This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: Good afternoon, ladies and gentlemen. Welcome to the Cathay General Bank Corp's first quarter 2021 earnings conference call. My name is Valerie, and I'll be your coordinator for today. At this time, all participants ought to listen on the note. Following the prepared remarks, there will be a question and answer session. If you'd 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.cathaygeneralbankcorp.com. Now let's turn the call over to Georgia Lowe, Investor Relations of Cathay General Bank Corp.
spk01: Thank you, Valerie, and good afternoon. Here to discuss the financial results today are Mr. Chang Liu, our President and Chief Executive 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, 2020, at Item 1A in particular, and in all of the 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, Cafe General Bancorp issued an earnings release outlining its first quarter 2021 results. To obtain a copy of our earnings release, as well as our first quarter earnings presentation, please visit our website at www.cathegeneralbankcorp.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.
spk05: Thank you, Georgia, and good afternoon, everyone. Welcome to our 2021 first quarter earnings conference call. While we acknowledge our first 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 $73.4 million for the first quarter of 2021, a 3.5% increase as compared to a net income of $70.9 million for the fourth quarter of 2020. Earnings per share increased 55.9% to $0.92 per share for the first quarter of 2021, compared to 59 cents per share for the same quarter a year ago. In the first quarter of 2021, our gross loans increased by $7.5 million to $15.7 billion. The increase in loans for the first quarter of 2021 was primarily driven by an increase of $93.5 million, or 39 percent, in Paycheck Protection Program loans. During the first quarter of 2021, we originated $142.4 million of PPP loans and 48.3 million of PPP loans were forgiven. As of March 31st, 2021, 36.2 million of PPP loans have been submitted to the government for forgiveness review. As of March 31st, 2021, our deferred PPP loan fees were 9.9 million. We continue to monitor our commercial real estate loans. Turning to slide seven of our earnings presentation, as of March 31st, 2021, the weighted average loan to value of our CRE loans was 51%. As of March 31st, 2021, CRE loans with an aggregate balance of 56 million or approximately 0.7% of our CRE loan portfolio remain on loan modifications to provide relief on repayment terms. As of March 31st, 2021, our retail loan portfolio comprises 23% of our total commercial real estate loan portfolio and 11% of our total loan portfolio. The majority, 61% of the $1.73 billion in retail loans, is secured by neighborhood, mixed-use, or strip centers, and only 10% is secured by shopping centers. There were no retail CRE loans still under loan modifications as of March 31, 2021, and our total loan modifications as of March 31, 2021 for all loan categories was less than 1% of total loans. For the first quarter of 2021, we reported net charge-offs of $7.8 million compared to net charge-offs of $7.6 million in the fourth quarter of 2020. Our first quarter charge-offs included two commercial loan charge-offs totaling $7.8 million from our Hong Kong office. Our non-accrual loans increased by $26.8 million to $94.4 million or 39.5% of period end loans as compared to the end of the fourth quarter of 2020. The increase was primarily due to an $18.8 million oil and gas loan that was placed on non-accrual when an additional secondary financing fell through and a $10.1 million commercial real estate loan in Northern California that was placed on non-accrual during the first quarter of 2021, the latter of which is in the process of being refinanced by another lender. Our total oil and gas loan portfolio as of March 31, 2021, was $120 million, and this $18.8 million was the only loan rated substandard. Please see page 11 of our earnings presentation. As permitted under the Coronavirus Aid Relief and Economic Securities Act, the CARES Act, and as extended by the Consolidated Appropriations Act 2021, the company has chosen to adopt the current expected credit losses methodology. for estimated credit losses as of January 1st, 2021. The adoption of CECL on January 1st, 2021 increased the allowance for loan losses by $13.9 million and the reserve for unfunded loan commitments by $0.5 million. We recognized a reversal for credit loss of $13.6 million in the first quarter of 2021 as compared to a $5 million reversal of provision for loan losses in the fourth quarter of 2020. The reversal for credit losses of $13.6 million reflected the improvement in the economic forecast made in March 2021 compared to the forecast made in December 2020 by the economic forecaster using our CISO process. Turning to slide 12, total average deposits increased by $259 million or 1.6 percent during the first quarter of 2021. Average time deposit decreased by $283 million or 4.2%, due mainly to the runoff of broker CDs. With that, I'll turn the floor over to our Executive Vice President and our Chief Financial Officer, Feng Cheng, to discuss the first quarter 2021 financial results in more detail.
