Cathay General Bancorp (CATY) 2018 Q2 法說會逐字稿

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

My name is Latif, and I'll be your coordinator for today.

(Operator Instructions) Today's call is being recorded and will be available for replay at cathaygeneralbancorp.com.

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

Thank you, Latif, 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 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 results -- 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 statements to reflect future developments or events, except as required by law.

This afternoon, Cathay General Bancorp issued an earnings release outlining its second quarter 2018 results.

To obtain a copy, please visit our website at 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, Georgia, and good afternoon.

Welcome to our 2018 second quarter earnings conference call.

This afternoon, we reported net income of $73.7 million for the second quarter of 2018, a 43.3% increase when compared to a net income of $81.4 million for the second quarter of 2017.

Diluted earnings per share increased 40.6% to $0.90 per share for the second quarter of 2018 compared to $0.64 per share for the same quarter a year ago.

Second quarter results were impacted by the systems conversion of Far East National Bank onto Cathay's system, which was successfully completed in April, allowing for the complete integration of our operations.

The second quarter 2018 acquisition and integration costs totaled $1.7 million, which reduced earnings per share by $0.015.

In the second quarter of 2018, in spite of a large amount of commercial real estate loan payoffs, our gross loans grew by $334.2 million to $13.3 billion, or an increase of 10.3% on an annualized basis.

The increase in loans for the second quarter of 2018 was primarily driven by the strong growth in residential mortgage loans of $180.1 million or 22.5% annualized, and commercial loans of $140.2 million or 23% annualized.

We continue to project loan growth in 2018 to be between 7% to 8%.

For the second quarter of 2018, our total deposits increased $92.3 million or 2.8% annualized to $13.1 billion.

Now I would like to address the potential impact of the trade tariffs between the U.S. and China on our borrowers.

Starting with the first quarter, we have reviewed all of our commercial borrowers to help assess the potential adverse impact of the imposed and proposed tariff on Chinese imports.

As of June 30, 2018, those borrowers, which we believe will be adversely impacted by the tariff, will be less than 1% of our total loans.

We continue to monitor and evaluate the trade dispute between the U.S. and China and its potential impact to our loan portfolio.

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

Thank you, Pin, and good afternoon, everyone.

For the second quarter, we announced net income of $73.7 million or $0.19 diluted earnings per share.

Our net interest margin was 3.83% in the second quarter 2018 as compared to 3.63% in the second quarter of 2017 and 3.75% for the first quarter of 2018.

In the second quarter of 2018, interest recoveries and prepayment penalties added 4 basis points to the net interest margin compared to 5 basis points for the first quarter of 2018, and 6 basis points for the second quarter of 2017.

Given the second quarter results, we believe that our net interest margin for the second half of 2018 will be between 3.75% to 3.85%.

Noninterest income during the second quarter of 2018 increased by $1.6 million to $7.8 million when compared to the second quarter of 2017.

The increase in the second quarter of 2018 compared to 2017 was primarily due to an increase in income from wealth management commissions, other fees, net gain on interest rate swaps as BOLI income, partially offset by a decrease in the fair value of equity securities.

Noninterest expense increased by $6.4 million or 11.3% to $63.1 million in the second quarter of 2018 when compared to $56.7 million in the same quarter a year ago, due in part to the acquisition of Far East National Bank.

For the second quarter of 2018, the increase in noninterest expense was primarily due to $4.5 million increase in salaries and employee benefits expense, 1 -- a $1.2 million increase in contributions to the Cathay Bank Foundation that is usually made in the second quarter of each year and $1.7 million increase -- $1.7 million in acquisition and innovation cost, which were partially offset by $1.5 million increase in the reserve for unfunded commitments.

The effective tax rate for the second quarter of 2018 was 13.0%.

We completed our investment in the solar tax credit fund during the second quarter, which we expect will reduce our full year -- projected full year 2018 effective tax rate to approximately 18.5%.

Our second quarter effective tax rate reflects a year-to-date adjustment to the new full year effective tax rate.

Because the new solar tax credit investment was made late in the second quarter, there was no amortization expense recorded on this new investment.

We expect solar tax credit amortization to be approximately $5 million in Q3 and $15 million in Q4 of 2018.

At June 30, 2018, our Tier 1 leverage capital ratio increased to 10.95% as compared to 10.35% at December 31, 2017; our Tier 1 risk-based capital ratio increased to 12.58% 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.

Net charge-offs for the second quarter of 2018 were $185,000 compared to net recoveries of $1.8 million in the first quarter of 2018 and net recoveries of $266,000 in the second quarter of 2017.

