Cathay General Bancorp
NASDAQ:CATY
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Good afternoon ladies and gentlemen and welcome to the Cathay General Bancorp's Fourth Quarter and Full Year 2020 Earnings Conference Call. My name is Chino and I'll be a 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. [Operator Instructions] Today's call is being recorded and will be available for replay at www.cathaygeneralbancorp.com.
Now, I would like to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp.
Thank you, Chino, and good afternoon. Here to discuss the financial results today are Mr. Chang Liu, our President and Chief Executive Officer, and Mr. Heng 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 31st, 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 statements 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 fourth quarter and full year 2020 results. To obtain a copy of our earnings release, as well as well as our earnings presentation, please visit our website at www.cathaygeneralbancorp.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 2020 fourth 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 5.2% increase when compared to a net income of $67.4 million for the fourth quarter of 2019.
Diluted earnings per share increased 6% to $0.89 per share for the fourth quarter of 2020 compared to $0.84 per share for the same quarter a year ago.
In 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 1.3% in commercial real estate loans. We anticipate loan growth in 2021 excluding Paycheck Protection Program loans to be between 3% to 5%.
As of December 31st, 2020, or COVID-19 C&I loan modifications were $29 million, or approximately 1.1% of our commercial loan portfolio.
Turning to slide eight of our earnings presentation, as of December 31st, 2020, CRE loans with an aggregate balance of $81 million or approximately 1.1% of our CRE loan portfolio are still on loan modifications to provide relief [ph] 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 31st, 2020, Cathay had hotel loans that totaled $299 million. Of that $299 million, the hotel loans with loan loss were $24 million or 8% of the total hotel portfolio compared to $39 million hotel loans with loan loss as of September 30th, 2020.
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 in retail loans is secured by neighborhood, mixed use, or strip centers, and only 10% is secured by shopping centers.
The amount of retail CRE loans still under loan modifications dropped to $5 million as of December 31st, 2020, or 30% of the $161 million as of September 30th, 2020.
Turning to slide 10, as of December 31st, 2020, $41 million of our residential mortgage loans are still under loan modifications or 23% of the $180.6 million as of September 30th, 2020.
In summary, 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 in the third quarter of 2020. Our non-accrual loans decreased by $9.5 million to $67.7 million or 0.44% 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 loan in our Hong Kong branch.
We recognized a reversal for credit loss of $5 million in the fourth quarter of 2020 compared to a $12.5 million provision for loan losses in the third quarter of 2020. The reversal for credit losses of $5 million reflected the improvement in the economy during the fourth quarter of 2020.
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 CECL 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 National Emergency comes to an end or January 1st, 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 to our loan portfolio. Borrowers that we believe could be adversely impacted by the current tariffs constitute approximately 1.5% of our total loans.
Turning to slide 13, total average deposits decreased by $324 million or 2% during the fourth quarter. Average time deposit decreased by $594 million or 8.2% due to the run off of broker CDs.
With that, I'll turn the floor over to our Executive Vice President and Chief Financial Officer, Heng Chen to discuss the third quarter 2020 financial results in more detail.
Thank you, Chang and good afternoon everyone. For the fourth quarter of 2020, net income increased by $3.5 million or 5.2% to $70.9 million compared to the fourth quarter of 2019, which was primarily attributable to higher security gains compared to the prior year.
Our net interest margin was 3.12% in the fourth quarter of 2020 as compared to 3.02% for the third quarter of 2020. There were 2.6 million loans at their flow [ph] rate as of December 31, 2020. In the fourth quarter of 2020, interest recoveries and prepayment penalties added four basis points to net interest margin compared to eight basis points for the third quarter of 2020.
Approximately $2.6 billion and $1.1 billion of our CDs mature during the first and second quarters of 2021 with average rates of 1.45$ and 0.68% respectively. We're targeting renewing retail CDs in the 50 to 60 basis point range. We expect our net interest margin for 2021 to be between 3.15% to 3.25%.
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.
