Cathay General Bancorp (CATY) 2018 Q3 法說會逐字稿

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

My name is Shari, 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.

Ms. Lo, you may begin.

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 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, 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 third quarter 2018 results.

To obtain a copy, please visit our website at www.cathaygeneralbancorp.com.

After comments by management today, we will open this up -- this call up 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 third quarter earnings conference call.

This afternoon, we reported net income of $69.8 million for the third quarter of 2018, a 40.2% (sic) [40.4%] increase when compared to a net income of $49.7 million on the third quarter of 2017.

Diluted earnings per share increased 39.3% to $0.85 per share for the third quarter of 2018 compared to $0.61 per share for the same quarter 1 year ago.

In the third quarter of 2018, our gross loans grew by $298.9 million to $13.6 billion or an increase of 9.3% on an annualized basis.

The increase in loans for the third quarter of 2018 was primarily driven by the continued strong growth in the residential mortgage loans of $190.2 million or 24.9% annualized, and commercial loans of $97.4 million or 15.3% annualized.

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

For the third quarter of 2018, our total deposits increased $476.5 million or 15% annualized to $13.6 billion, mainly as a result of a summer CD promotion.

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

As of September 30, 2018, those borrowers which we believe will be adversely impacted by the current tariffs, will be less than 2.5% of our total loans.

We are in frequent contact with these borrowers, and many had indicated that they believe that much of the 10% tariffs will be shared between manufacturers, importers, retailers and customers.

Many of these borrowers are also deliberating sourcing some of their products from other countries.

Post September 30, 2018, there have been no loan accruals or charge-offs that were linked to the imposition of the tariffs.

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

Thank you, Pin, and good afternoon, everyone.

For the third quarter, we announced net income of $69.8 million or $0.85 per share.

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

In the third quarter of 2018, interest recovery and prepayment penalties added 5 basis points to the net interest margin compared to 4 basis points for the second quarter of 2018 and 16 basis points for the third quarter of 2017.

Given the third quarter results, we believe that our net interest margin for the fourth quarter of 2018 would be between 3.8% to 3.85%.

Noninterest income during the third quarter of 2018 decreased by $5.2 million to $7.8 million when compared to the third quarter of 2017.

The decrease in the third quarter of 2018 compared to 2017 was primarily due to the $5.4 million gain recognized in the third quarter of 2017 from the acquisition of SinoPac Bancorp, the parent company of Far East National Bank.

Noninterest expense increased by $4.7 million or 7.7% to $66 million in the third quarter of 2018 when compared to $61.2 million in the same quarter a year ago.

For the third quarter of 2018, the increase in noninterest expense was primarily due to a $2.6 million increase in salaries and employee benefits expense and a $5.4 million increase in amortization expense of investments in low income housing and alternative energy partnerships, partially offset by a $3.1 million decrease in acquisition and integration costs when compared to the same quarter a year ago.

The effective tax rate for the third quarter of 2018 was 21.1%.

We anticipate that our effective tax rate for the fourth quarter of 2018 will be approximately 19.3%.

The third quarter effective tax rate reflects a year-to-date adjustment to the new full year effective tax rate.

In the third quarter of 2018, we recognized $5.7 million of amortization expense from solar tax credit investment that was made in the second quarter of 2018.

We expect solar tax credit amortization of approximately $12 million in the fourth quarter of 2018.

At September 30, 2018, our Tier 1 leverage capital ratio increased to 11.03% as compared to 10.35% at December 31, 2017; our Tier 1 risk-based capital ratio increased to 12.81% from 12.19% at December 31, 2017; and our total risk-based capital ratio increased to 14.6% from 14.11% at December 31, 2017.

Net recoveries for the third quarter of 2018 were $3.1 million compared to net charge-offs of $185,000 in the second quarter of 2018 and net recoveries of $5.7 million in the third quarter of 2017.

There was a loan loss reversal of $1.5 million for the third quarter of 2018 compared to no loan loss provision in the second quarter of 2018 and third quarter of 2017.

Our nonaccrual loans decreased by $23 million to $42.4 million or 0.31% of period-end loans as compared to the third 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 Aaron Deer with Sandler O'Neill.

The growth again this quarter was strong, and it seems to be still centered in the residential book.

Curious, what kind of rates are you getting on that new production today?

And with rates continuing to drift higher, what's your outlook for the sort of growth in that business as we go forward?