There was no loan loss provision for the second quarter of 2018 and 2017 compared to a loan loss reversal of $3 million for the first quarter of 2018.

Our nonaccrual loans decreased by $11.3 million to $52.7 million or 0.4% of period-end loans as compared to the end of 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 the line of Aaron Deer of Sandler O'Neill.

Heng, pardon me if you've mentioned this in your opening remarks, but my audio quality is kind of bad.

But in regard to the margin in the quarter, was there anything unusual that supported that?

I was just surprised by the strength of the margin this quarter.

I just wondered if there's anything unusual in there that might have caused it to be elevated this quarter, cause it to pull back in the third quarter?

Well, we gave the prepayment penalties, which was 4 basis points this quarter versus 5 last quarter.

The only other thing is the discount accretion was 2 basis points this quarter and 1 basis point in the first quarter.

But we think that 2 basis points is probably a good run rate for the rest of this year.

So in terms of what happened to the margin, the loans increased by 16 basis points and deposits only increased by 11 basis points.

So it's just the result of those dynamics.

Sure.

Well -- and then I guess the stronger loan growth than deposit growth, if you were to work to keep the loan-to-deposit ratio at 100 versus a little over 100, to what extent would you anticipate having to pay up for deposits that maybe the -- puts more downward pressure on the margin than the lift that you've been getting?

I think it's going to be pretty minor.

Surprisingly, 2 weeks ago, Home Loan Bank advances are at 2.1%, 210 basis points, whereas we're thinking our summer CD promotion would be lower than that.

And then our broker CDs were -- for 1-year broker CDs were at 2.4% is the current rate.

So I think overall, it's going to be relatively minor.

And then another dynamic is that our period-end loans were $300 million higher than the average second quarter loans.

So that's going to give us some momentum going into Q3.

Sure.

And then just on -- with respect to capital, and it continues to be strong, it didn't look like you guys did any share repurchases.

I gather that's because of -- the stock stayed above $40.

I think that's kind of your threshold for buybacks.

Is that still the case?

Or are you reevaluating your thoughts on share repurchases at this point?

Well, we'll move the price up slightly each quarter, but I think $40 is the good target.

And then we will have a pretty robust dividend increase in Q4 that would help.

And then in terms of future capital management, there're some capital instruments in the holding company, some higher-cost troughs that we could redeem next year that would be a use of capital.

Our next question comes from the line of Chris McGratty of KBW.

Yes, Heng, could you just repeat the loan growth guidance?

I may have missed it as well.

Could you just repeat what your expectations are for the back half of the year?

Yes, it's 7% -- it's still between 7% to 8%.

Okay.

And then could you remind me, based on the favorable reprices happening in your loan book, the split between fixed and variable and kind of the LIBOR component that's helping some banks?

Yes, I -- we think the floating -- including about $600 million of fixed-rate loans that we've swapped into LIBOR, we think that's about 60% to 65% is floating.

And then the -- so we have, once again, $600 million that's -- that swaps into 1-month LIBOR.

But we -- we have only a couple -- $300 million or $400 million loans that's tied to LIBOR by itself organically.

Okay, great.

And then maybe if I could on the expense rate -- expense growth rate.

You gave the color on the AM.

I assume $6 million's still on the low income tax.

Is that still about -- how should we think about the total amortization expense?

Yes, $6 million each in Q3 to Q4.

Okay, and then kind of operationally, now that the conversion's occurred, how should we be thinking about just organic upward pressure on costs in that low single digit, mid-single digit?

What's fair for a...

Well, I -- hopefully, it's low, low single digits.

We have -- we still have a couple of branch closures from Far East that will happen in the summer, so that will help, and then in terms of the lay-offs that happened late -- that happened mostly in June of the back office personnel.

So that -- so we'll get the full quarter impact in Q3.

Okay, great.

And then maybe if I could on the tax rate between Q3 and Q4.

Do you happen to have -- I can calculate it offline, but do you happen to have the expectation for the effective Q3 versus Q4 given the movement in the amortization?

Yes.

Oh, well, the amortization is -- doesn't impact -- it just impacts pretax income.

It doesn't impact the rate.

So we're thinking it's 18.5% for Q3 and Q4.

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

Could you talk about where the strong C&I growth came from that you had this quarter on the period-end basis?

Was it participations in any particular verticals?

We have increase in certain ABL participations.

And also, we have -- grew in new customer acquisition also.

And also, seasonal drawdown that caused a $140 million increase in C&I loan in the second quarter.

What was the last part?

I'm sorry.

Seasonal.

