Cathay General Bancorp

Ladies and gentlemen, thank you for standing by and welcome to the Cathay General Bancorp third quarter 2020 earnings conference call. My name is Val and I'll be your coordinator for today. At this time, all participants are listening on remote. 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 at 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.cafegeneralbancorp.com. Now I'd like to turn the call over to Megan Chung, Investor Relations of Cafe General Bancorp.

Thank you, Valerie, and good afternoon. Here to discuss the financial results today are Mr. Chang Lui, our President and Chief Executive Officer, and Mr. Hang Chan, 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, 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 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 an anticipated event. This afternoon, Cafe General Bancorp issued an earnings release outlining its third quarter 2020 results. To obtain a copy of our earnings release as well as our third quarter 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 Lui.

Thank you, Megan, and good afternoon, everyone. Welcome to our 2020 Third Quarter Earnings Conference Call. While we acknowledge our third quarter operating results, our commitment and focus today is on continuing to support our clients, team members, and communities during the COVID-19 pandemic. This afternoon, we reported net income of $56.8 million for the third quarter of 2020, a 22% decrease when compared to a net income of $72.8 million for the third quarter of 2019. The Luda earnings per share decreased 22% to $0.71 per share for the third quarter of 2020, compared to $0.91 per share for the same quarter a year ago. In the third quarter of 2020, our gross loans decreased by $42.5 million to $15.6 billion, The decrease in loans for the third quarter of 2020 was primarily driven by a decrease of $164 million, or 6%, in commercial loans due to unusually high paydowns from our commercial borrowers resulting from their strong cash flows. Commercial real estate loans increased by $67.8 million, or 0.9%, as a result of the origination of new loans, and construction loans increased by $50.9 million, or 8.2%, as a result of construction drawdowns. During the third quarter, we again conducted credit reviews of our borrowers in industries particularly impacted by the economic impact of the pandemic. We are encouraged because 68.6% of our commercial real estate and single-family mortgages that were on payment deferral have returned to full scheduled payment status as of September 30, 2020. Also, many of our borrowers are reporting improved cash flows, and many of our hotel borrowers are reporting higher occupancy levels during the third quarter. We are also encouraged by the low loan-to-value for these review loans and of the outside liquidity that is held by the guarantors of these loans, which we expect could be used to support these loans. As of September 30, 2020, our COVID-19 loan modifications were as follows. 48 CNI loans with an aggregate balance of $45.3 million as of September 30, 2020, or approximately 1.8% of our commercial loan portfolio, are still modified to provide relief on repayment terms. Turning to slide seven of our earnings presentation, as of September 30, 2020, 95 CRE loans with an aggregate balance of $428 million, or approximately 5.7% of our CRE loan portfolio, are still on loan modifications to provide relief on repayment terms. The average loan-to-value ratio at origination for these loans was 52%. By October 20, 2020, the balance of CRE loans still under loan modifications have further decreased to only $146 million, or approximately 2% of our CRE loan portfolio. We will provide some specifics about Cathay's hotel and retail loan portfolios of the two segments more impacted by the downturn. As of September 30, 2020, Cathay has 64 hotel loans that total $351.6 million, including 49.2 million of SBA loans. As of September 30th, 2020, the remaining loans with loan mods were at 129 million or 37% of the total hotel portfolio. Among the 64 hotel loans, 59 are limited service and five are full service, three in Southern California and two in Texas. Turning to slide eight, we note that we review 81% of the loans in our retail loan portfolio which comprises 19% of our total commercial real estate loan portfolio and 9% of our total loan portfolio as of September 30, 2020. The majority, 62% of the $1.42 billion in retail loans reviewed is secured by neighborhood, community or strip centers and only 12% is secured by regional malls, power or lifestyle or factory outlet properties. among the 161 million of CRE retail loans still under loan modifications as of September 30th, 2020, approximately 38% are paying interest only. Turning to slide nine, as of September 30th, 2020, 367 payment deferment requests with an aggregate balance of 180.6 million or approximately 4.3% of our residential mortgage loan portfolio remain on payment deferral status. As of October 20th, 2020, The balance of our residential mortgage loans still under loan modifications had decreased to $139 million, or approximately 3.3% of our residential mortgage loan portfolio. For the third quarter of 2020, we reported net charge-offs of $3.1 million compared to net charge-offs of $3.6 million in the second quarter of 2020. Our non-accrual loans increased by $20.7 million, or $77.2 million. or 0.5% of period end loans as compared to the end of the second quarter of 2020. The increase is a result of the placement of our only two movie theater loans acquired through the acquisition of Far East National Bank going to non-accrual status during the third quarter of 2020. We recognized a 12.5 million loan loss provision in the third quarter of 2020 compared to 25 million in the second quarter of 2020. The 12.5 million loan loss provision in the third quarter of 2020 included qualitative adjustments under the incurred loss model due to the impact of the COVID-19 pandemic. We have elected to defer the implementation of the CECL standard for recognizing credit losses as permitted under the recently enacted CARES Act. Based on preliminary calculations, the CECL allowance for credit losses for the third quarter of 2020 will be approximately $15 to $25 million less than the $12.5 million incurred loan loss provisions. The lower ACL provision is primarily a result of the improvement in the forecasted economic factors shown in the Moody's September baseline case forecast compared to Moody's June baseline forecast. 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 constitute approximately 1.6% of our total loans. Turning to slide 12, total average deposits increased by $363 million or 2.3% during the third quarter. Average money market deposits increased by $363 million or 13.2% in part as a result of marketing efforts to large corporate depositors. Average time deposit decreased by $335 million or 4.4% due to the runoff of wholesale deposits. We plan to further address the excess liquidity brought by the growth in core deposits by reducing broker deposits during the fourth quarter of 2020. With that, I'll turn the floor over to our Executive Vice President and Chief Financial Officer, Peng Cheng, to discuss the third quarter 2020 financial results in more detail.