Cathay General Bancorp (NASDAQ:CATY) Q1 2020 Earnings Call

0:00 At this time, all participant lines are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. If you would like to participate in this portion of the call, please press star, followed by one at any time during the conference. If assistance is needed any time during the call, please press star, followed by zero, and a coordinator will be happy to assist you. Today's call is being recorded and will be available for replay at www.sageneralbancorp.com. Now I would like to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp. May I please begin?

0:37 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 Operating 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 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 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 of which it is made and except as required by law.

1:39 We undertake no obligations 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 its first quarter 2020 results. To obtain a copy, 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 Chief Executive Officer, Mr. Pintai.

2:10 Thank you, Georgia, and good afternoon. Welcome to our 2020 First Quarter Earnings Conference Call. I will acknowledge Our commitment and focus today is on supporting our clients, team members, and communities 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 our net income of $66.7 million for the first quarter of 2019. Valued 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.

3:03 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 19 cents. 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.

3:58 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 the result of new depositors and additional wholesale deposits. We continue our stock buyback program and we purchase 400,000 shares of our stock at an average cost of $32.20 per share in the first quarter of 2020.

4:44 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 loans, deposits, services and products during the second quarter of 2020 and beyond. With that, I'll 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.

5:18 Thank you, Pen, 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 1st 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%.

6:03 We began working with our CRE and CNI 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 31st, 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 CNI loans with an aggregate balance of $50.4 million as of March 31, 2020, or approximately 1.7% of our CNI loan portfolio and 0.32% of our total loan portfolio, have been modified to provide relief on repayment terms.

7:06 We launched our SBA Payment Protection Program on April 6th. 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 microloan 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 nine-state footprint with loans between $5,000 to $10,000. As of April 20th, 24th, 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.

8:05 Our non-accrual 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 one 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 CISO have been adopted.

9:11 We also continue to monitor and evaluate the potential impact of the continuing tariffs from the partially resolved trade dispute between the US 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, Peng Cheng, to discuss the first quarter 2020 financial results in more detail.

9:39 Thank you, Chang, and good afternoon, everyone. For the first quarter of 2020, an income decreased by 19.8 million or 29.7% to 46.9 million compared to the first quarter of 2019. Deleted earnings per share was 59 cents for the first quarter of 2020, a decrease of 24 cents or 29% compared to the first quarter of 2019, which was reduced by 19 cents 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.

10:34 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 one basis point for the net interest margin compared to two basis points for the first quarter of 2019 and four basis points for the fourth quarter of 2019. Approximately $1.2 billion and $1.7 billion of RCDs matured during the second and third quarters of 2020 with average rates of 1.9% and 1.8%.

11:30 Non-interest 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. Non-interest 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.

12:21 For the first quarter of 2020, the decrease in non-interest 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 low-income 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.

13:09 We completed an investment in the solar tax credit fund last week, which we project would 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 two 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.

13:57 A Tier 1 risk-based capital ratio decreased to 12.38% from 12.51% at December 31, 2019. And a total risk-based capital increase to 14.12% from 14.11% at December 31, 2019.

14:19 Thank you, Hank. We will now proceed to the questions and answer portion of the call. And thank you. Ladies and gentlemen, if you have a question at this time, please press the star key, then 1 on your telephone to ask a question. We ask that you please limit yourself to one question and one follow-up. You may then return to the queue. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place yourself on mute once your question has been stated. And again, ladies and gentlemen, that is star 1 if you'd like to ask a question. And our first question comes from Chris McGrady from KBW. Your line is now open.

15:01 Great. Good afternoon.

15:03 Oh, hi, Chris. Hey, 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 environment turned a little bit more challenging from a revenue perspective?

15:26 Well, you know, 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, you know, 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 the low-income housing that you would be – It's about $6 million a quarter.

16:12 Okay, great. Maybe just a follow-up, my second question would be, you know, there's a lot of discussion this quarter about some of the portfolios that banks have that might be perceived a bit riskier given – given the environment we're in. Could you remind us your exposure to several of these portfolios, you know, hotel, restaurants, energy, just a proportion of loans that would be helpful or any others that you see as kind of a higher risk today?

16:44 Yeah, 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, you know, I think we mentioned in the past a couple, last year when there was interest in retail.

17:29 The LTDs 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 fast service Chinese restaurants.

17:58 it's a well anyway that's and then I think I think those are the categories is there 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 that's great thank you very much thank you Thank you. And our next question comes from Gary Tenner from D.A. Davidson. Your line is now open. Thank you. 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 Cecil.

18:47 Yeah, Gary, I think, you know, we feel that Cecil We were somewhat unique in that we've been in net recoveries for five 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 loss from the 2008-2009 recession and the So for the day one adjustment, we had an increase in the all, which we'll mention in our 10Q. We didn't mention our 10K. It was a little bit over 10%.

19:43 And then when we tried to apply these very drastic measures that were economic measures at the end of March. You know, we felt that CECL for us was probably overstates the loan loss provisions given how our overall low LCV. So, like about 15% of the mid-cap banks, you know, we chose to defer. and then we know that whenever the emergency is declared over or December 31 of this year, we would have to restate all of the quarters in 2020.

20:41 But that's more or less the thinking that we have. We have the choice. We needed more time to really validate our model because because of our lack of decent charge-offs. And so we felt strongly that the incurred loss model, as we have adjusted to capture the COVID-19, would 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 that you said?

21:39 Oh, hold on. It is, I got it here. It was $1.2 in the second quarter and $1.7 in the third quarter. Okay, and what's your current 12 months you're here at?

