Q4 2020 Cathay General Bancorp Earnings Call
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Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's fourth quarter and full year 'twenty 'twenty earnings Conference call. My name is Tina and I'll be your coordinator for today. That's 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 the number one at any time during the conference.
And if a census need at any time during the call. Please press star followed by zero and a coordinator will be happy to USA today.
Today's call is being recorded and will be available for replay at www Dot Cathay General Bancorp Dot Com now I would like to turn the call over to Georgia law and Investor Relations of Cathay General Bancorp.
Thank you Tina and good afternoon huge and discuss the financial results today are Mr. Chengdu, Our president and Chief Executive Officer, and Mr. Heng, Chen our executive Vice President and Chief Financial Officer, before we begin and 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 31st 2019 and item one day in particular.
And and other reports and filings with the Securities and Exchange Commission from time to time and.
As such we caution you not to place undue reliance on such forward looking statements any forward looking statements speak only as of the date on which it is made and except as required by law. 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, Cathay General Bancorp issued an earnings release outlining its fourth quarter and full year 'twenty and 'twenty results to obtain a copy of our earnings release as well as our earnings presentation. Please visit our website at Www Dot Cathay General Bancorp Dotcom.
After comments by management today, we will open this call up for questions I will now turn the call over to our President and Chief Executive Officer, Mr. Chengdu.
Thank you, Georgia and good afternoon, everyone.
Welcome to our 2024th quarter earnings Conference call.
While we acknowledge our fourth 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 $70 9 million for the fourth quarter of 2020, a five 2% increase when compared to a net income of $67 4 million for the fourth quarter of 2019.
Diluted earnings per share increased 6% to <unk> 89 per share for the fourth quarter of 2020 compared to 84 per share for the same quarter a year ago.
And the fourth quarter of 2020, our gross loans increased by $78 6 million to $15 6 billion.
The increase in loans for the fourth quarter of 2020 was primarily driven by an increase of $95 7 million or one 3% and commercial real estate loans.
We anticipate loan growth and 2021, excluding paycheck protection program bonds to be between 3% two five per cent.
As of December 31st 2020 on Covid, 19, and C&I loan modifications were $29 million or approximately one 1% of our commercial loan portfolio.
Turning to slide eight of our earnings presentation as of December 31, 2020, CRE loans with an aggregate balance of $81 million or approximately one 1% of our CRE loan portfolio are still on loan modifications provide relief on repayment terms.
The average loan to value ratio at origination for these loans was 51%.
This represents a decrease of 81% compared to the $428 million of CRE loans on deferral as of September 30th 2020.
As of December 31, 2020, Cathay hotel loans that totaled $299 million.
Of that $299 million.
The hotel loans with low months or $24 million or 8% of the total hotel portfolio compared to $39 million of hotel loans with low Moss as of September 32020.
As of December 31st 2020, our retail loan portfolio comprises 23% of our total commercial real estate loan portfolio and 11% of our total loan portfolio.
61% of the $1 72 billion and retail loans are secured by neighborhood mixed use or strip centers and only 10% are secured by shopping centers.
The amount of retail CRE loans still under loan modifications dropped two 5 million as of December 31, 2020, or 3% of the $161 million as of September 32020.
Turning to slide 10.
As of December 31, 2020, $41 million of our residential mortgage loans are still under loan modifications or 23% of the one $180 6 million as of September 32020.
In summary, as of as of December 31st 2020, total loan modifications were $151 million or approximately 1% of the total loan portfolio.
For the fourth quarter of 2020, we reported net charge offs of $7 6 million compared to the net charge offs of $3 1 million and the third quarter of 2020.
Our non accrual loans decreased by $9 5 million to $67 7 million or zero point for 4% of period end loans as compared to the end of the third quarter of 2020.
The decrease was primarily due to a $8 4 million charge off for a commercial loans Hong Kong branch.
We recognize that reversal for credit loss of $5 million and the fourth quarter of 2020 compared to a $12 5 million provision for loan losses, and the third quarter of 2020.
The reversal for credit losses of 5 million and reflected the improvement and the economy during the fourth quarter of 2020.
And as permitted under the cares act and as extended by the consolidated Appropriations Act 2021. The company has chosen to continue to defer the adoption of the seasonal methodology for estimated credit losses until the earlier of the beginning of the company's fiscal year that begins after the date, the COVID-19 and <unk>.
