Good afternoon ladies and gentlemen and welcome to the Cathay General Bancorp's First Quarter 2021 Earnings Conference Call. My name is Valerie 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, Valerie, 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 31, 2020 at Item 1A in particular, and in all 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 first quarter 2021 results. To obtain a copy of our earnings release, as well as well as our first quarter earnings presentation, please visit our Web site 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 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. Diluted earnings per share increased 55.9% to $0.92 per share for the first quarter of 2021 compared to $0.59 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% 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 31, 2021, 36.2 million of PPP loans have been submitted to the government for forgiveness review. As of March 31, 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 31, 2021, the weighted average loan to value of our CRE loans was 51%. As of March 31, 2021, CRE loans with an aggregate balance of $56 million or approximately 0.7% of our CRE loan portfolio remaining on loan modifications to provide relief on repayment terms.

As of March 31, 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, now 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] [ph] substandard, please see Page 11 of our earnings presentation.

As permitted under the Coronavirus, a 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 1, 2021.

The adoption of CECL on January 1, 2021, increased the allowance for loan losses by 15.9 million and the reserve for unfunded loan commitments by 0.5 million. We recognized the reversal for credit loss of 13.6 million in the first quarter of 2021 as compared to 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 forecasts made in March 2021 compared to the forecast made in December 2020 by the economic forecaster using our CECL process. Turning to Slide 12, total average deposits increased by 259 million or 1.6% 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 and Heng Chen to discuss the first quarter 2021 financial results in more detail..

Thank you, Chang 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 favorable to the reversal of provision for credit losses, and higher net interest income.

Our net interest margin was 3.2% in the first quarter of 2021 as compared to 3.12% for the fourth quarter of 2020. There were 2.7 billion of loans at the [far] [ph] rate as a March 31, 2021.

In the first quarter of 2021, interest recoveries and prepayment penalties added 2 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 0.6% and 0.84% respectively.

We're targeting renewing retail CDs in the 40 to 50 basis point range. Given the results of the first quarter of 2021, we are increasing our expectations of our net interest margin for 2021 wide by 5 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% to 71.4 million in the first quarter of 2021, when you compare it to 65.2 million in the same quarter a year ago.

There was a gain on sale of other real estate owned a 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, the first quarter of 2020.

The increase was primarily due to 1.8 million in higher salary and benefit expense and 1 million higher marketing expense from a donation to the Stop Asian Hate Campaign, offset by a decrease of 2.3 million in amortization and loans on 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% and 25%] [ph] and 22.5%.

Solar tax credit amortization was 5 million in the first quarter of 2021 and is expected to be 3 million in the second quarter of 2021 and non-[indiscernible] 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 risk-based capital ratio increased to 13.94% from 13.52% as of December 31, 2020, 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 new share repurchase program..

Thank you, Heng. We will now proceed to the question-and-answer portion of the call..

[Operator Instructions] Our first question comes from Matthew Clark with Piper Sandler..

Maybe just first on the amortization going forward.

Any guide on the low income housing amortization as well?.

It should be constant. I think we're guiding to about 6.6 million per quarter. So it should be the same for the rest of the year..

Okay, great.

And then, the contribution from PPP in net interest income this quarter and guess how much do you have left including round two?.

It's a total 9.9 million at the end of March..

Okay.

And you have the contribution in 1Q?.

I think I mentioned in my -- it was….

If you did that's, okay, I can go back..

I'll call you with it..

No worries. Okay. And then, just one more for me, if I may. On the level of the reserve, how low are you willing to go in kind of post-CECL world? I mean, I assume you'll continue to grow into these reserves.

But what's kind of your minimum threshold that you're willing to run the bank at?.

It's very formula driven Matthew. And 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 forecasts.

And that, for example, their forecasts of unemployment, it's already better for the rest of the year than what they're forecasting in March. So there's a tendency for lower for a lower reserve..

Thank you. Our next question comes from Chris McGratty of KBW..

I'm interested in an update and how you guys are thinking about quarter 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? Thanks..

As far as sort of loan growth and excluding PPP, we had a number of borrowers have pay down and paid all the volumes during the first quarter. So as the economy recovers and a consumer demand increases, we believe that a loan demand will increase accordingly.

So as such, we still expect that the loan growth for the full year 2021 it's going to be between 3% to 5%. Part of that also, we believe that mortgage pay off will start to slow as the interest rates continue to rise..

Yes, Chris, can you repeat the second part of that question? I think that was for me..

Yes. 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 higher, you're going to continue to run off some non-core deposits. Thanks..

We have a limited amount of broker CDs that will mature for the rest of the year. There's a couple 100 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 longer term interest rates, were really going to go up pretty much. And so in the second quarter, we expect to -- we have started buying MBS.

And so that will use up some of our excess liquidity and will continue to buy 150 million or so MBS each quarter, so that our securities portfolio will begin to climb from moderate overview..

Thank you. Our next question comes from Gary Tenner of D.A. Davidson..

I just wanted to ask, I think last quarter you said you were holding off on any additional investments on the solar tax credits due to uncertainty over kind of the tax outlook with the Biden administration.

If you were to not invest at all and have your 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?.

I will look at more on the EPS impact. It's about $0.05 or $0.06 a share. But our plan is to go back into that market in the fourth quarter for Q1 funding..

Okay. Thank you. And then, just one more question on PPP.

Can you give us the average PPP loans outstanding for the quarter?.

Well, I have to get back to you on that Gary. It was in February and March. And the forgiveness was pretty linear, but I'll call you..

Thank you. Our next question comes from David Chiaverini of Wedbush Securities..

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.

Wondering how much net growth in the securities portfolio we should expect?.

It's about, I would say, just on MBS, it's about 75 million a quarter..

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 averaging? Can you give any comments related to that?.

Yes, I think we're in that latter category. 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, or we are amortizing fees over 18 months. And for the ones that are over 150,000, we're amortizing it little over five years contractually.

So I think there's going to be more forgiveness in the second half of the year from round two PPP..

And 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?.

Yes. First, we're going to buy back stock that's issued for [indiscernible] and forgive the reinvestment. And then 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..

[Operator Instructions] Our next question comes from Matthew Clark of Piper Sandler..

Just had a question on that other fee income increase, I think it was up $1 million on a core basis, not the wealth management piece, but the other fee income, just wondering if that's sustainable, or not..

It's a one time gain, Matthew, we have a investment in the CRA fund. And so that gain, it wasn't low income housing anyways. We were able to realize that in the first quarter and so we booked that in other income..

Okay.

And then any updated thoughts on just your core fixed expense outlook, excluding amortization and any other noise relative to last year to this year?.

Well, we continue to actively manage that. We have two branches that we're closing in June. So there'll be some expense saves there. And then, we continue not to replace offices on the staff side, well, we can and then, but because our income for the first quarter is higher than we had budgeted a certain amount for a loan loss provision this year.

And given the negative Q1 provision and the likelihood of very low provisions for the rest of year, we're going to have a couple of million of higher bonus accruals throughout the year. So that's going to be that's what we see..

Thank you. I'm showing no further questions at this time. I'll turn the call back over to Management for any closing remarks..

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..

Ladies and gentlemen, thank you for participating in today's conference. This concludes the presentation. You may now disconnect. Have a great day..