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spk05: Good afternoon, ladies and gentlemen, and welcome to CAFE General Bank Court Second Quarter 2021 Earnings Conference Call. My name is Paul, and I'll be your coordinator for today. At this time, all participants 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 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.categeneralbankcorp.com. Now, I would like to turn the call over to Georgia Lowe, Investor Relations of Cate General Bank Corp.
spk03: Thank you, Paul, 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 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 its second quarter 2021 results. To obtain a copy of our earnings release, as well as our earnings presentation, please visit our website at www.cathaygeneralbancorp.com. After comments by management today, we will open this call-out for questions. I will now turn the call over to our President and Chief Executive Officer, Mr. Chang Liu.
spk10: Thank you, Georgia, and good afternoon, everyone. Welcome to our 2021 second quarter earnings conference call. This afternoon, we reported net income of 77.2 million for the second quarter of 2021, a 5.2% increase as compared to a net income of 73.4 million for the first quarter of 2021. Deluded earnings per share increased 42.6% to 97 cents per share for the second quarter of 2021, compared to 68 cents per share for the same quarter a year ago. In the second quarter of 2021, our gross loans excluding PPP loans increased by $134.4 million to $15.5 billion, which represents an annualized growth rate of 3.4%. The increase in loans for the second quarter of 2021 was primarily driven by increases of $72.3 million, or 11.1% annualized, in commercial loans excluding PPP loans and 65.6 million or 3.5% annualized in commercial real estate loans. We continue to expect full-year loan growth excluding PPP loans of between 3% and 5%. During the second quarter of 2021, 118.5 million of PPP loans were forgiven. As of June 30th, 2021, our deferred PPP loan fees were 8.8 million. We continue to monitor our commercial real estate loans. Turning to slide seven of our earnings presentation, as of June 30th, 2021, the average loan to value of our CRE loans was 51%. As of June 30th, 2021, CRE loans with an aggregate balance of 92 million, or approximately 1.2% of our CRE loan portfolio, remain on loan modifications to provide relief on repayment terms. All loans under loan modification are continued to make interest payments as of june 30th 2021 our retail property loan portfolio comprises 23 of our total commercial real estate loan portfolio and 11 of our total loan portfolio the majority 61 of the 1.72 billion in retail loans is secured by neighborhood mixed use or strip centers and only 10 is secured by shopping centers for the second quarter of 2021 We reported net charge-offs of 7.3 million compared to net charge-offs of 7.8 million in the first quarter of 2021. Our second quarter charge-offs included an oil and gas loan charge-off of 4.4 million and a commercial loan charge-off of 1.7 million from our Hong Kong office. Our non-accrual loans were 0.42% of total loans as of June 30th, 2021, decreased by 26.7 million to 67.8 million as compared to the end of the first quarter of 2021. The decrease was primarily due to a sale of an $18.8 million oil and gas loan at a discount of $4.4 million and a payoff of a $10.1 million commercial real estate loan in April 2021. Our total oil and gas loan portfolio was $113 million as of June 30, 2021, and no loan was rated substandard. Please see page 11 of our earnings presentation. We recognize the reversal for credit loss of $9 million in the second quarter of 2021 as compared to a $13.6 million reversal provision for credit losses in the first quarter of 2021. The reversal for credit losses of $9 million reflected the continuing improvement in the economic forecast made in June 2021 compared to the forecast made in March 2021 by the economic forecaster used in our CISO process. Turning to slide 12. Total average deposits increased by $348.7 million, or 8.7% during the second quarter of 2021. Average time deposit decreased by $369.5 million, or 23.1%, due mainly to the runoff of broker CDs. Under the company's $75 million April 1, 2021 buyback program, we repurchased 1.5 million shares of our stocks at an average cost of $41.46 million. totaling 63.5 million in the second quarter of 2021. We continue to work on the integration and conversion plan for our purchase of the 10 branches and 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 requiring $1 billion in low-cost deposits and $0.8 billion in residential loans. 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, Hang Cheng, to discuss the second quarter 2021 financial results in more detail.
