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Cathay General Bancorp (NASDAQ:CATY)
Q2 2021 Earnings Call
Jul 26, 2021, 6:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen and welcome to Cathay General Bancorp's Second Quarter 2021 Earnings Conference Call. My name is Paula and I'll be your coordinator for today. [Operator Instructions]

Now, I would like to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp.

Georgia Lo -- Investor Relations

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. 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 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 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 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 up for questions.

I will now turn the call over to our President and Chief Executive Officer, Mr. Chang Liu.

Chang M. Liu -- President and Chief Executive Officer

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. Diluted earnings per share increased 42.6% to $0.97 per share for the second quarter of 2021 compared to $0.68 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 30, 2021, our deferred PPP loan fees were $8.8 million. We continue to monitor our commercial real estate loans. Turning to slide 7 of our earnings presentation, as of June 30, 2021, the average loan to value of our CRE loans was 51%. As of June 30, 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 30, 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 30, 2021. Decreased by $26.7 million to $67.8 million as compared to the end of the first quarter of 2021. The decrease of primarily due to a sale of an $18.8 million oil and gas loan at a discount of $4.4 million and a pay-off of $10.1 million commercial real estate loan in April, 21.

Our total oil and gas loan portfolio was $113 million as of June 30, 2021 and no long the rate [Phonetic] was substandard. Please see page 11 of our earnings presentation. We recognized a reversal for credit loss of $9 million in the second quarter of 2021 as compared to $13.6 million reversal provision for credit losses in the first quarter of 2021. The reversal for credit losses of $9 million reflected a continuing improvement in economic forecast made in June 2021 compared to the forecast made in March 2021 by the economic forecasts used in our CECL 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 run-off 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 totaling $63.5 million in the second quarter of 2021. We continue to work on the integration and conversion plan for 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 $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, Heng Chen to discuss the second quarter 2021 financial results in more detail.

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

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 prepayment penalties added 3 basis points to the net interest margin as compared to 2 basis points for the first quarter of 2021. There were $2.9 billion of loans at the floor rate as of June 30, 2021. Approximately $1.6 billion and $1.4 billion of our CDs matured during -- for the first quarter of 2021 with average rates of 0.82% and 0.68% respectively. We are targeting renewing retail CDs in the 40 basis point 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%. We have 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 BOLI 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 $71.4 million in the first quarter of 2021. The decrease trust primarily due to a decrease of $0.9 million in amortization of low income housing and solar tax credit funds and $0.7 million in costs associated with that redemption.

The effective tax rate for the second quarter of 2021 was 22.7% as compared to 21.9% 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 and amortization 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 30, 2021, our Tier 1 leverage capital ratio decreased to 10.85% as compared to 11.06% as of March 31, 2021. Our total risk-based capital ratio decreased 13.77% from 13.94% as of March 31, 2021 and our total risk-based capital ratio increased to 15.47% from 15.8% as of March. 31, 2021.

Chang M. Liu -- President and Chief Executive Officer

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

Questions and Answers:

Operator

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

Matthew Clark -- Piper Sandler -- Analyst

Hey, good afternoon.

Chang M. Liu -- President and Chief Executive Officer

Hi.

Matthew Clark -- Piper Sandler -- Analyst

The 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?

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

No, we had about $1.3 million BOLI tax benefit. So that should be non-recurring.

Matthew Clark -- Piper Sandler -- Analyst

Okay, got it. Okay. And then the contribution from PPP revenue in net interest income this quarter?

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, it's in our press release.

Matthew Clark -- Piper Sandler -- Analyst

Okay. Never mind. I think, I'll find it. Okay. And then on the buyback, good to see, you guys are pretty proactive this quarter, what are your -- what's your appetite for reupping another buyback assuming you complete the latest one this quarter?

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

We'll probably excessive quite spread [Phonetic] approval, given the fact that our capital ratios are among relatively high and loan growth is moderate, we think buybacks are good use of our excess capital.

Matthew Clark -- Piper Sandler -- Analyst

Okay. And then just on the reserve ex-PPP. I think we're down to 90 basis points. Looking back...

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, 84 basis points. Yeah.

Matthew Clark -- Piper Sandler -- Analyst

Yeah, I guess I'm excluding PPP. But looking back to pre-COVID you guys were in the 80s, I mean it is kind of the low 80s where you think it will probably stabilize or you think you can dip below that?

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

I think for now that's probably the number, the range for us to the extent that our substandard loans are non-accrual for us significantly, we would see for the model leaves us.

