Cathay General Bancorp (CATY) 2019 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp's Third Quarter 2019 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 Georgia Lo, 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 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, 2018, at Item 1A in particular, and in all 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 revisions 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 third quarter 2019 results.

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

Welcome to our 2019 third quarter earnings conference call.

This afternoon, we reported net income of $72.8 million for the third quarter of 2019, a 4.3% increase when compared to net income of $69.8 million for the third quarter of 2018.

Diluted earnings per share increased by 7.1% to $0.91 for the third quarter of 2019 compared to $0.85 per share for the same quarter a year ago.

In the third quarter of 2019, our gross loans grew by $171.8 million to $14.8 billion or an increase of 4.9% on an annualized basis.

The increase in loans for the third quarter of 2019 was primarily driven by the growth in commercial real estate loans of $190 million or 11.3% annualized, and residential mortgage loans including loans held for sales of $118.5 million or 12.8% annualized, partially offset by the decrease in commercial loans of $104.9 million and the sales of $38.1 million in residential mortgage loans.

We anticipate loan growth in 2019 of between 6% to 7%.

For the third quarter of 2019, our total deposits increased $295.3 million or 8.6% annualized to $14.7 billion.

The increase in deposits for the third quarter of 2019 was primarily driven by the growth in money market deposits of $186.2 million or 36.7% annualized and noninterest-bearing demand deposits of $181.6 million or 25.4% annualized, partly offset by the decrease in time deposits of $92.6 million.

We continued our stock buyback program and repurchased 135,000 shares of our stock at an average cost of $34.76 per share in the third quarter of 2019.

We'll repurchase additional shares in the fourth quarter of 2019, depending upon stock price, general business and market conditions and other pertinent matters.

With respect to the ongoing trade dispute between the U.S. and China, we continue to monitor and evaluate its potential impact to our loan portfolio.

Borrowers that we believe could be adversely impacted by the current tariffs hold approximately 2.5% of our total loans.

With that, I'll turn the floor over to our Executive Vice President and Chief Financial Officer, Heng Chen, to discuss the third quarter of 2019 financials in more detail.

Thank you, Pin, and good afternoon, everyone.

For the third quarter, we announced net income of $72.8 million or $0.91 in earnings per share.

Our net interest margin was 3.56% in the third quarter of 2019 as compared to 3.83% in the third quarter of 2018 and 3.58% for the second quarter of 2019.

In the third quarter of 2019, interest recoveries and prepayment penalties added 12 basis points to the net interest margin compared to 5 basis points for the third quarter of 2018 and 3 basis points for the second quarter of 2019.

We expect our net interest margin for the fourth quarter of 2019 to be between 3.45% and 3.50% based on the 0.25 point rate cut after the October 30 Fed meeting.

Noninterest income during the third quarter of 2019 increased by $2.6 million to $10.4 million when compared to the third quarter of 2018.

This increase was primarily due to an increase of $1.5 million in the valuation of interest rate swap contracts and $0.8 million gain on the sale of residential mortgages.

Noninterest expense decreased by $0.4 million or 0.6% to $65.6 million in the third quarter of 2019 when compared to $66 million in the same quarter a year ago.

For the third quarter of 2019, the decrease in noninterest expense was primarily due to a $4.1 million decrease in the amortization of investments in low-income housing and alternative energy partnerships, partially offset by a $1.4 million increase in salary and employee benefits; a $1.2 million increase in marketing expense; and a $0.7 million increase in professional services.

The effective tax rate for the third quarter of 2019 was 22.4%.

Third quarter effective tax rate reflects a year-to-date adjustment to the full year effective tax rate.

The third quarter 2019 income tax expense included a $1.4 million adjustment to reflect the impact of a delay in the installation of solar systems and a $0.8 million adjustment for lower-than-expected low-income housing tax credits.

We anticipate that our effective tax rate for the fourth quarter of 2019 will be approximately 20%.

Solar tax credit amortization was $3.3 million in the third quarter of 2019.

We project solar tax credit amortization of approximately $5 million in the fourth quarter of 2019.

At September 30, 2019, our Tier 1 leverage capital ratio decreased to 10.81% as compared to 10.83% at December 31, 2018.

Our Tier 1 risk-based capital ratio decreased to 12.41% from 12.43% at December 31, 2018, and our total risk-based capital ratio decreased to 14.06% from 14.15% at December 31, 2018.

Net recoveries for the third quarter of 2019 were $5.3 million compared to net recoveries of $0.1 million in the second quarter of 2019 and net recoveries of $3.1 million in the third quarter of 2018.

There was a loan loss reversal of $2 million for the third quarter of 2019 compared to no loan loss provision in the second quarter of 2019 and a loan loss reversal of $1.5 million in the third quarter of 2018.

Our nonaccrual loans decreased by $7.5 million to $47.2 million or 0.32% of period-end loans as compared to the end of the second quarter of 2019.

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 + Partners.

