Cathay General Bancorp (CATY) 2017 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp's Third Quarter 2017 Earnings Conference Call.

My name is Sherry, and I will be your coordinator for today.

(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 Monica Chen, Investor Relations of Cathay General Bancorp.

Thank you, Sherry, and good afternoon.

Here to discuss the financial results today are Mr. Pin Tai, our Chief Executive Officer and President; and Mr. Heng Chen, our Executive Vice President and Chief Financial Officer.

Before we begin, we wish to remind you that the speakers of 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, 2016, 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, which speak only as of the date of this presentation.

We undertake no obligation to update any forward-looking statements or to publicly announce any revision of any forward-looking statement to reflect future developments or events, except as required by law.

This afternoon, Cathay General Bancorp issued an earnings release outlining its third quarter 2017 results.

To obtain a copy, 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 Chief Executive Officer, Mr. Pin Tai.

Thank you, Monica, and good afternoon.

Welcome to our 2017 third quarter earnings conference call.

Before we discuss the results of the third quarter of 2017, I would like to provide a quick update on the acquisition of SinoPac Bancorp, the parent company of Far East National Bank.

We recently received final regulatory approval for the bank merger and have scheduled the merger of Far East National Bank into Cathay Bank to be effective October 27, 2017.

Turning to the third quarter results.

We reported net income of $49.7 million for the third quarter of 2017, a 7.8% increase when compared to a net income of $46.1 million for the third quarter of 2016.

Diluted earnings per share increased 5.2% to $0.61 per share for the third quarter of 2017 compared to $0.58 per share for the same quarter a year ago.

In the third quarter of 2017, our gross loans increased by $1 billion to $12.6 billion.

Organic loans grew by $332 million or an annualized increase of 11.8% compared to December 31, 2016.

Loans from the acquisition of Far East National Bank were $694.7 million.

The increase in loans for the third quarter of 2017 resulted primarily from residential mortgages and commercial loans, which grew by $132 million or 24.8% annualized and $135 million or 24% annualized, respectively.

Commercial mortgage loans remains relatively flat in the third quarter, posting a small increase of $15 million or 1% annualized.

We anticipate organic loan growth in 2017 to be around 8%.

For the third quarter of 2017, excluding deposits from Far East National Bank, our total deposits increased by $381 million to $12.6 billion.

Also, excluding Far East National Bank, our core deposits increased $163 million, an annualized growth of 7.1% when compared to December 31, 2016.

With that, I'll turn the floor over to our Executive Vice President and Chief Financial Officer, Heng Chen, to discuss the third quarter 2017 financials in more detail.

Thank you, Pin, and good afternoon, everyone.

For the third quarter, we announced net income of $49.7 million or $0.61 per share.

This has been a very noisy quarter, and I will try to summarize the main nonrecurring items.

First, the onetime items related to the SinoPac Bancorp acquisition generated a net income of $2.6 million or $0.03 in EPS.

The onetime items are comprised of a $5.4 million bargain purchase gain, $3.3 million of acquisition and reorganization and integration costs and $901,000 of interests on the deferred portion of the acquisition price.

Second, based on the solid deployment of our solar tax credit investment, we adjusted our forecasted effective tax rate for 2017 to 34% compared to the 29% effective tax rate estimated in the second quarter.

Third quarter net income was reduced by $5.3 million or $0.065 in EPS because of the increase in the forecasted effective tax rate.

Our net interest margin was 3.75% in the third quarter of 2017 as compared to 3.36% in the third quarter of 2016 and 3.63% for the second quarter of 2017.

The increase in net interest margin in the third quarter was due to interest recoveries and prepayment penalties which added 16 basis points to the net interest margin compared to 6 basis points for the second quarter of 2017 and 3 basis points for the third quarter of 2016.

The increase was primarily due to a $4.6 million interest recovery from a single real estate loan that was paid off in the third quarter.

Noninterest income during the third quarter of 2017 increased $4.2 million to $13 million.

The increase was primarily due to the gain from the acquisition of $5.4 million recorded in the third quarter that was offset by a decrease in security gains of $1.7 million in the prior year quarter.

Noninterest expense increased by $10.5 million or 20.7% to $61.2 million in the third quarter of 2017 when compared to $50.7 million in the same quarter a year ago.