spk02: Thank you, Chang, and good afternoon, everyone. For the second quarter of 2021, net income increased by $3.8 million, or 5.2% to $77.2 million, compared to the first quarter of 2021. This increase was primarily attributable to reversal of provision for credit losses and higher net interest income. OUR NET INTEREST MARGIN WAS 3.24% IN THE SECOND QUARTER OF 2021 AS COMPARED TO 3.20% IN THE FIRST QUARTER OF 2021. IN THE SECOND QUARTER OF 2021, INTEREST RECOVERIES AND PREPENDENT PENALTIES ADDED THREE BASIS POINTS TO THE NET INTEREST MARGIN AS COMPARED TO TWO BASIS POINTS FOR THE FIRST QUARTER OF 2021. There were 2.9 billion in loans at the floor rate as of June 30th, 2021. Approximately 1.6 billion and 1.4 billion of our CDs matured in the third and fourth quarter of 2021 with average rates of 0.82% and 0.68% respectively. We are targeting renewing retail CDs in the 40 to 50 basis point range. Given the results of the second quarter of 2021, we are maintaining our expectations of our net interest margin for 2021 to be between 3.2% to 3.3%. Net interest income during the second quarter of 2021 increased by 2.6 million to $12.6 million when compared to the first quarter of 2021, primarily due to reduced losses in equity securities and a one-time BOE benefit of $1.2 million. Non-interest expense decreased by $1.7 million, or 2.4%, to $69.7 million in the second quarter of 2021 when compared to $71. IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF 2021 IN THE FIRST QUARTER OF FOR THE FIRST QUARTER OF 2021. WE EXPECT THE FULL YEAR 2021 EFFECTIVE TAX RATE TO BE BETWEEN 22% AND 22.5%. SOLAR TAX CREDIT ANALYZATION WAS 3.8 MILLION IN THE SECOND QUARTER OF 2021 AND IS EXPECTED TO BE 3 MILLION IN THE SECOND HALF OF 2021. At June 30th, 2021, our Tier 1 leverage capital ratio decreased to 10.85% as compared to 11.06% as of March 31, 2021. Our Tier 1 risk-based capital ratio decreased to 13.77% from 13.94% as of March 31, 2021. And our total risk-based capital ratio decreased to 15.47% from 15.84% as of March 31, 2021.
spk10: Thank you, Hank. We will now proceed to the question and answer portion of the call.
spk05: Ladies and gentlemen, if you have a question at this time, please press the star, then one key on your touchstone telephone. we ask that you please limit yourself to one question and one follow-up question. 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. Your first question comes from Matthew Clark with Piper Sandler.
spk06: Yeah, good afternoon. Hi. This first question on the other non-interest income, I think it was up to $10.3 million this quarter from $8.8 million last quarter. Anything unusual there, or is that a good run rate?
spk02: No, we had a $1.2 million BOLI death benefit. So that should be non-occurring.
spk06: Okay, got it. Okay, and then the contribution from PPP revenue in managers' income this quarter?
spk02: Yeah, it's in our press release.
spk06: Okay, never mind. I'll find it. Okay, and then on the buyback... Good to see you guys are pretty proactive this quarter. What's your appetite for re-upping another buyback, assuming you complete the latest one this quarter?
spk02: Well, we'll probably request Fed approval, you know, given the fact that our capital ratios are relatively high and loan growth is is moderate. We think buybacks are a good use of our excess capital.
spk06: Okay. And then just on the reserve, you know, XPPP, I think we're down to, you know, 90 basis points.
spk02: You know, looking back... 84, yeah.
spk06: Yeah, I guess I'm excluding PPP. But, you know, looking back to, you know, pre-COVID, you guys are in the 80s. I mean, is kind of the low 80s where you think it'll probably stabilize, or do you think you can dip below that?
spk02: I think for now, that's probably the number, the range for us, to the extent that our substandard loans, our non-recrual loans, drop significantly, we would see for the model EFS. Okay.
spk06: Thank you.
spk02: Thank you.
spk05: Your next question comes from Gary Tanner with D.A. Davidson. Your line is open.
spk09: Thanks. Good afternoon. I just want to ask about commercial real estate growth. I know you got into the full year long growth range of 3% to 5%, so unchanged. But in terms of the CRE segment, can you talk about specifically where you saw the growth this quarter and if there were any particular geographic areas that were driving growth?
spk10: Sure, Gary. We saw, I think, some activities, increased activities with mixed use and apartments, and a lot of that with kind of transitional and repositioned place. Geographically, we saw most of that in California. We saw some in the East Coast, but most of that came from the West Coast.
