Cathay General Bancorp

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, 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, Cafe General Bancorp issued an earnings release outlining its third quarter 2021 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 Liu.

Thank you, Georgia, and good afternoon, everyone. Welcome to our 2021 Third Quarter Earnings Conference Call. This afternoon, we reported net income of $72.4 million for the third quarter of 2021, a 6.2% decrease as compared to a net income of $77.2 million for the second quarter of 2021. Diluted earnings per share increased 31% to $0.93 per share for the third quarter of 2021, compared to $0.71 per share for the same quarter a year ago. In the third quarter of 2021, our gross loans excluding PPP loans increased by $355.6 million to $15.8 billion, which represents an annualized growth rate of 9.1%. The increasing loans for the third quarter of 2021 was primarily driven by increases of 73.8 million or 11.2% annualized in commercial loans excluding PPP loans, 220.4 million or 11.6% annualized in commercial real estate loans, 23.7 million or 14.3% annualized in real estate construction loans. and 41.1 million were 4% annualized in residential mortgage loans. Our fourth quarter loan growth continues to be strong and will likely exceed that of the third quarter. The overall loan growth for 2021 is expected to be close to 5%. During the third quarter of 2021, 73.9 million of PPP loans were forgiven. As of September 30th, 2021, our deferred PPP loan fees were 3.8 million. We continue to monitor our commercial real estate loans. Turning to slide seven of our earnings presentation, as of September 30th, 2021, the average loan-to-value of our CRE loans was 51%. As of September 30th, 2021, our retail property loan portfolio comprises 22% of our total commercial real estate loan portfolio and 11% of our total loan portfolio. The majority, 62% of the $1.74 billion in retail loans, is secured by neighborhood mixed-use or strip centers, and only 9% is secured by shopping centers. For the third quarter of 2021, we reported net charge-offs of $2.3 million compared to net charge-offs of $7.3 million in the second quarter of 2021. Our third quarter charge-offs included a commercial loan charge-off of $1.3 million from a Hong Kong office, Our non-accrual loans were 0.43% of total loans as of September 30, 2021, increased slightly by $0.9 million to $68.7 million as compared to the end of the second quarter of 2021. We recorded a provision for credit loss of $3.1 million in the third quarter of 2021 as compared to a $9 million reversal of provision for credit losses in the second quarter of 2021. The provision for credit losses of $3.1 million reflected the net charge-offs of $2.3 million and provisions for the loan growth during the third quarter. We expect a provision for credit losses in the fourth quarter as a result of the expected loan growth in the fourth quarter. Turning to slide 12, total average deposits increased by $517.2 million or 12.6% annualized during the third quarter of 2021. We were especially pleased by the $233 million increase or 25.6% annualized in average demand deposits during the third quarter compared to the second quarter. Average time deposit decreased by $152.6 million or 10.1% annualized due mainly to the runoff of broker CDs. We repurchased 942,613 shares of our stock at an average cost of $39.40. totaling $37.1 million in the third quarter of 2021. There is $98.6 million remaining under our September 2021 $125 million stock buyback program. 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 acquiring $1 billion in low-cost deposits and $800 million in residential mortgages. 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, Peng Cheng, to discuss the third quarter 2021 financial results in more detail.

Thank you, Cheng, and good afternoon, everyone. For the third quarter of 2021, net income decreased by $4.8 million, or 6.2%, to $72.4 million compared to the second quarter of 2021. The decrease was primarily attributable to a provision for credit losses of $3 million in the third quarter as compared to a $9 million reversal of provision for credit losses in the second quarter. Our net interest margin was 3.22 in the third quarter of 2021 as compared to 3.24 percent in the second quarter of 2021. In the third quarter of 2021, interest recoveries and pre-payment penalties added four basis points to the net interest margin as compared to three basis points for the second quarter of 2021. There were 3.1 billion loans at the floor rate as of September 30th, 2021. Approximately 1.4 billion of our CDs mature in the fourth quarter of 2021 with an average rate of 0.68%. We are targeting renewing retail CDs in the 40 to 50 basis point range. Given the results of the third quarter of 2021, we continue to expect our net interest margin for 2021 to be between 3.2 to 3.3 percent. Non-interest income during the third quarter of 2021 decreased by $360,000 to $12.2 million when compared to the second quarter of 2021, primarily due to a one-time BOE income of $1.2 million in the second quarter. Non-interest expense increased by 2.5 million or 3.6% to 72.2 million in the third quarter of 2021 when compared to 69.7 million in the second quarter of 2021. The increase was primarily due to an increase of 1.7 million in amortization in low-income housing and solar tax credit funds including a $3.2 million catch-up adjustment for 2020 low-income housing losses resulting from the receipt of 2020 K-1s and an increase in $0.7 million in salary and employee benefits, mainly from higher bonus accruals. The effective tax rate for the third quarter of 2021 was 19.1% as compared to 22.7% for the second quarter of 2021. The decrease in effective tax rate resulted from a $1.7 million catch-up adjustment recorded in the third quarter of 2021 for 2020 solar tax credits. for higher 2020 solar tax credits resulting from the receipt of 2020 K-1s. We expect the full year of 2021 effective tax rate to be between 21.5 percent and 22 percent. Solar tax credit amortization was 1.4 million in the third quarter of 2021, and it's expected to be 1.5 million in the fourth quarter of 2021. As of September 30th, 2021, our Tier 1 leverage capital ratio decreased to 10.67% as compared to 10.85% as of June 30th, 2021. Our Tier 1 risk-based capital ratio decreased to 13.29% from 13.77% as of June 30th, 2021. And our total risk-based capital ratio decreased the 14.93% from 15.47% as of June 30th, 2021. Thank you, Hang.