The increase was due to a $5 million increase in salary and employee benefit expenses primarily due to the acquisition of Far East National Bank and $3.3 million of acquisition-related expenses offset by a decrease in other operating expense of $1.1 million.

The effective tax rate for the third quarter of 2017 was 41.4%.

We anticipate that our effective tax rate for the fourth quarter of 2017 would be about 34%.

We plan on making new investments in 2018 in solar tax credit investments, which would bring our effective tax rate in 2018 to about 30% with ex solar tax credit amortization expense of about $2 million in the fourth quarter of 2017.

At September 30, 2017, our Tier 1 leverage capital ratio decreased to 10.41% as compared to 11.57% at December 31, 2016.

Our Tier 1 risk-based capital ratio decreased to 12.18% from 13.85% at December 31, 2016, and our total risk-based capital ratio decreased to 14.11% from 14.97% at December 31, 2016.

Because we crossed over the $15 billion in assets threshold, our trust preferred securities no longer qualify as Tier 1 capital, but qualify as Tier 2 capital.

This resulted in about an 80 basis point decrease in our Tier 1 leverage capital ratio.

All this shows significantly exceeded Cathay's minimum ratio under all regulatory guidelines.

At September 30, 2017, our common equity Tier 1 capital ratio was 12.18%.

Net recoveries for the third quarter of 2017 were $5.7 million.

Net charge-offs were $5 million in the third quarter of 2016.

Our nonaccrual loans increased by 2% or $1.3 million to $65 million or 0.6% of period-end loans as compared to the second quarter of 2017.

Thank you, Heng.

We will now proceed to the question-and-answer portion of the call.

(Operator Instructions) Our first question comes from Lana Chan with BMO Capital Markets.

Can you talk about the loan growth, and given how strong it's been year-to-date, guidance for the full year is still around 8%?

It seems kind of conservative.

What are you seeing with the pipelines going to the fourth quarter?

Well, we have a pretty strong pipeline on the commercial loans in the fourth quarter.

So our outlook for this last quarter is still 8% because we feel that we had a stellar growth for commercial real estate loan.

Lana, we hope to do better than that, but we did increase our guidance.

It was a range of 7% to 8%, and now we're targeting at least 8%.

Of course, we always hope to do better.

Okay.

And any outlook in terms of the margin?

I think if we strip out the prepayment penalties and interest recoveries, this quarter was just slightly below 3.60%.

But I guess normally you have a bit of that every quarter.

Yes, we -- our guidance is between 3.60% and 3.65%.

We -- once we -- after this Friday, I think we'll be able to frank our balances to the Fed by $100 million, $150 million, so that will help the margin.

And then the prepayment penalty, just through the month of October, they're pretty strong.

So yes, so we feel good about that, and then we don't see much deposit pricing pressure for core deposits.

And our guidance, because the primary increase is expected in the middle of December, we don't think we'll get much of a benefit this quarter from that.

Our next question comes from Matthew Clark with Piper Jaffray.

Curious on the noninterest expense run rate.

It came in, I think, a lot lower than expected obviously with the acquisition partially in there.

Curious about the outlook there, whether or not -- how much of the cost saves have you -- are left, I guess, are left to go.

Yes, so of the noninterest expense, we -- our tax rate went up, but we had guided to $7 million of solar tax credit amortization expense in Q3 and the actual was less than $1 million and we're guiding to $2 million in Q4.

And then in terms of the cost saves, we feel pretty good.

The Far East acquisition, just to summarize, it's 90% cash and 10% stock.

And so we're seeing right now without any branch closures about, earnings from Far East excluding onetime items, about $0.025 of EPS.

And we'll have some layoffs in the middle of November, and then we'll consider branch consolidations in the first quarter.

So I think roughly, we probably only have 1/3 of the cost saves.

So we have 2/3 of the cost saves still to come from Far East.

Great.

Okay.

And then on the -- on reserve coverage, obviously, credit is holding up well, net recoveries and -- but as you think about provisioning going forward, you haven't had a provision in the black for quite some time.

I'm just curious whether or not you think that's realistic anytime soon or you feel like there's still a decent pipeline of recoveries to come and -- can hold reserves maybe a little bit lower than where you are today.

Yes, we still have at least one more recovery of over $5 million that's from an A/B note split.

And this quarter we did have that large payoff, which add both interest recoveries as well as loan recoveries.