High...

Yes, seasonal, drawdown.

Yes.

Usually, the first quarter is a low season for C&I drawdown.

Okay, got it.

And then what are the new loan yields on resi mortgages now?

Residential mortgage, right now, we are underwriting at about -- around 4.5%.

Our current yield is about 4.46%.

Yes, and our new yield of -- close to 5%.

Residential mortgage loans.

Yes.

The new yields are close to 5%?

Yes.

4.75%, 5%.

Okay.

And just one question.

I'm not sure if I heard it before, Heng, but could you -- do you have any estimate in terms of the loan yield this quarter, how much that benefited from the interest recoveries and prepayment penalties?

I know you gave it on the margin, but what about on the loan yields?

Well, in terms of absolute dollar amount, is that what you're looking at?

Or (inaudible)

Yes, either in dollars or basis points.

Yes, yes.

I have it in dollar amount.

So just let me find it.

It's -- they're just (inaudible) people don't normally ask, but it's $1.6 million.

Our next question comes from the line of Michael Young of SunTrust.

Heng, I wanted to see if we could just cover maybe the credit side of the equation, obviously, back to kind of no provision this quarter and slight, very marginal net charge-offs.

Are we kind of through the backlog of recoveries and we should be moving into higher net charge-offs and positive provision going forward?

Or are there still some tailwinds on some things you see in the pipeline?

Yes, well we -- Michael, we did get a $2.6 million recovery here in July.

It was from a commercial real estate loan where we did a [A/B split] a few years ago.

But then in terms of charge-offs of Q3, we're not sure.

It's been low, but it could pick up.

So -- and then with the loan growth, probably sometime before the end of the year, we'll start to provide for incremental loan growth.

And any credit areas that you're kind of keeping a closer eye on, particularly maybe in real estate or commercial real estate?

Obviously, you did the review of tariff impacted maybe things in the C&I space, but anything just on the real estate front that you're watching?

We have reviewed that portfolio.

Actually, our loan-to-value ratio is pretty low.

Overall is, I think, 52% around.

So the CRE portfolio is really healthy.

Right.

And then I think this is dated information, but in the first quarter, we looked at the our retail concentration, and I think the average loan size was about $2 million, the average LTV was about 58% and debt service coverage ratio was well over 1.4 or thereabouts.

So I'm -- things are pretty good, but we're always cautious as to real estate values.

Our next question comes from the line of Matthew Clark of Piper Jaffray.

On just reserves, I think, in the past, you've talked about given a decent slug of your loan growth is coming from single-family resi and the coverage that you provide on that, I think, is closer to 40, 45 basis points.

Is that still the way we should think about it?

And is it fair to assume that, that reserve continues to drift a little lower?

And then just as a follow-on to that, how CECL might play into that in 2020?

Yes, well first, 40 basis points is probably a reasonable rate.

And then in terms of our CRE payoffs in the second quarter, there were -- we have a lot in hotels and office buildings.

So those tend to be more heavily reserved, even when they're a pass.

And then as to CECL, we're just -- we're in the parallel stage.

So we'll -- I think, in the second half, we'll have an idea on what that transition might be.

Okay.

And then just on the potential dividend increase here in the fourth quarter, is 40% payout still kind of the way you're thinking about it or likely?

Yes, yes.

I mean, we'll have to look at what the full year results are in terms of the number.

I think maybe $0.30.

Once again, we'll look at the EPS.

Okay.

And then just on the C&I loan growth.

I think it sounded like $140 million of it was related to increased utilization.

Can you just give us an update as to what utilization rate did from the first to second quarter?

We don't have that on a portfolio-wide basis.

I would say probably 1/2 of the $140 million increase is utilization.

The other half is actually new loan acquisition, new, recent acquisitions and also participation in the ABL standing.

Our next question comes from the line of Gary Tenner of D.A. Davidson.

I just wanted to ask, on the commercial real estate payoffs, do you have a sense of whether the elevated payoffs were due to properties being sold or maybe movement of the real estate in kind of the permanent financing market?

Any sense of why there was higher pay-downs and why maybe you lost some credits, if there was some element of that.

Yes, it's a combination of reasons.

There are some loans that because of -- the payoff because of properties being sold.

But the market is still very strong.

The price is good.

And also, we also had payoffs coming from -- with financing, other banks, they offer lower rate.

Okay.

So with the unusually large amount of payoff activity, it wasn't weighted one way or the other more so than usual?

It's [covered], yes.

Across the different business [regions].

Okay.

And then I know you'd already answered this but I missed it.

The expected amortization in the back half of the year on the energy investments would be what?