Well, the current rate that we're underwriting is about 4.5% to 5%.

And half of this -- residential mortgage loan is [3.1% or 5.1%] technical rate mortgage.

And this current underwriting range is slightly higher than the foregoing 4.57% in the third quarter.

Aaron, most of our originations are on purchases.

So we don't think that our interest rates will slow that down.

There is some seasonality during the holiday season and also Chinese New Year, so it may slow down because of that.

Okay.

And then I don't know if you guys are prepared to kind of talk about 2019 at this point, but obviously the growth has been pretty good this year.

As you look out to next year, do you have a sense of what kind of growth we should expect?

Well, we're -- we haven't finished our planning yet.

We suspect it'll be similar to this year.

But in January, we'll certainly have formal guidance.

Sure.

I guess maybe similarly looking out to 2019, Heng, you gave an update in terms of what we should expect for the low income housing credits and tax rate related to that.

Do you have -- so have you been talking to your partners in that business yet about investments that you might be making in '19 and what level we might expect going forward?

Yes.

We need to get regulatory approval.

And so we -- it takes some time.

But assuming we make another investment, our tax rate should be, for the year, should be close to -- for 2019, 19.5%, and the amortization expense will be about $20 million compared to $17 million this year.

Our next question comes from Michael Young with SunTrust.

Just wanted to go back on the deposit side and just wonder if you could provide some color on kind of the summer CD special and anything else you plan to do, maybe around the holiday season this year, just to give us a sense of kind of what your expectation is on rate and betas going forward?

Yes.

We were targeting -- our summer CD promotion actually goes into -- it finishes this week.

So we were targeting about $600 million of net new funds.

And it's -- I think, we'll wind up right at that.

Through September 30, we had about $500 million.

And then surprisingly, there was a -- or the pace of that it's still pretty constant, even though there was a Fed rate increase in the last week of September and the broker CD rates moved up by about 25 basis points.

But we're still getting the same new volume.

And then going to next year, we will do another Chinese New Year promotion.

It's -- the rates -- we haven't set up the rate yet, but it'd probably be a little bit higher than the 2.25% rate that we're offering now.

Okay.

So just kind of taking that all together and I guess with the assumption of kind of continued steady growth on the loan side, would you expect your deposit betas to remain relatively similar to kind of where we're at today moving forward?

I think so.

One of the favorable surprises for the fourth quarter -- for the third quarter was that our noninterest-bearing demand deposits on average went up $117 million.

And some of it -- seasonally, the second half of the year is a little stronger for core deposits, so that helps us.

And then the other thing is we still -- through today, we still haven't updated our poster rate for money market rates.

Still -- we're following the big banks.

And as long as the larger banks are sitting tight, we'll sit tight as well.

And one last one just on the recovery pipeline.

It's been benefiting provision for a while.

Just what's the current outlook now?

And into '19, do you think you'll be able to continue to harvest those and kind of keep provision at pretty low levels or near 0?

Well, we still have the same couple of large potential recoveries in the $10 million to $15 million range, but we can't predict what quarter they'll pop up.

So we -- it's just a couple of B notes and we have to depend on the customer to want to sell the properties.

But aside from that because so much of our loan growth is coming from residential mortgage, we think our loan loss provision will be moderate because, once again, half of the loan growth is residential mortgage, which we only need about 50 basis points in reserve for that.

Our next question comes from Matthew Clark with Piper Jaffray.

Could you just isolate the low income housing tax credit amortization in the third quarter from the solar?

And then you gave the $12 million on solar, but could you also give it on the low income housing for the fourth quarter?

Yes.

So this might be a little rough, but it's -- the total was $11.1 million and we had $5.6 million in solar.

So the rest is, what, it's roughly $5 million.

And then in the fourth quarter, the solar -- our guidance from last quarter was $15 million, now it's down to $12 million.

And then normally, the loan from housing amortization is about $6 million a quarter.

Got it.

Okay.

Great.

And then other fee income looked a little light on a sequential basis, flattish year-over-year.

But just wondered if there's anything unusual in there or not that might be seasonal.

Well, the -- there was about $900,000 of a mark-to-market on the value of our swaps, and it's unusually high.

So we'll think -- we think it'll turn around in the fourth quarter, meaning the swaps that are hedging our fixed-rate loans.

Great.

Okay.

And then any update on your capital management plans in the fourth quarter into 2019?

Well, I think last quarter I mentioned that we would -- in the fourth -- in the first quarter call up to $50 million of our trusts.