So we think -- we -- once -- if we start to provide, our average provision would probably be about 30 basis points of the net loan growth because so much of it is residential mortgage.

Okay.

And then I guess with the mark, do you have your adjusted reserve to loan ratio right now?

The mark is -- we're still working on it.

Tentatively, it's around 1% of Far East's loans.

So if you count that mark, then our loan loss reserve is still over 1%.

The -- so that's -- we're still going to -- we have -- there's a 1-year period for acquisitions to finalize the purchase accounting.

So we may wind up increasing that mark in the fourth quarter, in which case they may reduce a bit of above in purchase gain.

But anyway, right now it's 1%.

Okay.

And last one for me on share range.

Yes, and then they have, Far East, they have no nonaccrual loans, almost no standalones.

So we -- so that's why the mark seems a little bit lighter than the standard mark.

Got it.

And then any share repurchase in the quarter?

And I guess, what is your appetite to resume or continue share repurchase going forward?

We had originally thought that we would try to buy back the 1 million shares we issued to Bank SinoPac in the fourth quarter.

But based on where bank stock prices are right now, I think we'll sit and wait.

Particularly, I think with the prospects of having the corporate tax rate drop to 20%, we think that's helping stock valuations in general.

So long story short, it's kind of slightly above our target repurchase price point.

(Operator Instructions) Our next question comes from Jon Arfstrom with RBC Capital Markets.

Can you talk a little bit about the organic deposit growth?

It looks like it was a pretty strong quarter for you, and you said you're not really seeing any deposit pricing competition.

Can you just talk about what you're seeing and talk about what the drivers were for the quarter?

Yes, we had a core CD motion.

So we limited the rate to -- if it's a 1-year CD, and we limited the rate to 1.1% on average and it was all core deposits.

So if it was under 50,000, I believe the rate was 1%, and if it's over 100,000 -- 150,000, it was maybe 1.2%, but the average rate was close to 1.1%.

And we were surprised that we got through -- that promotion is going to finish at the end of this month, but through the end of the third quarter, we raised about $400 million.

And well, today, the fixed -- the 1-year brokered CD is probably at 150.

So the fact that we're able to raise not much in the way of core deposits from our customer base, I think, makes us comfortable or makes us positive on the margin outlook.

Right.

Okay.

Good.

That's helpful.

And then the other side of the balance sheet, I think last quarter you talked about competition in commercial real estate pricing.

And just curious at all if that's changed or if your appetite has changed at all in commercial real estate.

The market is still very competitive.

So that's why we are seeing already growth in terms of commercial real estate market.

Yes, so we are seeing a stronger growth in the commercial land loan and also the residential mortgage loan.

And up to now, I think our latest view for the new loan that we book are slightly above our seasoned portfolio.

Our next question comes from Aaron Deer with Sandler O'Neill and Partners.

Just a couple quick questions, one is on the energy tax credits.

If I heard you correctly, Heng, I think you guided toward a tax rate for next year of around 30%.

What does that guidance entail in terms of the amortization on the energy tax investments?

Oh, the amortization would probably be between $20 million and $25 million.

Okay.

And would that be spread out over the course of the year?

Does that kind of depend on the timing of when those...

No.

It probably be in Qs -- in the second through the fourth quarter.

It just -- we don't want to become experts in this product, but the sales cycle starts in January and then it then starts to fund in the second quarter for us anyway.

Okay.

And then the affordable housing stuff, that's going to continue to run, what, around $4 million or $5 million or something a quarter?

Right.

Yes.

Yes.

And then we think that the tax credits from that will go up by $1 million or $2 million next year.

So I think roughly we're getting -- I think we're getting about $16 million of tax credits from low income housing.

So that's going to go up a little bit next year, too.

Okay.

And then lastly on the credit front, the increase in the nonaccruals.

Is that tied to the credits that we discussed last quarter?

I think it was some New York condominium and maybe some other items in there?

Yes.

Yes.

Okay.

Any additional detail you can provide on that?

Or is there much to say there?

Well, I think there's one [maybe, size] one bank we think we can do a notes sale.

And then, I mean, aside from that, in terms of the LTV, they're pretty low.

Our next question comes from Chris McGratty with KBW.

Heng, sort of a follow-up on the expenses.