Yes.

It's $5 million in Q3 and $15 million in Q4.

Okay.

And then on top of the kind of $5 million run rate on the low-income housing?

Yes, $6 million run rate.

Yes.

$6 million, okay.

Our next question comes from the line of David Chiaverini of Wedbush Securities.

So I had a follow-up on the loan growth.

So the competitive pressure in the commercial real estate, so when we look out going forward, should we expect -- is your expectation that the payoffs -- elevated payoffs are going to kind of stay in place?

Or are you guys -- and at the same time, are you guys kind of pulling back from the market because of any perceived risk that you're seeing?

Definitely, no.

A little concerned about the future prospect, but we are seeing market.

That's why we are taking a look at our portfolio and also our lending criteria.

However, we also see that there's a lot of competition coming from other banks, especially big bank.

They're offering very loose term and low interest rate because they also need to show their loan growth.

So these are the pressure coming from competition.

And I think our loan officers work very hard, so we try to maintain our portfolio and grow as much as possible.

And with you maintaining the 7% to 8% loan growth guidance, should we expect this high level of C&I growth to continue in the back half of the year?

And looking at the resi mortgage on an end-to-period basis, looks like it was kind of flattish.

Should we expect that to pick up in the second half as well?

Well, yes.

Residential mortgage and C&I, these are the 2 portfolio that we expect to have higher growth rate in the second -- in the third and fourth quarter.

Yes.

Again, residential mortgage, I don't think it was flat during the quarter.

It was our strongest segment for loan growth.

Okay.

I see what I'm missing here in the number.

Okay.

And then shifting gears to the net interest margin.

With the new guidance of 3.75% to 3.85%, if I plug in the 3.83%, if that were to stay flat for the third quarter and the fourth quarter, it kind of lands right at the midpoint of the guidance.

So in the near term, would you -- is your expectation for the NIM to kind of trend sideways from here?

Well, it depends on the prepayment penalty.

So yes, it could be as -- some quarters, it's been as low as 2 basis points.

And so we -- that's why we have that 10 basis point range.

Got it.

And then last one for me is on the securities portfolio and the duration and what your outlook is for the duration.

Yes, I -- it's now about 40% in name of treasuries.

With still 4 more prime rate increases, we want to wait a little bit longer before we add to -- before we extend in the securities portfolio.

And I think the duration is about 2.5 or so in the securities portfolio.

So the expectation is as we get a couple more rate hikes, you may extend that duration to take advantage of higher rates?

Yes, yes.

I mean, in normal times, we target that duration of 3.

(Operator Instructions) Our next question comes from the line of Jon Arfstrom of RBC Capital.

Just a couple follow-ups here on the margin guidance.

You're not assuming any changes in interest rates with that guidance, is that right?

Well, it's normal, 1 or 2 more prime rate increases for this year -- but we're not giving guidance for 2019, but we will find out as time goes on.

Yes, okay.

And a commercial real estate question.

Like the message is you're still seeing good opportunities, it's just tough to hang on when you've got so many payoffs.

Is that a fair assessment that this is still a good market for you?

Yes.

It's still very competitive.

Okay.

And it's -- would you say it's more competitive over the last quarter?

Well, I'll say probably similar in terms of level of competition, the first and second quarter.

Okay, okay.

Good.

And then on commercial, any changes in the pipelines, any changes in borrower mood?

Would you say more positive or the same?

Well, because we book a lot of loan in the second quarter, so our pipeline have reduced a little bit because of that, but it's still healthy.

We still have about $1.6 billion in the pipeline.

That is overall.

Yes, yes.

It's a soft number.

I mean, we're not going to -- don't expect (inaudible).

Yes.

That's fair.

And then I appreciate the comment on the -- some of the tariff conversation, and I know it's extremely difficult to predict all of this, but what do you think about big picture?

Is there any secondary or derivative impact that you worry about outside of just the less than 1% of loans that you disclosed?

Let me -- first, that 1%, it's just on the current imposed tariffs.

So -- and that's mainly, we have a few metal distributors where some of their inventory comes from China.

But I mean, I don't -- I think nobody here has a crystal ball on what's going to happen, although the 10% tariffs will be more tolerable.

And then as part of our deep dive into our import and in our trade finance portfolio, we have a lot that's in our general merchandise, footwear, and hopefully those more consumer-oriented imports.

So the last thing that the administration will want to put tariffs on.

Okay.

Yes, it's difficult to know, but appreciate the information you gave us.

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 earning release date.

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

This concludes the presentation.

You may now disconnect.

Good day.