Cathay General Bancorp (CATY) 2018 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp's First Quarter 2018 Earnings Conference Call.

My name is Sherry, and I'll 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 Lisa Kim, Secretary of Cathay General Bancorp.

Thank you, Sherry, and good afternoon, everyone.

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 on this call may make forward-looking statements within the meaning of the applicable provisions of the Private Securities and 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, 2017, 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 first quarter 2018 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, Lisa, and good afternoon.

Welcome to our 2018 first quarter earnings conference call.

This afternoon, we reported net income of $63.8 million for the first quarter of 2018, a 30.4% increase when compared to a net income of $48.9 million for the first quarter of 2017.

Diluted earnings per share increased 27.9% to $0.78 per share for the first quarter of 2018 compared to $0.61 per share for the same quarter a year ago.

First quarter results include a $3.9 million decrease in the fair value of equity securities that was recorded in the income statement due to the adoption of a new accounting pronouncement, which reduced earnings per share by $0.03.

Adjust for these items, first quarter earnings per share was $0.81 per share.

Heng will further discuss this item in his remarks.

In the first quarter of 2018, our gross loans grew by $144 million to $13 billion or an increase of 4.5% on an annualized basis.

The increases in loans for the first quarter of 2018 resulted primarily from residential and commercial mortgage loans growth of $137 million or 18% annualized, and $128 million or 8% annualized, respectively, which were partially offset by a decrease in commercial loans of $25 million and construction loans of $91 million.

We anticipate loan growth in 2018 to be around 7% to 8%.

For the first quarter of 2018, our total deposits increased $322 million or 10.2% annualized to $13 billion as we benefited from our Chinese New Year CD promotion.

The systems conversion for Far East National Bank onto Cathay's system is scheduled for this weekend, which will permit the completion of the integration of our operations.

On July 14, 2017, until the system conversion, we have been running 2 sets of backroom operations which will no longer be necessary.

We anticipate that additional cost savings will occur over time as additional branch consolidations occur.

With that, I'll turn the floor over to our Executive Vice President and CFO, Heng Chen, to discuss the first quarter 2018 financials in more detail.

Thank you, Pin, and good afternoon, everyone.

For the first quarter, we announced net income of $63.8 million or $0.78 per share, which was reduced by $0.03 from a decrease in the fair value of equity securities.

Our net interest margin was 3.75% in the first quarter of 2018 as compared to 3.49% in the first quarter of 2017 and 3.65% in the fourth quarter of 2017.

In the first quarter of 2018, interest recoveries and prepayment penalties added 5 basis points to the net interest margin compared to 7 basis points for the fourth quarter of 2017, and 3 basis points for the first quarter of 2017.

Noninterest income during the first quarter of 2018 decreased by $1.4 million to $5.3 million when compared to the first quarter of 2017.

The decrease was due to the $3.9 million decrease in the fair value of equity securities that was recorded in the income statement from the adoption of new accounting pronouncement ASU 2016-01 financial instruments.

Prior to the adoption of ASU 2016-01, changes in the fair value of equity securities were recorded in comprehensive income as a component of equity.

Noninterest expense increased by $9.1 million or 17.5% to $61 million in the first quarter of 2018 when compared to $51.9 million in the same quarter a year ago, due in part to the acquisition of Far East National Bank.

For the first quarter of 2018, the increase in noninterest expense was due to a $4.5 million increase in salaries and employee benefits expense and a $1.8 million increase in professional services expense.

The effective tax rate for the first quarter of 2018 was 22.8%.

Income tax expense for the first quarter of 2018 was reduced primarily by the reduction of the corporate tax rate from the enactment of the Tax Cuts and Jobs Act.

We hope to complete an investment in the solar tax credit fund during the second quarter.

While there is no assurance that we will complete any such investment, if we proceed and complete such investment, we project our full year of 2018 effective tax rate would be between 18% and 18.5%.

Our second quarter effective tax rate will reflect a year-to-date catch-up to the new full year effective tax rate.

We expect solar tax credit amortization of about $2 million in the second quarter and then $9 million per quarter for the second half of 2018.

