Cathay General Bancorp
NASDAQ:CATY
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Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp's Third Quarter 2018 Earnings Conference Call. My name is Sherrie, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. [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. Miss Lo, you may begin.
Thank you, Sherrie, 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 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 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% increase when compared to a net income of 49.7 million for 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 one 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 loans for the third quarter of 2018 was primarily driven by the continued form growth in the residential mortgage loans of 119.2 million or 24.9% annualized. In commercial loans of 97.4 million or 15% 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 our summer CD promotion. We continue to monitor and evaluate the trade distance between the US and China and potential impacts 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 loan.
We are in frequent contact with these borrowers and many had indicated that they believe that much of the 10% tariffs would be shared between manufacturers, importers, retailers and customers. Many of these borrowers are also evaluating sorting some of their products from other countries. Through September 30, 2018, there had been no modular loan accruals or charge offs that were linked to the imposition of the tariffs.
With that I'll turn the floor 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 of 2018, as compared of 3.75% in the third quarter of 2017 and 3.83% for the second quarter of 2018.
In the third quarter of 2018, interest recoveries and prepayment penalties added five basis points to the net interest margin, compared to four 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%, non-interest 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, a parent company of Far East National Bank.
Non-interest 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 non-interest expense was primarily due to 2.6 million increase in salaries and employee benefits expense and 5.4 million increase in amortization expense of investments in long-term housing and alternative energy partnerships. Partially offset by 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%. Our 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 non-accrual loans decreased by 23 million to 43.4 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.
Hi, good afternoon, everyone.
Hi, Aaron.
The growth again in this quarter was strong and it seems to be still centered in the residential book. First, what kind of rates are you getting on that - on that new production today and with rates continuing to drift higher, what's your outlook for the growth in that business as we go forward?
Well, the current rate that we are underwriting is about 4.5% to 5% and I'll say half of the residential mortgage loan is 3 to 1 or 5 to 1 adjusted for mortgage. And - this current underwriting rate is high - slightly higher than the - [indiscernible] 4.57% in the third quarter.
And then, 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 seasons and also Chinese New Year, so it may slow down because of that.
Okay. And then I don't see as you 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 - what kind of growth we should expect?
Well, we haven't finished our planning yet. We suspect they will be similar to this year.
Okay.
But in January we'll certainly have formal guidance.
Sure. I guess maybe in similar ways looking out to 2019, Heng, you've given up there in terms of what we should expect for the low income housing credits and tax rate related to that? Do you have anything, have you been talking with your partners in that business about the investments that you might be making in '19 and what level we'd might expect going forward?
Yeah, 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 would be about 20 million compared to 17 million this year.
Okay. Perfect. Thanks for taking my questions.
Yeah. Sure. Thank you.
Thank you. Our next question comes from Michael Young with SunTrust.
Hey, good afternoon.
Hi, Michael.
Just wanted to go back on the deposit side and just wondered if you could provide some color on kind of the summer CD special, anything else you plan to do maybe you are on the holiday season this year. Just give us a sense of kind what your expectation is on rate and betas going forward?
Yeah, we were targeting - our summer CD promotion actually goes into - finishes this week. So we are targeting about 600 million of net new funds. And it's - I think, we'll wind up right at that. Through September 30 we have about 500 million. And then surprisingly there was a R&D pace of that is still pretty constant, even though there was a FED rate increase in the last week of September and the broker CD rates moved 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 rates yet, but it would probably be a little bit higher than the 2.25 rate that we're offering now.
Okay. Just kind of taking that all together and I guess with the assumption those kind of continued steady growth on the loan side, would you expect your deposit betas to remain relatively similar to kind of where we are at today moving forward?
I think so, you know, one of the surprise - favorable surprises for the third quarter was that our non-interest 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 - today, we still haven't updated our poster rate for money market rates. We're still following the big banks and as long as the larger banks are sitting tight, we 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 in the '19, do you think you will be able to continue to harvest those and kind of keep provision at pretty low levels are near zero?