And interest expense increased by $3.9 million or 5.4% to $75 million in the fourth quarter of 2021 when compared to $71.2 million in 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 2.5% between the fourth quarter of 2020 when compared to the fourth quarter of 2019.
For the fourth quarter of 2020, the increase in non-interest expense was primarily due to a $2.4 million increase in amortization of investments in low-income housing and alternative energy partnerships, higher operating losses, a prepayment penalty on FHLB buys [ph] and higher reserved for unfunded long-term methods.
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 in 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 the task credit amortization was $8.5 million in the fourth quarter of 2020 and is expected to be $9 million in 2021, which is $6 million in the first quarter of 2021 and $3 million in the second quarter of 2021.
As of December 31, 2020, or Tier 1 leverage capital ratio increased to 10.94% as compared to 10.83% as of December 31, 2019. Our Tier 1 risk-based capital ratios increased to 13.52% from 12.51% as of December 31, 2019, and our total risk-based capital ratios increased to 15.45% from 14.11% as of December 31, 2019. We resumed our stock buyback program during the fourth quarter of 2020 and repurchase 399,970 shares shows at average cost of $26.79.
Thank you, Heng. We will now proceed to the questions-and-answer portion of the call.
[Operator Instructions]
Your first question comes from Chris McGratty from KBW. You are now live.
Great. Thanks for the question. I'm interested starting with the net interest margin and net interest income outlook. How -- appreciating the guide you gave for the $3.50 to $3.25, how do we think about net interest income dollars? There's a lot of obviously moving parts, so maybe PPP contribution, how much of that is in the numbers? And maybe you could speak just the composition that the changes in the balance sheet that you expect? Thanks.
Yes, sure. Chris, on the PPP, on round one, we still have about roughly $4 million of deferred loan fee that that 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 -- Chang gave our loan guidance of 3% to 5% loan growth. So, based on our budget, we see mid-single-digit increase in NII for 2021.
That's great. Thanks. And maybe if I could just squeeze in a follow-up. I'm interested -- two parts, the appetite for more buybacks and also you gave the solar amortization, wondering if you had the low income as well that you expect for 2021? Thanks.
Yes. So, on buyback, I mentioned in the third quarter call that we're hoping to appraise -- to get approval for $75 million buyback and so we're working on that. And then on the low-income housing, it's roughly $6 million a quarter, so $24 million for 2021.
Sure. Thank you.
Yes, thank you.
Next one on the queue is Gary Tenner from D.A. Davidson. You are now live.
Thanks. Good afternoon. I just wanted to ask in terms of the brokered CD runoff, is there an additional amount of runoff in that book? Or rather, how much is left, if any?
It's about -- on brokered CD, it's about $700 million. We may runoff a few $100 million. It depends on the extent of core deposit growth in 2021. But what the constraining mix for us is our liquidity ratios, but we're trying to maintain a reasonable amount of on balance sheet liquidity.
Okay. And I missed the CD maturities that you noted for the first half of the year or the first and second quarter, if you could--.
Yes, I'd be happy to repeat that. It is $2.6 billion in Q1 at a rate of 1.45% and $1.1 billion in Q2 at a rate of 0.68%.
And what -- at that renewal rate, what is your, I guess, target for retention of those balances?
We're hoping based on 2020 activity, hoping 80% to 90%.
All right. Thank you.
Yes.
Next on the line as Matthew Clark from Piper Sandler. You are now live.
Hey, good afternoon. The -- within the margin, I think you mentioned the prepay fees and recoveries of four basis points, did that also include PPP related net revenue?
No, no. That's not.
How much in the way of PPP-related revenue did you have in the quarter?
It's pretty small. We believe it's around $600,000. We're amortizing the fee over 24 months and then as there's forgiveness, that -- for the loans are forgiven that that unamortized fee is -- goes into interest income, it's about $600,000.
Okay, great. And then 3% to 5% loan growth outlook ex-PPP, can you describe the pipeline and how it looks today maybe relative to a year ago or last quarter and the source of growth that you anticipate putting on?