At March 31, 2018, our Tier 1 leverage capital ratio increased to 10.59% as compared to 10.35% at December 31, 2017; our Tier 1 risk-based capital ratio increased to 12.7% from 12.19% at December 31, 2017; and our total risk-based capital ratio increased to 14.37% from 14.11% at December 31, 2017.

All ratios significantly exceeded well capitalized minimum ratios under all the regulatory guidelines.

Net recoveries for the first quarter of 2018 were $1.8 million compared to net recoveries of $1.7 million in the fourth quarter of 2017, and net charge-offs of $0.9 million in the first quarter of 2017.

Our loan loss reversal was $3 million for the first quarter of 2018 compared to $2.5 million for the first quarter of 2017 and 0 for the fourth quarter of 2017.

Our nonaccrual loans increased by $0.5 million during the first quarter to $49 million or 0.38% of period-end loans as compared to the fourth quarter of 2017.

Thank you, Heng.

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

(Operator Instructions) Our first question comes from Chris McGratty with KBW.

Hey, Heng, maybe I'll start with expenses.

Obviously, good control in the quarter.

I'm interested -- I think, in the past, you've talked about 4% expense growth core for 2018.

And given the moving parts with the acquisition and the tax credits, I'm hoping we could get a little bit more clarity on the dollar amounts.

If you take this quarter's $61 million, if you exclude the tax and -- that you indicated, it was $61 million less about $6 million, so roughly $55 million.

How should that -- if that's right, how should that trend over the balance of the year?

In -- we closed 2 branches in the first quarter for Far East, so -- but they were late in the quarter.

They were done at the end of February in terms of the lease expense, so you won't -- we'll see the full quarter impact in Q2.

And then with the conversion, we -- as Pin mentioned, we'll be able to eliminate the duplicate backroom and save in -- and then save a number of back-office staff.

So I think the first quarter is probably a good run rate.

We have salary increases that go into effect on April 1. But in the first quarter, we had about $1 million of FICA, extra FICA from the bonuses, which will go away.

And then we have probably combined $2 million of legal expense and DFAST.

The DFAST will continue into Q2, but then they'll be out of the second half, and then we had outsized legal expense in Q1.

So once again, we think the -- all in all, we -- the first quarter is a pretty good run rate for the rest of this year.

And it comes close to, I think, my prior guidance.

Okay.

So just to be clear, it's -- it will be $55 million for this quarter, plus the amortization expense that you highlighted.

And that's kind of a -- with cost inflation, that's about where we should be?

That's right.

That's right.

Okay, great.

I appreciate that.

On the deposit growth in the quarter, a lot of it came from the CDs.

I'm interested in the duration or maybe the -- how much money you were looking to raise in the terms of the CDs that you were doing, and whether that campaign is still ongoing, or has that ended in kind of in the context of your loan-to-deposit ratio targets.

Yes.

So that, we raised -- it was our most successful deposit promotion ever.

The rate was 1.6% for 1-year CDs, and so that was about 60% of the deposits.

And then we had some 2-year and 3-year depositors.

And then we -- probably we'll do a summer CD promotion, which we have done for -- we did that last year.

And then in terms of -- we will use broker CDs that keep our loan-to-deposit ratio at 100%.

So we're -- we think, with a pretty good increase in the first quarter, we sort of prefunded some of our loan growth in the first half in terms of having the deposits in place for the loans.

Our next question is from Aaron Deer with Sandler O'Neill.

I guess kind of following up on the CD question, I'm just curious, the -- given the higher cost associated with that, it was surprising to see the strength in the margin.

So I know you said there was about 5 basis points of interest recoveries and fees in there.

Was there anything else in terms of the purchase accounting or other noise that might've benefited the margin that would be going away in the second quarter?

It -- I think there was $400,000 of yield -- just accretion, purchase accounting accretion.

And we think that's probably a pretty decent run rate per quarter.

We -- it would take us a couple of years at that run rate to use up the purchase accounting discount accretion.

Okay.

So -- and nothing else?

And then in terms of the timing of that CD campaign, was that -- it sounded like that was more front-ended in the quarter even, so it's not as though there's any lingering deposit cost that would be coming through to weigh on the margin in the second quarter.

Is that -- am I reading that correctly?

Well, we started that, I believe, in February 1. And then, that promotion, it was so successful, we extended it to the middle of March.

So it's...