And burnt tissue comes through on and or January for 2022.
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 for our loan portfolio.
Borrowers that we believe could be adversely impacted by the current tariffs constitute approximately one 5% of our total loans.
Turning to slide 13.
Total average deposits decreased by $324 million or 2% during the fourth quarter.
Average time deposits decreased by $594 million or eight 2% due to the runoff of broker Cds.
With that I'll turn the call over to our executive Vice President and Chief Financial Officer Heng Chen to discuss the third quarter of 2020 financial results in more detail.
Thank you Chang and good afternoon, everyone for.
For the fourth quarter of 2020 net income increased by $3 5 million on <unk>.
And five 2% to $70 9 million.
Compared to the fourth quarter of 2019.
Which was.
Primarily attributable to higher security gains compared to the prior year.
On net interest margin was three 2%.
And the fourth quarter of 2020 as compared to three point.
<unk>, 2% for the third quarter of 2020.
There were $2 6 billion on loans.
For rates.
December 31 and 2020.
And the fourth quarter, and 2020 interest recoveries and prepayment penalties added four basis points.
Net interest margin compared to eight basis points.
For the third quarter of 2020.
Approximately $2 6 billion and $1 1 billion of our Cds mature.
During the first and second quarters for 2021 with.
And with average rates of one for five and six 8% respectively.
We're targeting renewing retail Cds and the 50 to 60.
Based on his appointment range.
We expect on net interest margin for 2021 to be between 315 to $3 two 5%.
Non interest income during the fourth quarter of 2020 increased by.
$2 6 million to 11 5 million when compared to the fourth quarter of 2019, due mainly to higher security gains.
Non interest expense increased by $3 9 million or five 4% to 75 million and the fourth quarter of 2020 on compared to $71 2 million and the same quarter a year ago.
Excluding the amortization of low income housing and alternative energy partnerships.
Non interest expense only increased by $1 4 million or two 5% between the fourth quarter 2020 on.
And when compared to the fourth quarter 2019.
For the fourth quarter of 2020, and the increase in non interest expense.
That's primarily due to a $2 4 million increase and amortization of investments and loan come housing and alternative energy partnerships higher operating losses.
A prepayment penalty on absolute Shelby borrowings.
And heart and a higher reserve for unfunded loan commitments.
The effective tax rate for the fourth quarter of 2020 was 12, 7%.
Compared to 19, 5% for the fourth quarter of 2019.
We do not expect to invest and additional solar tax credit.
Investments in 2021.
As a result, our effective tax rate for 2021 is expected to be between 18% to 19%.
Solar tax credit amortization was $8 $5 million and the fourth quarter of 2020.
And is expected to be $9 million and 2021.
Which is $6 million and the first quarter of 2021 and $3 million and the second quarter of 2021.
As of December 31, 2020 on tier one leverage capital ratio increased to $10 nine and 4% as compared to 10, 83% as of December 31.
19.
Tier one risk based capital ratios increased 13, 5% to 2%.
And from $12 five 1% as at December 31, 2019 and on.
Total risk based capital ratios.
The $15 four 5% from $14, one 1% as of December 31, 2019.
We resumed our stock buyback program during the fourth quarter of 2020 and repurchase.
399, 970 shares and average cost of $26 and 79.
Thank you Heng, we will now proceed to the question and answer portion of the call.
Ladies and gentlemen, if you have a question and at this time. Please press Star then the number one key on your Touchtone telephone and we ask that you. Please limit yourself to one question and one follow up question, you made and which are and should achieve with your question and there has been answered or you wish to remove yourself.
From the queue. Please press the pound key.
And to prevent any background noise. We ask that you. Please please yourself on mute once your question has been stated.
Your first question comes from the line of Chris <unk> from.
From K B W.
And our lives.
Great. Thanks for the question.
And I'm interested and starting with the net interest margin and net interest income outlook, how appreciate and the guide you gave for the.
325, how do we think about.
Net interest income dollars Theres, a lot of obviously moving parts.
So maybe PPP contribution how much of that is in and the numbers and.
Maybe you could speak to just the composition that the changes and the balance sheet that you expect thanks.
Yes sure Chris.
On the PPP on on.
Round, one and we still have about roughly.
Lastly for millions of.