spk09: Okay, thank you. And then just to go back on PPP for a second, just to kind of put a fine point on it, In terms of the average PPP balances for the second quarter, in terms of the S&A loan balances, Hank, do you have that number handy?
spk02: Yeah. This is based on the month-end balances. It's $304 million. I'm sorry, $204? No, $304.
spk09: $304, okay. Yeah, so we had a lot of forgiveness in the month of June. Okay, thank you. Yeah, thank you.
spk05: Your next question comes from Brandon King with TruViz Security.
spk08: Hey, good afternoon. Oh, hi, Brandon. Hey. So I thought it was a decline in residential mortgage loans. So could you just discuss what your expectations are for residential mortgage going forward and what type of activity you're seeing in the market from your customers?
spk10: In terms of mortgage loans for us, we are continuing to see activities. A lot of it is still on the sales side, although that has slowed down. We're definitely getting hit on the V5 side of our portfolio, seeing a higher rate of payoffs as we have seen from a prior year. So from a growth perspective, you know, I think the contribution to the revenue and the loan growth overall from our mortgage portfolio is going to be probably smaller than what we've seen in years past. Okay.
spk08: And then I saw loan yields are pretty stable. Are you seeing continued stability going into the latter half of the year, or are you still seeing potentially competitive pressures where loan yields haven't bottomed yet?
spk10: I think there's still competitive pressure. Whether or not it has bottomed or not, I think that remains to be seen, but we do what we can to maintain current existing loan relationships with our clients, even though we'll have to suffer a little bit on the yield side. And for new business, we are as competitive as we can be, obviously keeping an eye on the overall net interest margin for the entire portfolio. Okay.
spk08: And then lastly, with HSBC deposits coming online early next year, Are you, is the plan to become more aggressive in running off time deposits or with pricing with customers as we get closer to that close?
spk02: I think he's talking about R. I mean, HSBC, they have a fairly robust deposit franchise, so the time CDs are only 10% of that billion-dollar book. But on our side, we would We, uh, between now and the end of the year, we probably have five or 600 million of broker deposits that we would run off and that would come out of our excess equity at the Fed.
spk08: Okay. And just even for those time deposits that renew, would you be more aggressive in pricing those potentially?
spk02: Gradually, some of the smaller Chinese banks, I'm seeing on the promotions, one-year CDs at 60 basis points. So if I'm seeing it, our customers, our depositors are more likely to see it. So once again, that's from another ethnic Chinese bank. Okay. Thank you. Thanks.
spk05: Your next question comes from Chris McGrady with KBW.
spk04: Hi, this is Chris O'Connell filling in for Chris McGrady. I know it's a difficult line to project and appreciate the color on the solar tax credit, but is it fair to say that the total amortization tax credit line you know, holds going through year end, which is coming down a bit in this older tax credit that you mentioned in the opening comments?
spk02: Yeah, it's we send a copy of our investor slides to Chris, and you can also get it on the internet, I think. But on page 15 of our investor slides, we have it broken out by quarter of FOR THE LAST FIVE QUARTERS. SO THE LONG-TERM HOUSING HAS BEEN IN THE LAST THREE QUARTERS, IT'S AVERAGED ABOUT 6.5 MILLION. AND THEN THE SOLAR, IT'S RUNNING DOWN. IT WAS 5 MILLION IN Q1, 3.8 MILLION IN Q2, AND THEN WE THINK IN A ONE AND A HALF MILLION IN Q3 AND THE SAME IN Q4. NOW, WE'RE PLANNING TO GET BACK INTO THAT FIELD NEXT YEAR BECAUSE THERE'S MORE CLARITY AS TO THE BIDEN ADMINISTRATION STANDS ON THE CORPORATE MINIMUM TAX. So that expense will start to ramp up again in 2022. Got it.
spk04: Appreciate the call there. Thank you. And then given the earlier comments around the reserve and credit, you know, so it sounds like, you know, it's fair to say that, you know, pending any major changes that the reserve levels sound like they'll hold from here. You know, do you see, you know, any scenario where the reserve begins to drop down kind of, you know, below where it was in 4-2-19 around that, you know, 82 basis point or so level?