Heng, if I back out the interest recovery and prepayment penalties, it looks like the core margin was around 3.44% in the third quarter and your guidance for the fourth quarter is 3.45% to 3.50%, if I heard you correctly.

I'm just wondering given some of the yield pressures that we're seeing across the industry, what gives you confidence that we're going to see kind of a flattish to maybe even up margin here in the fourth quarter?

Yes.

That guidance, it's more art than science, but one thing is we have, on our CDs, on a point-to-point basis, they declined by 6 basis points from June 30, 2019 to September 30, 2019.

And two, we have a large influx of DDA and money market deposits late in the third quarter and that those deposits are still here.

So we think we'll get some benefits in the NIM from that in the fourth quarter.

And then we typically get about 4 basis points in prepayment penalties and interest recovery.

So I think since the guidance is in round nickel basis, I mean we can argue about whether it should be 3.43% or whatever.

But anyway, that's our expectation.

Sure.

I understand.

I guess sticking with the same theme.

The -- I think you guys are probably toward the tail end of -- or maybe you've completed your summer CD campaign.

Where -- maybe where are the offered rates now on your 1-year CDs relative to what they were a year ago?

Yes.

I think we've learned from experience.

So we are leaving -- we have general guidance to our branch managers so that we don't wind up overpaying for smaller CDs.

But I think the best reflection of that is in the -- 4 quarters from now, which reflects the CDs that were repriced this quarter, the rate has dropped down to 1.78% versus our 9/30 average rate of 2.07%.

And then for the upcoming quarter, the average CD rate is 2.06%.

So I think roughly, we are picking up maybe 30 basis points from the repricing.

And we're hoping that it's -- right now, I think the deposits are a little sticky on the repricing side because there's still a few banks that are offering CD promotions.

And it takes a while for depositors to get used to the now lower rates.

But we think as time goes on in the fourth quarter, we'll continue to improve on that.

Our next question comes from Matthew Clark with Piper Jaffray.

Just to clarify.

Your NIM guidance of 3.45% to 3.50% is on a recorded basis including 4 basis points of prepay and recoveries, correct?

Yes.

Yes.

Okay.

And then just on the buyback.

Activity slowed this quarter.

I assume that's partly just given your concerns around the trade war.

But then again, your nonperformers and your TDRs are both down.

Can you just speak to the -- your appetite to buy back stock?

And how much is left remaining under the current authorization?

Yes.

There is a -- I believe there's $20 million that's left.

And the Fed recently changed their requirement, so bank holding companies, they don't need regulatory approval for new buybacks.

And then in terms of the appetite, I think we look at it as a fairly long campaign rather than trying to hit a particular amount every quarter.

So I think as Pin mentioned, it depends on the circumstance.

And for sure, we'll do some amount in Q4.

And then 2020 is a new year, and obviously, we'll have to do a fair amount given the compression on the NIM.

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

You slowed the loan growth guidance for the full year to 6% to 7% from 7% to 8% before I think.

Is that because you're planning on selling more resi mortgage?

I think the larger issue is that we almost have a $4 billion residential mortgage portfolio.

And with lower rates, we are seeing more prepayments or refinancings.

And so that's the main driver for that.

And then we did move $37 million of loans to held for sale, and we sold them last week, so.

But that's the extent of residential mortgage loan sales for this quarter.

Okay.

And my second question is, can you give us an update on the expected tax credit amortization expense in 4Q as well as the tax rate?

Yes.

The amortization is $5 million for solar, probably $5 million for low-income housing.

And the tax rate for the fourth quarter will be 20%.

Our next question comes from Michael Young with SunTrust.

I wanted to follow back up on the loan growth question.

Just C&I balances were down pretty significantly this quarter.

Could you provide a little bit of color around what was driving that?

Yes.

Go ahead, Pin.

You want to...

We had some pay down and pay off during the third quarter.

That probably cost around an increase of $15 million.

And we also have a certain amount of loans that we planned to close in the third quarter that got pushed into October.

That caused the increase in the C&I loan outstanding.

And should we expect…

Yes, so I think that this time…

Yes, for lack of anything else.

Go ahead, yes.

I was just going to ask, should we expect kind of a rebound in the C&I balances in 4Q, as capital call lines and some other things kind of kicking in in the fourth quarter?

Just was curious what you're seeing in the pipeline there?

And also have you seen any change in demand for the 1-to-4 family mortgage product?

Yes.

We expect some increase in the fund financing lending.

And also for the syndication department that I called them today, they're expecting kind of an increase in the volume later on this month.

And residential mortgage, we're still going strong.

So add together, I think we still expect to have a higher loan growth in the fourth quarter.

Okay.

And one just cleanup question for me just on other expenses.

Dropped down a good bit this quarter.

Anything that changed there, Heng?

Well, other expenses.

I think the -- Michael, you're talking about other, other or...

Yes.

Around $4 million this quarter versus $6 million last quarter?

No.

I think it's -- yes, I'm trying to think.