And then we also said that we would buy back our stock when it's below 40, and surprisingly, it's here.

So we will be back -- we will be in the market next week if the stock price was below that.

And in terms of the amount, we had 930,000 shares that we issued to SinoPac.

And then over the last 2 years, we had, all told, about 600,000 shares issued from stock options and divesting of restricted stock units.

So we historically have bought back those share issuances.

So I -- the total is about 1.5 million shares.

Got it.

And then just last one.

Any thoughts around potential costs savings -- cost-saving initiatives next year, and also as a partial offset or any related investments or things you're working on, projects?

Well, our health care premiums are down by almost $1 million.

And DP Contract was renewed in July, it's also going to save us about $1 million.

And then we're thinking of some process improvement in the back room, which will sort of dribble in.

In 2019, that will save us -- we don't know how much, but I think it's going to be a reasonable amount.

So we're really focused on delivering positive [operating] leverage.

So -- and then we know that's a constant effort.

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

In terms of the balance sheet growth, I think 7%, 8% loan growth, how should we be thinking about new securities purchases and kind of managing the size of the investment portfolio from here?

Yes.

We think that the -- we'll start to ramp up the securities portfolio gradually.

It could be that interest rates peak late in 2019, and if that happens, we would want to have a larger securities portfolio.

But we're also pretty mindful of the NIM.

So -- but the -- I think, we'll be drifting higher in 2019, mainly with the 15-year MBS.

Okay.

And if I could follow up on the prior question on capital.

Aside from the dividend and share repurchases and organic growth, how are you and the board thinking of external M&A?

Is that something that is a priority?

Are there a lot of opportunities in your markets?

Any comments there would be great.

We are always looking out for potential targets.

I understand that everything has a price.

So we will continue watching out.

There's no specific target right now.

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

Just wanted to ask about the commercial loan growth.

You started to get some good C&I growth over the last quarter or 2. What's the industry segments?

And are those participations?

Well, you probably remember we had our invest team that we set out last year, so we are seeing some increase in the loan commitment and loan outstanding in the area.

And we also see some new commercial, C&I loans coming from different specialized industries.

It's not from participations, I guess.

It's not significantly from participations.

Sorry.

Okay.

And my other question was around CRE.

I think you guys had made some commentaries over the last 2 quarters about just more competitive conditions on the CRE side.

Can you talk about that and what we should expect in terms of that portfolio, considering it's a pretty big business in terms of your loan book?

CRE loan is still very competitive.

There's no change from the previous quarter.

And given that we understand coming in 2019, 2020, the market might be softening, so we are more careful in underwriting the new loans.

So that's why you will see a growth in the CRE loans in the last couple of quarters.

And our final question comes from David Chiaverini with Wedbush Securities.

Question on -- first, a clarification on the NIM guidance, the 3.8% to 3.85%, was that for the fourth quarter or for the full year 2018?

Just the fourth quarter.

Okay.

And could you talk about -- and since we're kind of smack dab in the might middle of that range, at 3.83% for the third quarter, could you talk about what could potentially cause that to go to the upper end of the range?

And vice versa, what could cause it to be at the lower end of the range?

Well, I think what could cause it to go up higher is if we have more prepayment penalties.

So it's -- we're at 5 basis points right now.

So -- and then in terms of what could it go lower, well, it's the same factor.

And then if -- the risk for banks such as us is if money market deposit rates start to move significantly.

We're -- it only increased by 8 basis points in the Q3, from 68 to 79 -- I'm sorry, that's 11 basis points.

So we're starting to see movement that's there, but it's -- that's always a concern for us in the money market, the pricing.

That's helpful.

And then, can you provide what the period-end deposit rate was?

I think the average was 1.05% for the quarter.

Do you have what it was at September 30?

Well, we just have it for the month of September handy, we normally don't compute it.

So the month of September, the average rate for interest-bearing liabilities is 1.22% versus it was 1.15% for the quarter.

And do you have a similar number on the -- for the loan side -- loan yield?

Yes.

I mean, it's -- well, for earning assets, it's 4.74% versus 4.67% Yes.

Got it.

4.74% was for the month of September?

Yes, but we book our purchase accounting accretions only at the end of the quarter, so it's skewed a little bit by that.

Ladies and gentlemen, thank you for your participation.

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

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

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

This concludes the presentation.

You may all disconnect, and have a wonderful day.