Once you kind of get through the remaining 2/3 of the cost savings and understanding the kind of unpredictable nature of the tax credit investments and the amortization, how should the core expenses be trending as you kind of look out 6 months once you kind of get through the synergies?

What's a decent kind of expense run rate when you kind of add all up?

I guess -- we're doing our budget for 2018, so we're kind of reluctant to give guidance, but we will have positive offering leverage like we have so far.

So...

Any kind of larger -- maybe asked another way, any larger projects that you might be contemplating that might not be in the run rate thus far?

Not really large, but residential mortgages are very important to us.

So we're upgrading to a state-of-the-art mortgage origination system.

But that expense will be spread out over a couple of years, so it won't be that noticeable.

And then for us, the BSA, it's a constant investment for us, so we're not -- I think we're keeping pace at our current levels.

So we -- I would think this is -- once -- we haven't done our planning, but -- and generally, maybe 4% and 12 aside from low income housing, that's sort of how we try to budget for the next year to come.

And then there will be a reduction from the -- for the Far East cost saves.

Great.

That's helpful.

Maybe if I can sneak one quick one in.

With respect to the margin this quarter, you talked about the interest reversals.

Was there any notable accretable yields from the transaction in third quarter results?

It's about $0.5 million.

Okay.

And then lastly, I noticed your interest-bearing deposit costs were flat, and you talked about the promotion you ran.

Is any of the kind of the steady state of the deposit costs reflective of first accounting in the quarter?

Was that all just...

No.

No.

We -- their deposits were -- in fact, we're pleasantly surprised.

Their money market deposits were lower than ours.

We have -- for our larger customers, we have premium tiers.

Those were just, once again, low across the board.

So it has helped keep our money market -- I think it pushed down our money market rate by 1 basis point, yes.

Our next question comes from Michael Young with SunTrust.

I wanted to follow up, I guess, with the capital question.

Share repurchase, obviously, not looking as attractive at these stock price levels.

But are there other deployments of capital that you're considering, whether it'd be related to the trust preferreds that are now faced out of Tier 1?

And/or would you consider reentry to the M&A market sooner just given where your stock valuation is?

Yes, well, one, we normally have our dividend increase -- our annual dividend increase in the fourth quarter.

So we'll probably, if our board approves, we'll probably have increase in the dividend.

And then we have a pretty good loan growth.

You can see that the capital ratios brought -- I think the way I put it in the past was the Far East acquisition was like doing 1.5 years of buybacks through our merger transaction.

Pin, you want to talk about the prospects?

Well, we will always let you know our potential target, our opportunity target of note.

And acquisition sometimes is depending on the market position.

So right now we don't have any particular target in mind right now.

Okay.

Great.

And one last one, I guess, just Heng, as you're thinking out to next year on the tax credit investment front, should we expect any changes if we do see a change in the statutory tax rate from something in Washington?

And would you curtail any of the investments, et cetera?

Maybe just walk us through kind of your thought process there.

I don't think so because unlike loan housing, which is very sensitive to the tax rate because it's very dependent on writing off the original investment, these solar tax credits, most of the return comes from the tax credits themselves.

So we think we'll still have interest.

And as we've diversified our suppliers of that tax credit, we might even ramp up more than the guidance of 30% as our effective tax rate.

(Operator Instructions) Our next question comes from David Chiaverini with Wedbush Securities.

So I have a follow-up on credit and the provision.

You mentioned you have 1 more recovery of $5 million to go.

Any sense of the timing of when that could come through?

Yes, it's a B note, and you're closer to the customer.

I mean, I think the maturity of the B note is 2019, like that, or...

I think this quarter is the last quarter we're expecting a pay-off.

You mean, the fourth quarter?

Yes.

Right, right, right.

Yes.

The tax...

Oh, yes, there might not be a charge off to that one.

The one I was thinking about was the Northern California, yes.

And that one, I think it's probably a 2019.

And then we have some loans that are nonaccrual for -- we've taken partial charge-offs, but we don't want to give guidance on like the interest price [of yen] we'll get recoveries off of those special charge-offs.

Got it.

I see.

So we have several quarters to go before that.

That's all I had.

Ladies and gentlemen, thank you for your participation.

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

Thank you for joining us for this call, and we look forward to speaking with you at our next quarterly earnings release date.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may all disconnect, and have a wonderful day.