Sort of the belly of the quarter?

Yes, yes.

Right.

Okay.

The -- okay.

And then just on the credit front, it looks like you continue to see generally good trends there.

I did notice that the TDR spiked up a little bit.

Anything behind that, that you can talk about?

Or is that something we should be keeping an eye on?

No.

I think we took a -- we -- it's not a deterioration.

I think we've had a few loans that we -- I guess, we fine-tuned our definition for what's a TDR.

So we added a -- most of the increase was to change in the -- from the fine-tuning of that definition.

Our next question is from Michael Young with SunTrust.

I just wanted to start on the capital front.

I think in the -- or on the fourth quarter conference call, the stock was at about $45, and there -- I think there was some hesitancy to buy back stock at those levels, but we've now just broken below 2x tangible book value from a valuation standpoint.

Are you more interested in buying back stock at these levels?

Or any color you can provide there?

Yes.

I think we issued 920,000 shares as part of the Far East acquisition at $37.

So I think on that batch, we would probably buy back as long as stock was below -- somewhat below $40.

And then we'll see -- we're more likely to increase the dividend, either most likely in the fourth quarter to use up some of our excess capital and -- but -- so that's our thinking right now.

Okay.

And just switching over to credit and asset quality, and obviously a big provision credit this quarter.

We keep thinking that's going to come to an end.

Is -- are there more recoveries that you continue to see in the pipeline going forward?

Or how are you thinking about that going forward?

Yes.

We have -- they tend to be lumpy, so we can't predict when they happen.

But I think one of the things that happened in the first quarter was we had $91 million of construction loans that either paid off or transferred to term CRE, and that has a pretty heavy reserve against it under our methodologies.

And so most of our growth for the last year has -- much of the growth has come from residential mortgage, which has a very low all allocation.

So I think we'll have less pressure on the all than -- given the trends of the portfolio.

Our next question is from Matthew Clark with Piper Jaffray.

I wanted to first start on the margin outlook.

I think you gave guidance, I think, last quarter of 3.70% to 3.80% for the year.

Obviously came in a little strong here to start the year.

Wondered if you wanted to tweak that guidance.

Well, I think we're still comfortable at that because of the -- we have a large percentage of our loans in residential mortgage.

The first quarter we picked up about 2 basis points from the day count compared to other quarters of the year.

And then we had 5 basis points of interest recovery from prepayments, and some quarters, that's dropped to 2 or 3. So but we're -- maybe we'll improve -- or we'll up that guidance in Q3.

But for now, we -- I think we're keeping to the same guidance of that band.

Okay.

Okay.

And then on the loan growth, I think you tweaked the outlook there to 7% to 8%.

I guess, how do you think about sort of the mix of that growth going forward?

Do you still expect, call it, 50% of it to come from single-family resi this year?

I think that stronger growth is still coming from residential mortgage, and we expect C&I growth of about 8%.

Okay, okay.

Great.

And then on the deposit pricing side of things, you mentioned the promotion you did at 1.60%.

I guess, where is the kind of incremental cost of your deposits coming on, say, at the end of March?

Well, I think it's probably 1.90%, if it's 1-year broker CDs or 2%.

But we're -- yes.

Okay.

So the more promotional stuff, or if you have to rely on broker, it's upwards of 2%, okay.

Yes.

Right.

Our next question comes from Lana Chan with BMO Capital Markets.

Question on the current flattening of the yield curve, just 2 parts on that.

What are you seeing on new pricing on your resi mortgage and your commercial real estate?

Our residential mortgage, the first quarter, the new loan coming in, we had a slightly higher percentage compared to our existing portfolio.

We did, first quarter, we have -- our yield origination is about 4.43% -- 4.6% compared to existing portfolio of 4.43%, so that's an increase of 17 points -- basis points in the new longer origination for residential mortgage.

And for C&I loan, we are originating around primary, which is slightly above the current portfolio yield of 4.38%.

Okay.

And then on the CRE?

CRE, we are originally above 4.88%, which is quite close to the current portfolio yield.

Okay.

And given the context of that, and again the yield curve, how are you thinking about new securities investments?

You're trying to fund your loan growth with deposit growth going forward, so how should we think about the securities book?

Should it be relatively stable from here for the rest of the year?