Deferred loan fees.
We expect to.
Go into interest income.
Once the loans are forgiven.
It's slow going for us so we assume it would be spread out between Q1 and Q2.
And then in terms of.
Cheng Guevara.
Loan guidance.
Three 3% to 5% loan growth so so based on our budget.
We see.
Mid single digits.
Increase in NII for 2021.
That's great thanks and.
And maybe if I could squeeze and a follow up I'm interested.
Two parts.
The appetite for more buybacks and also you gave the solar amortization I'm wondering if you had the the low income as well, but you expect for 'twenty one yes.
And so on buybacks and I mentioned in the third quarter call.
We're hoping to.
Authorized.
Get approval for $75 million.
Dollar buyback and so we're working on that.
And then.
On the loans to housing.
Roughly $6 million per quarter.
So $24 million for 2021.
Sure. Thank you.
Yes. Thank you.
Next one on the Q is carried center from D. A Davidson here and our lives.
Thanks, Good afternoon.
I just wanted to ask in terms of the brokered CD run off is there an additional amount and run off in that book or rather how much is left if any.
It's about seven.
And on brokered Cds, it's about $700 million.
We may run off a few hundred million.
It depends on the extent of <unk>.
For deposit growth.
In 2021.
But.
What the constraining mix for us is on.
And so our liquidity ratio so we're trying to maintain.
On a reasonable amount of on balance sheet liquidity.
Okay and.
And I missed the CD maturities that you'd noted for the first half for the year or the first and second quarter.
Yes.
Okay.
Yes, I'd be happy to repeat that it is.
And.
See two 6 billion in Q1 and.
On a rate of 145.
And $1 1 billion and Q2 and a rate of six eight.
And.
That renewal rate what is your.
So I guess target for retention of those balances.
And what we're hoping.
Based on 2020 activity or hoping 80% to 90%.
Alright, thank you.
Next one on the line is Matthew Clark from Piper Sandler fjord our lives.
Hey, good afternoon.
<unk>.
The.
Within the margin and I think you mentioned.
And to prepay fees and recoveries of four basis points did that also include PPP related net.
Revenue.
No no no that's not how.
How much how much and a way of PPP related revenue did you have and the quarter.
It's pretty small.
We believe it's around 600000.
We're amortizing the fee.
Over 24 months and then as those forgiveness.
Bad.
For the loans are forgiven and bad debt.
Unamortized fee is.
And to interest income, but its about 600000.
And our reforms.
Great and then that 3% to 5%.
Loan growth outlook ex PPP can you describe the pipeline and how it looks today maybe.
Relative to year ago, or last quarter and the source of growth that you anticipate.
Putting on.
Sure Matthew I think our guidance on the three 3% to 5% loan growth is mostly looking for a stronger C&I.
Increases and the Outstandings, we have added a new C&I team and several other.
Strong C&I lenders and relationship people.
So we're really kind of focus on on the C&I side and the business, we expect a modest CRE growth as well and our mortgage business will probably be.
Very small growth to flat given some of the prepayment high prepayment that we've seen in 2020.
Okay, and then just on the uptick in criticized loans was that just a function of some deferrals debt.
And have kind of.
And that you've just.
Migrated and are waiting for them to start making payments or is there something else to it.
Color there.
I think there was one hotel loan.
Oh.
Talking about substandard or special mention.
Yes, well, so I'm just I'm looking at the combined number I'm sorry.
I think it's mostly.
I guess, one more focused on the sub standard loans, but.
My recollection.
Election is that.
And if.
And there was one hotel loan that was downgraded from the third.
The fourth quarter and then there was another one.
That was downgraded.
And the.
Aviation parts business and sell.
Okay.
Okay, but that day.
And they remained on accruals.
Okay.
And then the last one for me was just around the decision to no longer per.
Pursue these solar.
And tax credit investments I guess your decision there.
Well, it's mainly.
Because of the change in administration and the uncertainty as to.
Corporate taxes.
So as to the corporate tax rate.
As well as.
Ah.
President and Baidu and he was.
Running for office is tax program included a fairly steep.
And I believe its 15% minimum tax.
And for a minimum tax so.
And so we're already with a low income housing tax credits.
We're expecting.
A lot of a fair amount of tax credits and.
2021 so.
We wanted to wait and see and then.