spk02: We might, you know, like if there's a mixed change where our residential mortgage loans become a higher percentage, but more importantly, if our substandard loans drop to very low levels and our non-accruals drop, then we would view that as justification to use the model number. Because the model is going to continue to pull us down a little bit every quarter. Understood. Thank you. Thank you.
spk05: Your next question comes from David Chavarini with Wedbush Security.
spk07: Hi, thanks. A couple questions for you. Starting with CNI loan growth, can you talk about the demand environment and, if possible, utilization rates of your borrowers?
spk10: Yeah, I think on the CNI side, we're seeing some increased activities from different industries, We had, as we mentioned in prior calls, brought on a new team that has added to some new relationships for the bank. As far as utilization rates, at the moment, I think through the first couple of quarters of the year, they're modest, but we talked to some customers where we believe that the utilization rates will move up in the third and fourth quarter.
spk07: Great. And then on the deposit side, can you talk about the deposit environment? You guys put up pretty decent core deposit growth this quarter. Can you talk about the outlook on deposits?
spk10: The focus there is to reduce our reliance on CDs and try to focus more on business, commercial accounts, and transactional deposits. And that's really, you know, that's one that will increase our core deposits, and two, that will continue to hopefully drive down the cost of deposits.
spk07: Great. And then looking at you guys have been able to pay down your borrowings to a pretty low level and at the same time add to the securities portfolio in the most recent quarter, you know, so low should we expect securities purchases to pick up?
spk02: I think they'll, you know, it's hard to be a fixed income investor. I mean, on the last call, it looked like the tenure was going to go to, you know, 2%, 2% in three or four months. Now it's at 128. So we're trying to, every quarter, buy a certain amount of, But we're going to be cautious because, you know, I think this inflation debate, there's merit for it becoming embedded in people's expectations and in labor costs. So at some point, the Fed may have, you know, if they ever fall behind the the ball in terms of controlling inflation. They're going to have to increase rates rapidly to keep the inflation in check. We're looking at every quarter and trying to buy about the same amount that we have been in the first two quarters.
spk07: I think last quarter you were talking about how you were getting, I think it was $50 million or so of maturities per quarter, and you were purchasing maybe $75 million per quarter. Is that still the case, or is it really dependent on the rate environment?
spk02: No, we bought $150 million. That's what we said, and the maturities of MBS and the maturities were $75 million. And for the third quarter, that's still our plan.
spk07: Got it. Great color. Thanks very much.
spk02: Thank you.
spk05: Once again, ladies and gentlemen, if you have a question or an additional question, please press star 1 on your touchstone telephone. We ask that you limit yourself to one question, one follow-up. Your next question comes from Gary Tenner with DA Davidson. Your line is open.
spk09: Thanks. I just wanted to clarify on your deposit comments. The broker deposits, I think you mentioned $500 million to $600 million, that runoff, or I'm sure the back half of this year, is that included in the $3 billion or so time deposits you mentioned previously?
spk02: Mostly, we have some broker money markets. So in that number is $150 million of broker money markets.
spk09: Okay. And of those broker deposits, what's the rate on those as compared to the rate you gave us on the CD?
spk02: Well, of the broker money market, we were fortunate. We got $100 million at one basis point in last December. And then the other $50 million, that's 18 basis points. And then the broker CD rates, they tend to be in the 150 range because they were made a year ago.
spk08: Thank you. Thank you.
spk05: Your next question comes from Matthew Clark with Piper Sandler.
spk06: Hey, just want to follow up on the core expense run rate. You guys have done a good job of holding that run rate pretty flat since last year, just under $59 million. What are your thoughts on that run rate going forward and any kind of reinvestment needs or savings?
spk02: Yeah. We're trying to maintain that. We might have to increase our bonus accruals, particularly when we get to the fourth quarter, when we see how we compare the budget. But, you know, aside from that, I mean, we still have process improvement. We did close two branches during June. I think for 2022, if inflation is 3%, we'd probably be at 2.5% or something like that.
spk06: Got it.
spk02: Okay. Thank you. Yeah. Thank you.
spk05: Thank you for your participation. I will now turn the call back over to Cathay General Bancorp's management for closing remarks.
spk10: I want to thank everyone for joining us on our call, and we look forward to speaking with you at our next quarterly earnings release call.
spk05: Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.
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