spk04: Thank you, Cheng, and good afternoon, everyone. For the first quarter of 2021, net income increased by $2.5 million, or 3.5%, to 73.4 million compared to the fourth quarter of 2020. The increase was primarily attributable to the reversal of provision for credit losses and higher net interest income. Our net interest margin was 3.2 percent in the first quarter of 2021 as compared to 3.12 percent for the fourth quarter of 2020. There were 2.7 billion of loans at the floor rate as of March 31, 2021. In the first quarter of 2021, interest recoveries and prepayment penalties added two basis points to the net interest margin as compared to four basis points for the fourth quarter of 2020. Approximately 1.2 billion and 1.6 billion of our CDs will mature during the second and third quarters of 2021 with average rates of 0.68% and 0.84% respectively. We are targeting renewing retail CDs in the 40 to 50 basis points range. Given the results of the first quarter of 2021, we are increasing our expectations of our net interest margin for 2021 by five basis points to be between 3.20 to 3.30. Non-interest income during the first quarter of 2021 increased by 4.2 million to 10 million when compared to the first quarter of 2020 primarily due to losses and equity securities. Non-interest expense increased by 6.2 million or 9.6 percent to 71.4 million in the first quarter of 2021, when compared to 65.2 million in the same quarter a year ago. There was a gain on sale of other real estate owned at 4.5 million during the first quarter of 2020. Excluding the other real estate owned gain, non-interest expense only increased by 2.1 million or 3% comparing first quarter of 2021 to first quarter of 2020. The increase was primarily due to 1.8 million in higher salary and benefit expense and 1 million in higher marketing expense from a donation to the Stop Asian Hate campaign, offset by a decrease of $2.3 million in amortization in low-income housing and solar tax credit funds. The effective tax rate for the first quarter of 2021 was 21.9%. compared to 12.7% for the fourth quarter of 2020. We expect the full year 2021 effective tax rate to be between 21.5% and 22.5%. Solar tax credit amortization was $5 million in the first quarter of 2021, and it's expected to be $3 million in the second quarter of 2021, and none thereafter for the second half of 2021. As of March 31, 2021, our Tier 1 leverage capital ratio increased to 11.06% as compared to 10.94% as of December 31, 2020. Our Tier 1 list-based capital ratio increased to 13.94% from 13.52% as of December 31, 2020, and our total risk-based capital ratio increased to 15.84% from 15.45% as of December 31, 2020. In April 2021, we announced a $75 million insured repurchase program.
spk05: Thank you, Hank. We will now proceed to the question and answer portion of the call.
spk02: Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. We ask that you please limit yourself to a question and a follow-up question. You may then return to the queue. If your question has been answered and 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. One moment, please. Our first question comes from Matthew Clark of Piper Family. Your line is open.
spk03: Hey, good afternoon. Maybe just first on the amortization going forward, any guide on the low-income housing amortization as well? It should be constant.
spk04: I think we're guiding to about 20... It's about 6.6 million per quarter, so it should be the same for the rest of the year.
spk03: Okay, great. And then the contribution from PPP in net interest income this quarter, and I guess how much do you have left, including round two? The total is 9.9 million at the end of March. Okay, and do you have the contribution in one queue?
spk04: Well, I think I mentioned it in my, it was. If you did, that's okay. I can go back. Let's see. Well, I'll call you with it. All right.
spk03: No worries. Okay. And then just one more for me, if I may. On the level of the reserve, you know, how low are you willing to go in kind of a post-CECL world? I mean, I assume you'll continue to grow into these reserves, but, you know, what's kind of your minimum threshold that you're willing to run the bank at?
spk04: You know, it's very formula-driven, Matthew, and the – So we don't know what the answer is. I think under CECL the quantitative portion is most of the reserves. So the CECL reserves when times are very good could be lower than the incurred loss model. And then we got the April Moody's forecast and that For example, their forecast of unemployment, it's already better for the rest of the year than what they were forecasting in March. So there's a tendency for a lower reserve. Got it.
spk03: Okay, thank you. Yes.
spk02: Thank you. Our next question comes from Chris McGrady of KBW. Your line is open.
spk08: Great. Good afternoon. I'm interested in an update on how you guys are thinking about core loan growth from here, excluding the impact of PPP, and whether, based on your revised higher margin outlook, the expectation for an interest income over the balance of the year.
spk05: Thanks. As far as sort of loan growth and excluding PPP, we had a number of borrowers that paid down or paid off their borrowings during the first quarter. So as the economy recovers and the consumer demand increases, we believe that the loan demands will increase accordingly. So as such, we still expect that the loan growth for the full year 2021 is going to be between 3% to 5%. Part of that also, we believe that mortgage payoffs will start to slow as the interest rates continue to rise.
spk04: Yeah, Chris, can you repeat the second part of that question? I think that was for me, right?
spk08: Yeah, I guess I'm just trying to figure out what your expectation is for cash and securities and how that contributes to net interest income growth, whether you expect deposit retention to be high or you're going to continue to run off some non-core deposits. Thanks.