Yeah.
We may go back into it in 2022.
Until the picture of small clear water.
For having a pause here.
Okay makes sense. Thank you.
Yes.
Next question comes from Michael Young from true as Securities and fewer non lives.
Hey, Thanks for taking the question wanted to start with a follow up just on the solar tax credit.
And that was just asked.
And just on a standalone basis, the IRR return characteristics still strong enough where it would be of interest. It is just more of the kind of on.
Uncertainty.
Going forward.
Ah.
Well Michael.
We estimate it adds about expense to Etfs per year are low.
And more in 2020 because.
Our debt.
Volume was much faster than we expected so.
And the but its really until we were clear on the island and administration.
Corporate tax status.
We don't want be trapped software, we're paying all alternative minimum tax for many years.
Right, no I understand that and and maybe switching to just kind of the various guidance out outlook I think the loan growth guide was ex PPP, but I just wanted to be sure that that's excluding both rounds of PPP and then.
NII and NIM guide does that include kind of the fee recognition and acceleration that you were talking about or is that exclusive of bad just trying to frame everything relative to PPP.
Net loss for the.
The loan growth guidance of 3% to 5% it does exclude PDP round two.
Ill defer to hang to speak to the NII, Paul also round, one for giving us Ronald.
Core.
Core loans and then.
In our budget, we put put and nothing for PPP around too but.
But that fee.
Yes.
Yes, the remaining fee from round one is.
As in the NIM guidance, Jim you want to talk about what we're seeing and round two and round two so far just through as of yesterday and really we've seeing over 1400 applications come through our portal with a total application requests on about $174 million and we've already started some.
Hitting our centric and significant portion of that into SBA for approval. So we're seeing some success through the portal and through the application process.
Okay and.
Maybe just last one for me on expenses kind of ex the <unk>.
Credit pieces.
It sounds like there was some interest and hiring wasn't sure. If you have some levers to pull on maybe the branch side with a lot of branches closed kind of getting a view of what that may look like.
So just any color on puts and takes for expenses and into 'twenty one.
I think the objective here, Michael for Us and 2021, and certainly you're still going to be a challenging year and COVID-19 is not going to be any time.
And behind US So we're looking through silicon and continue to control on expenses, and where we can and and obviously the biggest pieces are the.
Sort of the the employee costs as well as the debt.
Physical occupancy costs so.
We hope to continue to control that cost down as much as possible.
Yes, I think budgeting purposes.
And we're hoping that on.
Expenses.
Excluding solar and loan come housing and the core expenses were.
We're hoping to keep that around.
And 1% or so.
Okay. Thanks.
Next one on the queue is David share reading from Wedbush Securities fewer and all lines.
Hi, Thanks.
I wanted to start with a follow up on on the tax rate you mentioned, 18% to 19%, but we'll have solar tax credits and the first half of the year, how should we think about the progression of the tax rate through the year should we see it lower in the first couple of quarters, and then kind of ramp up and the second half of the year.
Well.
Im happy to say.
And it should be constant.
On the effective tax rate you make the forecast at the beginning of the year and update it every quarter and so we're on.
For funding out our 2020 solar tax credit fund. So we know so it's in our 2021 forecast cuts because its offer there so it should be.
Flat through through two each quarter of 2021.
Got it thanks for that and then.
On deferring diesel can you talk about why you guys decided to push it out again as it just given all the uncertainty it's easier to work on the older <unk>.
Modeling for that and related to that.
You guys had the reserve release this quarter whats the outlook for potential reserve releases here under the old method.
Yes, and deferring fees so it's.
Our current intent to adopt it assets January one 2021.
The law is.
We believe it's.
Flexible as to what tier you adopt.
And.
And in.
Talking and consulting with our outside auditors.
That's a present plan and the.
And the day, one charge would be as of January one 'twenty 'twenty one so.
So we think the pre tax day, one charge would be between five and $15 million on scan that.
It goes against retained earnings.
Opening retained earnings.
And then in terms of methodology.
We've been running in parallel in.
In 2020 and.
We have a better.
For.
Feel of how our model behaves so we.
We have the assets.
And we.
We have a on.
Multi scenario.
We have a blended seasonal for base.
Base case optimistic pessimistic and so.
It.
It's going to be most heavily driven by.
Unemployment for us.