Sure, Matthew, I think our guidance on the 3% to 5% loan growth is mostly looking for a stronger C&I increases in the outstandings. We've added a new C&I team and several other strong C&I lenders, and relationship people. So, we're really kind of focused on the C&I side of the business. We expect some 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 that have kind of -- that you've just migrated and are waiting for them to start making payments or is there something else to it? Just give some color there?
I think there was one hotel loan. Are you talking about substandard or special [Indiscernible]?
Both?
Yes. Well--
I'm looking at the combine number. I'm sorry.
I think it's mostly -- I guess we're more focused on the substandard loans. But my recollection is that there was one hotel loan that was downgraded in the third -- in the fourth quarter and then there was another one that was downgraded there in the aviation parts business. So--
Okay.
But they remained accrual.
Okay. And then the last one for me was just around the decision to no longer pursue these solar 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 President Biden, when he was running for Office, his tax program included a fairly steep -- I believe it's 15%, minimum tax -- corporate minimum tax.
So, we're already with our low-income housing tax credits, we're expecting a lot of -- a fair amount of tax credits in 2021. So, we want to wait and see and then we may go back into it in 2022. But until the picture is not clear, we're having a pause here.
Okay, make sense. Thank you.
Next question comes from Michael Young from Truist Securities. You are now live.
Hey, thanks for taking the question. I wanted to start with a follow-up just on the solar tax credit question that was just asked. Just on a standalone basis, the IRR or return characteristics still strong enough where it would be of interest, it is just more of the kind of uncertainty going forward?
Well, Michael, as you know, we estimate it as $0.06 to EPS per year. A little bit more in 2020 because our deployment was much faster than we expected. So, but it's really, until we were clear on the Biden administration, corporate tax stance, we don't want the trapped or where we're paying -- or from a minimum tax for many years.
Right. And I understand that. And maybe switching to just kind of the various guidance outlook, I think the loan growth guide was ex-PPP, but just wanted to be sure that's excluding both rounds of PPP. And then same with NII and NIM guide, does that include kind of the fee recognition acceleration that you were talking about? Or is that exclusive about just trying to frame everything relative to TPP?
Yes, the loan growth guidance is 3% to 5%. It does exclude PPP round two. I'll defer to Heng to speak to the--
Also round one forgiveness. So, it's just core loans. And then in our budget, we put in nothing for PPP round two. But that fee -- the remaining fee from round one is in the NIM guidance. Chang, you want to talk about what we're seeing in round two?
Yes, in round two so far just through as of yesterday, really, we've seen over 1,400 applications come through our portal with a total application request at about 174 million. And we've already started submitting a 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 this last one for me on expenses, kind of ex the tax credit pieces. It sounds like there was some interest in hiring, wasn't sure if you had 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 in 2021?
I think the objective here, Michael, for us in 2021 certainly is still going to be a challenging year and COVID is not going to be any time be -- any far behind us. So, we're looking to still continue to control our expenses where we can and obviously, the biggest pieces are the sort of the employee costs as well as the physical occupancy cost. So, we hope to continue to control that cost down as much as possible.
Yes, I think for budgeting purposes, we're hoping that our expenses excluding solar and low-income housing, the core expenses, we're hoping to keep that around 1% or so.
Okay. Thanks.
Next one on the queue is David Chiaverini from Wedbush Securities. You are now live.
Hi, thanks. Just wanted to start with a follow-up on -- on the tax rate, you mentioned 18 to 19% that will have solar tax credits in 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 quarters and then kind of ramp up in the second half of the year?
Well, I'm happy to say it should be constant on the effective tax rate. You make the forecast at the beginning of the year and update it every quarter end. So, we're for funding out our 2020 solar tax credit funds. So, we know -- so it's in our 2021 forecast, because it's [Indiscernible], so it should be flat through each quarter of 2021.
Got it. Thanks for that. And then on deferring CECL, can you talk about why you guys decided to push it out again? Is it just given all the uncertainty, it's easier to work on the older modeling, for that?