22:00 It's about 1%. We hope to get it a little bit lower once time goes by. Because, you know, in the last six weeks or so, the market, the wholesale market, Broker CD market has been, the rates have been pretty high, but as the stimulus proceeds have come into the banking system, including at cafes, like today, our loan to deposit ratio is under 100%, and so now we can try to be more efficient in terms of the Thank you.

23:04 And our next question comes from Elena Chang from BMO Capital Markets. Your line is now open. Hi. Thank you. A couple of questions. provisioned this quarter of $25 million. How much of that was for potential losses on the one C&I credit that you highlighted?

23:31 That was well secured. It's in workout. We have it's cross-collateralized other real estate. It's just that it was past 90 days due maturity. Okay. And of the loans that you mentioned were in modification this quarter or have been modified under CRE and CNI, could you give us a sense of what segments, industries they were in? Is it more retail on the CRE side?

24:16 Yeah, Chang, yes. Sure. There's probably a segment of hotels and motels and then retail as well. Those are the two biggest categories of the numbers that we talked about. Okay. I guess when you look across your CRE portfolio, especially in the retail and the hotel and motel sectors, and actually against 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?

24:57 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 three sectors you mentioned, hotel, motel, retail, and even restaurants, collectively, the loans that we have actually been working on from a mod standpoint, they make up for just about 2% of the entire loan portfolio.

25:25 I want to add that for hotel, motel portfolio, Our leverage, LTV, is above 45.6%. And for retail, it's above 56%. Okay, thank you. Thank you. Thank you. And again, ladies and gentlemen, if you have a question, that is going to be star 1. Again, if you have a question, that's going to be star 1. And our next question is going to come from David. Chiribani from Wedbush Securities. Your line is now open. Hi, thanks. A couple 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, you know, what level of provisioning could occur in the second quarter?

26:30 I think, you know, It's going to be more on the economic forecast. So if, let's say, many more states, you know, at June 30th, if the majority of the states that we're in have reopened and unemployment has peaked, you know, under CECL, you would use less of a provision when things are improving. And as far as, you know, because our borrowers that have weak cash flow now, they're under deferment, under our incurred loss model, we don't count those as trouble.

27:27 That's in both the regulatory guidance and in the It's very hard to figure out where things are going to be two months from now. Yep, 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 quarters?

28:00 So We think, you know, it varies. I mean, I think one is the, you know, it's the level of the PPE and when it's, because the rate is low, but if they're forgiven, then you get, you know, this two or three point fee income. But as I said about it, our March March Miriam was 3.12 I'm sorry that was April March Miriam was 3.23 and then preliminary I think 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.

29:05 You know, every month as our CDs reprice, we get a lift from the CDs repricing. So, you know, I think over time, if there are no surge of non-accruals and things like that, I mean, it 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 rates on new loans. So for example, new CRE loans, to the extent we get many nowadays, the rate will be in the low four. So it's very close to our average portfolio.

29:56 And we pushed up the rates on our residential mortgage loans. 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?

30:30 We can't predict for one because of the PPP, but aside from that, so far in April, the CNI loan growth has been very muted. And then also the same for residential mortgage and CRE. Great. Thanks very much. Thank you. Thank you. And our next question comes from Gary Tenner from D.A. Davidson. Your line is now open. Thanks. 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?

31:17 Two? Yeah, probably 2%. Great. Thank you. Yeah, same. Thank you. Thank you. And our next question comes from Michael Young from Sanchez, Robeson, and Humphrey. Your line is now open. Thank you. I 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?

32:09 So at the moment, the residential mortgage, we mentioned on the call, 987 of the 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, Hang, I think you said, you know, obviously you guys, you know, 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. you know 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 wanting to tamp down growth altogether and preserve capital just in case of you know credit losses etc.

33:05 Well it's certainly I think historically it's a safer category and then the risk weighting is only 50% compared to you know 100% for a CRE so It's relatively lighter on capital, but I think for the last month or two, our staff have been very busy doing the rate mods. 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, you know, June and July, you know, like the more normal months for green.

34:00 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, you know, in New York or Dallas, other cities.

34:24 Yeah, it's in our investor slides which is on our website, right, Georgia? But anyway, then it's about 50% of Southern California and about 30 or 35% is New York, then about 10% is in Northern California. And then like Texas, Washington, those 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?

35:18 No, I think In terms of hotel, motel, that's more or less spread out in terms of geographies. Yeah, yeah. 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 provided, are those averages for the portfolio or would that be pretty consistent from, you know, the high end to the low end at this point?

36:03 Yeah. You know, our maximum LTV for CRE in most classes is 65%. So, yeah, and so that's, you know, When it's in the 50%, those are current LTVs, so there's been some pay down and some appreciation, but we don't have a big dispersion. We have that more in single family, where we have some larger loans where the down payments are higher. Okay, that's helpful. Thank you.

36:50 Yeah, great. Thank you, Michael. Thank you. And we have a follow-up question from David Chivarani from Wedbush Securities. Hey, thanks. 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. You mentioned the 50% figure for overall CRE earlier, but I was curious if you happen to have the LTBs for each of the portfolios.

37:27 This is for the deferment, and they're very close to the average. And then I can call you later, but the hotel, motels, it's 46%, retail is 56%. What was the other category? The restaurants. Restaurant 53 Great, thank you. Thank you. Thank you for your participation. I would now like to turn the call back over to Kasei General Bancorp's management for closing remarks.

38:07 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.