Any of the factors and then a little bit by housing and real estate prices.
And if they declined significantly.
And.
What about in terms of potential reserve releases.
Feel as if you're kind of prep.
Properly set with the reserve towards low ratio that you have now or do you think there is.
Room for additional releases well, we don't know.
Because it depends on what happens to the Moody's forecast and the first quarter as well as.
Our net charge offs.
But our day one adoption number is.
And based on the December 2020, Moody's forecast so.
So when we adopt <unk> so that should be.
It should be what the model says and.
The number to be so in terms of room or not.
That's the number.
And then.
Based on our.
Other mid cap banks.
I guess, the fourth quarter and how they were operating and seasonal for the fourth quarter and tender.
Provisions have been relative bins.
Benign so we'll see if that continues.
So just to be clear are you adapting Cecil January one 2021 or January one 2022.
January one 'twenty 'twenty one.
Okay, and I was confused by that Alright, and then shifting to the.
Net charge offs debt, you mentioned about $8 million and the Hong Kong branch can you talk about just what happened there and remind us of the size of that portfolio over there.
Well the Hong Kong portfolio is about.
$240 million.
And this was the credit.
We can name customer names, but this borrower.
And Hong Kong.
And for some of the larger.
Industrial companies.
It's different.
Instead of having.
Yeah.
Align and funded by.
Different banks.
Look for.
For custom Hong Kong, and so that everybody has a separate loan but with <unk>.
Carry pursue clauses so.
This company was in the pay per products business.
And apparently.
There was some issues with.
With their financial statements and so we adopted.
And.
Sort of.
Our best guess on what the liquidation value assets.
And we charged down and this credit.
Down to that and amount there is still a few million dollars left.
<unk> credit.
Got it and then the last one for me as a follow up on the net interest margin.
And the fourth quarter with the 312% or are you able to comment on what the sort.
Sort of exit net interest margin was.
At year end or maybe for the month of December.
Yeah.
We can give the.
You have the day count issue.
Because December is a 41 day month and the.
And months for <unk>.
There's a 30 day month.
And we find it.
But it was trending down so.
Okay.
Yes.
Yes.
So December was 315.
And then.
Got it thanks very much.
Sure.
We do have a follow up question from Gary Tenner from D. A Davidson you are and our lives.
Thanks.
And I just wanted to clarify the commentary around social adoption.
Our reading of the press releases.
There will be the earlier of the year that starts after the national emergency was.
It was terminated or January one 2022, but it sounded like you. Just said you are adopting a January one 2021, just wanted to make sure I'm clear on that.
Correct.
See so for larger.
<unk> Bank.
And also skewed as a preferable accounting principles to the incurred loss model. So so I think.
So if you if you adopt earlier and the.
And there's a law.
Allows.
It's not discouraged.
Okay.
But there won't be a requirement to go back and restate 2020, with it and Thats correct correct, that's our understanding yes.
Okay. Thank you.
And then just on the.
Debt redemption. This it looks like $80 million <unk>, what was the rate on that fixture.
233%.
Great. Thanks for the follow up.
Sure.
We also have a follow up question from David <unk> from Wedbush Securities fewer and all that.
<unk>.
Hey, Thanks for the follow up so on the net interest margin with the $3 15 to $3 25.
Clearly at the beginning of the year when we get the forgiveness, that's going to boost the NIM and then we're also going to have the benefit of the Cd's repricing, but as we think about exiting 2021 in terms of the net interest margin are you able to comment.
Anticipating for.
And towards the end of the year for the net interest margin.
Well I mean, the hope is that it.
It's the highest at the end of the year.
And the PPP forgivenesses.
It's a few million dollars per quarter.
And if you have a full year of loan growth.
That's still on Q4 and you have.
A full year of Cvs and pricing.
You should be at appropriate point and wise.
So towards the higher end of that of that range. It sounds like yes.
Great. Thanks Heng.
Sure.
So again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
There are no further question on queue. Thank you for your participation I will now turn the call over back to Cathay General Bancorp's management for closing remarks.
I want to thank everyone for joining us on our call has been a challenging year for our country due to the pandemic and hope everyone will stay well and healthy we look forward to speaking with you at our next quarterly earnings release call.
Ladies and gentlemen, thank you for your participation and today's conference. This concludes the presentation. You may now disconnect good day.
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