it's about 50% in Southern California and about 30% or 35% is New York, then about 10% is in Northern California. And then like Texas, Washington loads about 2% of the total each of them. So it's predominantly Southern California, New York and Northern California.

And I guess I was just trying to get at. Do any of those specific categories have an outsized exposure to a different geography other than Southern and Northern California, like retail or hotel motel?

No. I think in terms of hotel motel, that's more or less spread out in terms of geographies, yes, yes. Retail, probably a little bit more in California than in New York. But I think uniformly, the LTVs are about the same.

Okay. And the LTVs that you've provided, are those averages for the portfolio? Or would that be pretty consistent from the high end to the low end at this point?

Yes. Our maximum LTV for CRE in most classes is 65% so. And so that's when it's in the 50%, that -- those are current LTVs. So there's been some pay down and some appreciation of that. We don't have a big dispersion. We have that more in single family, where we have some larger loans where that down payments are higher.

And we have a follow-up question from David Chiaverini from Wedbush Securities.

I just wanted to follow-up on that very last question there on the LTVs. Can you state what the LTVs are for hotel and what the LTV is for retail and what it is for restaurants, you mentioned how it's low. And you mentioned the 50% figure for overall CRE earlier, but I was curious if you happen to have the LTVs for each of the portfolios.

Yes. This is for the deferment and they're very close to the average. But -- and then I can call you later. But the hotel/motels, it's 46%. Retail is 56%. What was the other category?

The restaurant.

Restaurant.

Restaurant, 53%.

Thank you for your participation. I would now like to 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. It has been a challenging time for our country due to the pandemic. As we continue to provide banking services to our community, we look forward to speaking with you at our next quarterly earnings release date.

Thank you. And ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, you may now disconnect. Everyone, have a great day.