Matthew Clark -- Piper Sandler -- Analyst

Okay, thank you.

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you.

Operator

Your next question comes from Gary Tenner with D.A. Davidson. Your line is open.

Gary Tenner -- D.A. Davidson -- Analyst

Thanks. Good afternoon.

Chang M. Liu -- President and Chief Executive Officer

Hi.

Gary Tenner -- D.A. Davidson -- Analyst

I just wanted to ask about commercial real estate growth. I know you got into the full year loan 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?

Chang M. Liu -- President and Chief Executive Officer

Sure, Gary. We saw, I think some activities -- increased activities with mixed use and apartment and a lot of that with kind of transitional and reposition place. Geographically, we saw most of that in California. We saw some in the East Coast, but most of being from the West Coast.

Gary Tenner -- D.A. Davidson -- Analyst

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 average PPP balances for the second quarter, in terms of, they are saying loan balances, Heng, do you have that number handy?

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, this is based on the month end balance, $304 million.

Gary Tenner -- D.A. Davidson -- Analyst

I'm sorry, $204 million.

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

No $304 million.

Gary Tenner -- D.A. Davidson -- Analyst

$304 million. Okay.

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

So we had a lot of provisions [Phonetic] in the month of June.

Gary Tenner -- D.A. Davidson -- Analyst

Okay, thank you.

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Thank you.

Operator

Your next question comes from Brandon King with Truist Securities.

Brandon King -- Truist Securities -- Analyst

Hey, good afternoon.

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

Hi, Brandon.

Chang M. Liu -- President and Chief Executive Officer

Hey.

Brandon King -- Truist Securities -- Analyst

So I thought it was a decline in revenues and 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?

Chang M. Liu -- President and Chief Executive Officer

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 are definitely getting ahead on the WiFi [Phonetic] side of our portfolio, seeing a higher rate of payoffs as we have seen from the prior year. So from a growth perspective, I think the contribution to the revenue in the loan growth overall from our mortgage portfolio is going to be probably smaller than what we've seen in years past.

Brandon King -- Truist Securities -- Analyst

Okay. 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 have been bottom yet.

Chang M. Liu -- President and Chief Executive Officer

I think there is still competitive pressure whether not has bottom 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 it can be obviously keeping an eye on the overall net interest margin for the entire for the entire portfolio.

Brandon King -- Truist Securities -- Analyst

Okay. And then lastly with HSBC depositors coming online early next year, are you are -- the plan to become more aggressive and running off time deposits or with the pricing with customers as we get closer to that growth.

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

I think you talked about R [Phonetic], on the HSBC. They have a fairly robust deposit franchise. So the time CDs only 10% of that billion dollar book. So, but on our side, we would -- between now and the end of the year, sorry, we probably have $500 million or $600 million of brokered deposits that we would run off. And that would come out of our excess liquidity at the Fed.

Brandon King -- Truist Securities -- Analyst

Okay. And just even for those time deposits that we knew, would you be more aggressive in pricing those potentially?

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

Gradually, some of the smaller chains. Thanks. I'm seeing promotions, one year since growth of CDs at 60 basis points. So if I'm seeing it, our customers, our depositors are more likely see it. So that's once get us from another ethnic Chinese bank.

Brandon King -- Truist Securities -- Analyst

Okay. Well, thank you.

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

Thanks.

Operator

Your next question comes from Chris McGratty with KBW.

Chris O'Connell -- KBW -- Analyst

Yeah, this is Chris O'Connell filling in for Chris McGratty. I know it's a difficult line to project. I appreciate the color on the solar tax credit. But is it fair to say that the total amortization tax credit line holds going through year-end, which is coming down a bit in the solar tax for that you mentioned in opening comments.

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, it's -- we'll spend a copy of our investor slides to Chris. And you can also get it on the Internet. Thanks. But on page 15 of our investor slides. We have broken out by quarter 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, $3.8 million in Q2. And then we think in $1.5 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 be Biden administration stance on the corporate minimum tax.So that expense will start to ramp up again in 2022.

Chris O'Connell -- KBW -- Analyst

Got it. I appreciate the color there. Thank you. And then given the earlier comments around the authority or even credit, so it sounds like, it's fair to say that, pending any major changes there. Did the reserve levels selling the whole from here. Do you see any scenario where the reserve begin to drop down kind of both lower or was in 4Q19 around that 82 basis point or so level.