I think in the second quarter, we had some -- we had higher off-balance sheet or the reserve for off-balance sheet commitments, that was about $700,000.

And I think that's pretty much it.

I mean the -- and I think in the fourth quarter, we're hopeful that we could get a good decrease in that expense as well from the reserve for off-balance sheet commitments.

Our next question comes from Chris McGratty with KBW.

So if I can just elaborate on the expense question.

Heng, if we kind of look into next year, obviously the industry is facing a bit of revenue pressures with margins.

How do we think about the pace in investment for the franchise, maybe excluding the tax business?

Like what's the reasonable range of expense growth for the franchise?

Well, we're -- I think we're hopeful that it could be like 2.5%.

Now to the extent I was reading some other conference call scripts, I mean there's people that are pushing off investing until revenues are higher.

And I think we'll look at our branch network.

We can always find a branch to close.

And then I think that's -- as part of our planning for 2020, we're going to be very focused on that.

And maybe just one more on the tariffs.

Could you elaborate maybe on some of the conversations you're having with your corporate borrowers?

Did last week at all help?

And whether -- any kind of outlook for kind of demand given the tariff situation?

Yes.

I did speak to many of our customers in different regions, and many of them had planned.

They already had a plan, including moving the production facility from China to Vietnam and Cambodia, and also diversify their sourcing and also buying from other supplier in different countries to avoid these tariffs.

So it seems that most customers already have some plans.

And we're not seeing any performance negatively -- severely impacted by the tariffs so far.

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

Just had another question actually on that same topic of tariffs.

And really, I was curious about -- I know it's still a bit early in the fourth quarter, but where you're seeing drawdowns in trade finance.

Are you seeing where you are now being much different from where you would have experienced in years past?

In fact, when we look at some customers' loan outstanding, they are actually paying down their loans from the sales of their previous inventory.

So the loan outstanding so far is not -- we have not seen an increase because of the tariff issue.

Well and then you're also not seeing a seasonal increase in drawdowns related to kind of all the inventories?

No.

No.

No.

Right.

They make it better.

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

Couple of questions for you, starting with a follow-up on the net interest margin.

So on a sort of core normalized basis, the guidance kind of implies it to be flattish from third quarter to fourth quarter, when you include the normalized level of prepay fees you said was about 4 basis points.

Now you are seeing a pickup of about 30 basis points on CDs repricing.

So when we look out to the first quarter of 2020, is there a chance to possibly see the NIM up in the first quarter or is stable sort of the way we should think about it?

Well, we have -- the biggest portion of our CD book reprices in the first quarter.

So the -- and this is from our Chinese New Year promotions.

So we have $2.6 billion repricing in the first quarter.

And that portfolio has the highest average rates.

It's 2.20% right now.

So we're hopeful that when those CDs mature, we can roll them at, let's say, 1.60% or 1.70% or some of them will go back to money market balances.

Got it.

Okay.

That's helpful.

And then shifting gears to the loan growth.

You mentioned about the lower guidance is due to refi activity picking up.

Now that would kind of imply that your competitors are winning some of that business.

Is it that your competitors are being very aggressive on the rate and you're not willing to kind of match that rate?

Just could you talk about the competitive dynamic there?

Yes.

Let me -- well, first, we -- I check with the head of our residential mortgage department.

And we are primarily a purchase lender, so historically, 80% of our originations have been from purchases.

Now in our current pipeline, that has dropped to about 60%.

But the bulk of our production is coming from purchases.

And then in terms of pricing, products we offer are kind of unique.

There's not -- the mainstream banks don't offer this sort of stuff in terms of the low-doc mortgage, and also to a smaller extent, the nonresident alien mortgages.

So there, we're pretty competitive with the other Chinese, American peers.

But we don't see these depositors refinancing to Wells Fargo or somebody else.

But it's a fairly recent development, so we're -- as the months go on, we'll get a better idea as to the extent of the refinancings.

And our final question will come from [K.H Lee] with Taiwan Holdings.

This is [K.

H] from Taiwan Financial Holdings Institutional Investor.

Are you aware that in the recent Taipei Times news there are some articles on your M&A deal of Far East National Bank?

SinoPac Holdings alleges problems with the deal, strongly suggesting that Cathay and former bank SinoPac's President, Michael Chang, have engaged in illegitimate arrangements in order to get the deal at an unfair price.

My question is has Cathay ever provided benefit for Michael Chang in private in return for an underpriced purchase of FENB and not accepting Preferred Bank's Chairman, Yu Li, to visit in Taipei?

And will there be any legal actions against SinoPac in the future in order to protect Cathay's reputation?

This is Lisa Kim.

I'm the General Counsel of Cathay General Bancorp.

We are aware of the issues that are going on in Taiwan, but we are at no position to say anything, and we will not be making any comment on it.

At this time, there are no questions.

I'd 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 at our next quarterly earnings release date.

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

This concludes the presentation.

You may now disconnect, and have a good day.