Yes, yes.

We -- at the beginning of the year, we were going to buy -- we plan on buying 50 million per month of 15-year MBS.

And at the February investment meeting, we cut that down to 25 million.

And I think the MBS, we're only getting about 3% on that.

And given we're -- the Fed is talking about 3 prime rate increases in 2019 plus a couple more this year, it's -- the yield on securities is not that attractive.

So we -- so that's where we are.

We were -- I think, at best, it will creep up slightly, but not by much.

Our next question comes from Gary Tenner with D. A. Davidson.

Did I hear you say 1.6 million of discount accretion or purchase accounting accretion this quarter?

No, no.

$400,000.

I -- $400,000.

Okay, sorry.

I misheard you.

And can you remind us what it was back in the fourth quarter?

It was none because we were still fine-tuning the purchase accounting, so we didn't book any.

Okay, you didn't book any in the fourth quarter.

So -- All right.

I don't suppose representative sort of catch-up, it's more of a level you think is stable from here for at least a little while?

Yes.

I think probably $400,000 per quarter for the rest of the year.

Okay.

And then just in terms of the general outlook, as you think about your markets, any change of activity in terms of customer behavior, demand, the outlook maybe for the back half of the year for growth versus the first half of the year?

Any thoughts on that?

Surprisingly, we still see pretty strong pipeline in residential mortgage.

But in terms of CRE, it's really competitive out there.

A lot of them are competing for this commercial U.S. stated loan and actually bidding a lot, bidding down on the pricing.

But we are working hard, and we see -- since we are kind of expanding on a team on C&I lending, we expect to see some growth in the C&I lending.

And usually, the first quarter is the lowest quarter of utilization of revolving amount of credits.

So hopefully from second quarter and third quarter, the utilization rate will be going up.

In terms of the pricing competition, is it more severe today than it was 6 months ago?

I would say yes because of the reduction in the tax rate, so I think some of the banks are giving away the tax savings and giving up -- giving them to the customers.

Our next question comes from David Chiaverini with Wedbush Securities.

I had a follow-up question on capital.

You mentioned about buying back stock below $40.

I was curious, what's your target on the common equity Tier 1 ratio?

Well, we haven't given a lot of thought based on where the stock prices were, so I would think -- we look at the leverage ratio more, so probably between 9% and 9.5% leverage is what we look to.

So there's room there.

Great.

And then I was also curious about your reserve-to-loan ratio.

So it's not down at 94 basis points.

What's your comfort level there in taking that too?

Because it's been trending down over the past couple of years.

Well, I think our peers are -- depending on how many acquisitions they've done, there's not that many banks that are at 1% anymore.

I think First Republic, they're at like 65 basis points.

And so as -- we're not -- certainly not going even close to that, but I think we want to try to keep the percentage to loans right around here, but if it creeps down 1 basis point or 2 basis points, I mean, that we're sort of limited by our old methodology as to what that number winds up being.

So...

Yes.

That makes sense, especially since you're getting such strong growth from the resi portfolio.

That's all I had.

Thank you.

Yes.

Thank you.

And our final question comes from Chris McGratty with KBW.

Oh, great.

Heng, could you just repeat the tax guide?

I think you said 18% to 18.5% for the full year.

I think it was around 22% to 23% this quarter.

Can you just lay out the quarters, given the movement in the tax considerations?

Yes.

So we had a similar pattern last year.

It has to do with the timing of when we fund our solar tax credit investment.

It's -- so hopefully, it'll be relatively soon.

And so what we think the Q2 rate would be, if -- it'll probably be -- if you just do the math, if, for the 6 months, we're going to be at, let's say, 18%, and we're at 23% in the first quarter.

Then for the second quarter, we would have to be down at like 12% or something, 12% or 13%.

Okay.

And then 18% -- roughly 18% for the back half?

Okay.

Yes.

Yes, sir.

Okay.

And then the amortization, the $2 million, $9 million and $9 million, that's the low income or -- and then there's an additional solar on top of that or did I get that backwards?

No, no.

That's the additional solar.

The low income is about $6 million a quarter, so it's $24 million -- yes, it's $6 million a quarter.

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 participating in today's conference.

This does conclude the program.

You may all disconnect and have a wonderful day.