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

We might, like if those mix change, where our residential mortgage loans become a higher percentage but more importantly if our substandard loans drop to fairly low levels in our non-accruals then we would view that as justification to use the model number. So model is going to continue to pull us down a little bit every quarter.

Chris O'Connell -- KBW -- Analyst

Understood. Thank you.

Chang M. Liu -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from David Chiaverini with Wedbush Securities.

David Chiaverini -- Wedbush Securities -- Analyst

Hi, thanks. Couple of questions for you. Starting with the C&I loan growth, can you talk about the demand environment, and if possible utilization rates of your borrowers.

Chang M. Liu -- President and Chief Executive Officer

Yeah, I think on the C&I 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 the utilization rates at the moment I think through the first couple of quarters of the year, they're modest, but we've talked to some customers where we believe that the utilization rates will move up in the third and fourth quarter.

David Chiaverini -- Wedbush Securities -- Analyst

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?

Chang M. Liu -- President and Chief Executive Officer

The focus there is to reduce our reliance on CDs and try to focus more on business commercial account and transactional deposits and that's really, and that's one that will increase our core deposits and two, that will continue to hopefully drive down the cost of deposits.

David Chiaverini -- Wedbush Securities -- Analyst

Great. And then looking at you guys have been able to pay down your borrowings to pretty low level and at the same time add to the securities portfolio in the most recent quarter. So low should we expect securities purchases to pick up?

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

I think the -- 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 2%, 3% -- in three or four months now, it's actually a 1.28. So what we're trying to every quarter bias to come out, but we're going to be cautious, because I think this inflation to be there is -- there is merit for a becoming embedded in people's expectations and labor costs. So at some point, the Fed may have. If they have a fall behind the ball in terms of controlling inflation, they're going to have to increase rates rapidly to keep the inflation checked. So we're looking at every quarter and trying to by about the same amount that we have delivered first two quarters.

David Chiaverini -- Wedbush Securities -- Analyst

Yeah. But I think 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're purchasing maybe $75 million per quarter. Is that still the case or is it really dependent on the rate environment?

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

No, it was, we bought $150 million, that's what we said and the maturities of MBS and maturities or $75 million. And for the third quarter that's still, our plan.

David Chiaverini -- Wedbush Securities -- Analyst

Got it, great color. Thanks very much.

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you.

Operator

[Operator Instructions] Your next question comes from Gary Tenner with D.A. Davidson. Your line is open.

Gary Tenner -- D.A. Davidson -- Analyst

Thanks. I just wanted to clarify on your deposit comments, the brokered deposits, I think you mentioned $500 million to $600 million that run-off. I'm sure the back half of this year, is that included in the $3 billion or so time deposits, you've mentioned previously.

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

Mostly, we had some brokered money market, so in that number is &150 million of brokered money market.

Gary Tenner -- D.A. Davidson -- Analyst

Okay. And of those broker deposits, what's the rate on those, the rate you gave us on the CDs.

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

Well, of the brokered money market, we are fortunate we've got $100 million at 1 basis points, that was in last December. And then the other $50 million, that's it, 18 basis points. And then the brokered CD rates, they tend to be in the $150 million, they were made a year ago.

Gary Tenner -- D.A. Davidson -- Analyst

Thank you.

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

Thank you.

Operator

Your next question comes from Matthew Clark with Piper Sandler.

Matthew Clark -- Piper Sandler -- Analyst

Hey, just wanted 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.

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah, yeah, we're trying to maintain that. We might get -- we might a bit to increase our bonus accruals, particularly when we get to the fourth quarter. When we see how we compare to budget but aside from that, I mean, we still have a process improvement. We did close two branches in June. So we -- I think for 2022 inflation of 3%, we probably be 2.5% or something perhaps.

Matthew Clark -- Piper Sandler -- Analyst

Got it, OK. Thank you.

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Thank you.

Operator

Thank you for your participation. I will now turn the call back over to Cathay General Bancorp's management for closing remarks.

Chang M. Liu -- President and Chief Executive Officer

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.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Georgia Lo -- Investor Relations

Chang M. Liu -- President and Chief Executive Officer

Heng W. Chen -- Executive Vice President, Chief Financial Officer and Treasurer

Matthew Clark -- Piper Sandler -- Analyst

Gary Tenner -- D.A. Davidson -- Analyst

Brandon King -- Truist Securities -- Analyst

Chris O'Connell -- KBW -- Analyst

David Chiaverini -- Wedbush Securities -- Analyst

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