And related to that, you guys had the reserve release this quarter. What's the outlook for potential reserve releases here under the old method?
Yes, on deferring CECL, its current intent to adopt it as of January 1, 2021. The law is -- we believe it's flexible as to what year you adapt. And talking and consulting with outside auditors, that's our present plan. And the day one charge would be as of January 1, 2021. So, we think the pretax day one charge would be between $5 million and $50 [ph] million.
That goes against retained earnings -- opening retained earnings and then in terms of our methodology, we've been running it parallel in 2020 and we have a better feel of how our model behaves. So, we have a multi-scenario. We have a blended CECL base case, optimistic, pessimistic and so it's going to be most heavily driven by unemployment for us of any of the factors that are lowered by housing and real estate prices, if they declined significantly.
And what about in terms of potential reserve releases, do you guys feel as if you're kind of properly set with the reserves ratio that you have now or do you think there's room for additional releases?
Well, we don't know. I guess it depends on what happens to the Moody's forecast in the first quarter as well as our net charge-offs. But our day one adoption number is based on the December 2020 Moody's forecasts. So when we adopt CECL; that should be -- it should be what the model says the number to be.
So, in terms of room or not, that's the number. And then based on other midcap banks, I guess, the fourth quarter, they were operating under CECL for the fourth quarter and their provisions have been relatively benign. So, we'll see if that continues.
So, just to be clear, are you adopting CECL January 1st, 2021 or January 1st, 2022?
January 1, 2021.
Okay, okay. I was confused by that. All right. And then shifting to the net charge-off that you mentioned about $8 million in 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 a credit; we can't give customer names, but this borrower in Hong Kong, the -- for some of the larger industrial companies, there's different instead of having a line funded by different banks that look -- the custom in Hong Kong is that everybody has a separate loan, but with carry pursue clauses.
So, this company was in the paper products business and apparently, there were some issues with their financial statements and so we adopted sort of our best guess on what the liquidation value is. And we charged down this credit down to that amount. There's still a few million left.
Got it. And then the last one for me is a follow-up on the net interest margin. In the fourth quarter with the 3.12%, are you able to comment on what the sort of exit net interest margin was at year end or maybe for the month of December?
Yes. We can give -- I mean, you have the day count issue because December's a 31-day month and the other months were -- those are 30-day month, but let me find it. But it was trending down. So, December was 3.15% was the NIM.
Got it. Thanks very much.
Sure.
We do have a follow up question from Gary Tenner from D.A. Davidson. You are now live.
Thanks. I just wanted to clarify the commentary around CECL adoption, my reading of the press releases that it will be the earlier of the year that starts after the national emergency was terminated or January 1st, 2022. But it sounds like you just said you're adopting a January 1, 2021. Just wanted to make sure I'm clear on that.
That's correct. CECL for larger public banks such as is viewed as preferable accounting principle to the incurred loss model. So, I think if you if you adopt earlier, than the federal law allows, it's not discouraged.
Okay. But there won't be a requirement to go back and restate 2020, is that correct?
That's correct. That's our understanding. Yes.
Okay. Thank you. And then just on the debt reduction, looks like $80 million FHLB events, what was the rate on that fixture?
2.33%.
Great. Thanks for the follow-up.
Sure.
We also have a follow-up question from David Chiaverini from Wedbush Securities. You are now live.
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 re-pricing. But as we think about exiting 2021 in terms of the net interest margin, are you able to comment you know what you're anticipating for -- towards the end of the year for the net interest margin?
Well, I mean, the hope is that it's the highest at the end of the year because the PPP forgiveness is -- it's a few million a quarter. And you have a full year of loan growth in that -- that's there on Q4 and you have a full year of CD re-pricing, you should be able to project point NIM-wise.
So, towards the higher end of that of that range, it sounds like?
Yes.
Great. Thanks Heng.
Sure.
[Operator Instructions]
There are no further questions on a queue. Thank you for your participation. I'll 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. It 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 in today's conference. This concludes the presentation. You may now disconnect. Good day.