spk04: Yeah, we have a limited amount of broker CDs that will mature for the rest of the year. there's a couple hundred million in the fourth quarter. It's about $150 million per quarter. But one of the things is we held off on buying much in the way of mortgage-backed securities because certainly in March, it looked like the... the longer-term interest rates were really going to go up very much. So in the second quarter, we expect to, we have started buying MBS, and so that will use up some of our excess equity and will continue to buy, you know, $150 million or so of MBS each quarter so that our securities portfolio will begin to climb from March 30th. Great. Thanks a lot, Ed. Sure.
spk02: Thank you. Our next question comes from Jerry Turner of VA Davidson. You want us to open?
spk07: Thanks for the afternoon. I just wanted to ask, I think last quarter you said you were holding off on any additional investments in the solar tax credits due to uncertainty over over kind of the tax outlook with the Biden administration. If you were to not invest at all and have zero amortization in 2022 for the full year, where do you think that that would result in your effective tax rate a year out, assuming at this point no changes in the corporate tax rate?
spk04: I'd look at more on the EPS impact. It's about five or six cents a share. But our plan is to... go back into that market in the fourth quarter for Q1 funding.
spk07: Okay. Thank you. And then just one more question on PPP. Can you give us the average PPP loans outstanding for the quarter?
spk04: We'll have to get back to you on that, Gary. It was in February and March, and the forgiveness was pretty... pretty linear, but I'll call you on that.
spk07: Okay. Great. Thank you very much.
spk02: Sure. Thank you. Our next question comes from David Chiaveroni of Web Push Securities. You want to go first?
spk06: For you. Starting with a follow-up on the securities purchases, you mentioned $150 million per quarter. I was curious how much cash is coming back to you Per quarter, I'm wondering how much net growth in the securities portfolio we should expect.
spk04: It's about, I would say, just on MVS, it's about $75 million a quarter.
spk06: Okay. And what are your thoughts about kind of accelerating the purchases? It does seem like the balance sheet has plenty of excess liquidity to perhaps be a little bit more aggressive in the early next few months and then kind of slow it later? Or are you kind of viewing it from an interest rate standpoint that you don't want to go too fast in case interest rates move up and you want to kind of dollar cost average in? Can you give any comments related to that?
spk04: Yeah, I think we're in that latter category. You know, we've been very conservative on the amortization of the PPP fees. So on this round two, we're amortizing the loans under $150,000. We're amortizing the fees over 18 months. for the ones that are over 150,000, we're advertising over five years, the contractually. So I think there's gonna be more forgiveness in the second half of the year from round two PPP.
spk06: Got it, thanks for that. And then your capital ratios are pretty strong here. And you mentioned about the $75 million buyback authorization. Can you talk about your appetite and sort of timeframe of putting that to work?
spk04: Yeah, first, we're going to buy back stock that's issued for, for our shoes, and forgiven and reinvestment. And then if, if there's a lot of volatility for bank stocks, so during periods of weakness, we would look to buy back some, depending on the price.
spk06: Got it. Makes sense. Thanks very much. Thank you.
spk02: Thank you. Again, to ask a question, please press star then 1 on your touch-tone telephone. Our next question comes from Matthew Clark of Piper Stanley. Your line is open.
spk03: Just had a question on that other fee income increase. I think it was up a million dollars on a core basis, not the wealth management piece, but the other fee income. Just wondering if that's sustainable or not.
spk04: It's a one-time gain, Matthew. We have an investment in the CRA fund, and so... That gain, it wasn't low income housing. Anyways, we were able to realize the gain in the first quarter and so we booked that in other income.
spk03: Okay. Okay. And then any updated thoughts on just your core expense outlook excluding amortization and any other noise? I mean, relevant to last year, for this year?
spk04: Well, we continue to actively manage that. We have two branches that were closing in June, so there'll be some expenses there. And then, you know, we continue not to replace officers on the staff side where we can. But because our income for the first quarter is higher, we had budgeted a certain amount for the loan loss provision this year. And given the negative Q1 provision and the likelihood of very low provisions for the rest of the year, we're going to have you know, a couple million of higher bonus accruals throughout the year. So that's going to be, that's what we see.
spk03: Okay, great. Thank you. Thank you.
spk02: Thank you. I'm sure no further questions at this time. I'll have to turn the call back over to management for any closing remarks.
spk05: I want to thank everyone for joining us on our call as we slowly return to normal from the pandemic. We look forward to speaking with you at our next quarterly earnings release call.
spk02: Thank you for your participation. Thank you everyone for joining the call today. Ladies and gentlemen, thank you for participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.
Disclaimer