Well, we still have the same couple of large potential recoveries in the $10 million to $15 million range, but we can't - we can't predict what the quarter they'll pop-up. So we - it's just a couple of the B notes and we have to depend on the customer who want to sell the property. 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 reserved for that.
Okay, great. Thanks.
Yeah. Thanks.
Thank you. Our next question comes from Matthew Clark with Piper Jaffray.
Hi, good afternoon.
Hi, Matt.
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 launch of housing [ph] for the fourth quarter?
Yeah. So this might be a little rough, the total was 11.1 million and we had 5.6 in solar so the rest is the 4 point - it's roughly another 5 million, yeah. And then in the fourth quarter - the solar - our guidance from last quarter was 15 million and now down to 12 and then normally the low income housing amortization is about 6 million a quarter.
Got it, okay. Great and then the other fee income worked a little late on a sequential basis, flattish year-over-year, but just wondered if there's anything unusual in there that might be seasonal?
Well, there was about 900,000 by mark-to-market on the value of our swaps and it's unusually high, so we'll think - we think of turnaround in the fourth quarter, these are the swaps that are hedging our fixed rate loans.
Great, okay and then any update on your capital management plans in the fourth quarter and into 2019?
Well I think last quarter I mentioned that we would in the first quarter call up to 50 million of our tariffs [ph] and then we also said that would buyback our stock when that's below $40 and surprisingly [indiscernible], so what we will be back - were will be in the market next week if the stock prices below that. And in terms of the amount, we had 930,000 shares that we issued to the SinoPac and then over the last two years we had all told about that 600,000 shares issued from stock auctions and the best thing of the restricted stock units, so we historically have a bought back those share issuances though, so the total is about 1.5 shares [ph].
Got it and then just last one, any thoughts around potential cost savings - cost savings initiatives in next year and also as a partial offset or any related investments or things you're working on projects?
Well healthcare premiums are down by almost a million in our DP contract which we renewed in July is also going to save us 11 million and then was thinking of some process improvement in the backroom which will sort of triple in - in 2019. I will say what's - we don't know how much, but it's going to be small amounts. So we're really focus on delivering positive operating leverage and we know at a constant effort.
Got it, okay. Thank you.
Thank you.
Thank you. [Operator Instructions] Our next question comes from Chris McGratty with KBW.
Hi, thanks for the question. In terms of the balance sheet growth, I think 7% to 8% loan growth, how should be thinking about securities purchases and then kind of managing the size of the investment portfolio from here?
We think that the - we'll start to ramp up the securities portfolio on 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 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 a great.
But we're all always looking out for potential targets. I understand that [indiscernible] price that we are continuing watching out [indiscernible].
Great, thank you.
Yeah, thanks.
Thank you. Our next question comes from Lana Chan with BMO Capital Markets.
Hi, good afternoon.
Hi, Lana.
Hi, I just want to ask about the commercial loan growth, you started to get some good C&I growth over last quarter or two, which industry segments are those participations?
Well we probably meant that we have - the best teams [ph] last year, so we are seeing some increase in the loan commitment and loan outstanding areas and we also see some new commercial line loans coming from different specialized inventory.
Okay. And then we -
Not from participation, but guess it's - not [indiscernible] from participation side.
Okay. And another question with around CRE, I think you guys had made some commentaries over the last two 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 because it is a pretty big business in terms of your loan book?
But the CRE loan is still very competitive that 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 we even see a growth in the CRE loans in the last couple of quarters.
Okay. Thank you.
Thank you. And our final question comes from David Chiaverini with Wedbush Securities.
Hi, thanks. Question on - first clarification on the NIM guidance, the 3.8% to 3.85% was that for the fourth quarter or for the full-year of 2018?
Just the fourth quarter.
Okay. And could you talk about - and since we're kind of smack that in the 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 to go up higher as if we have more prepayment penalties [indiscernible]. We're at 5 basis points right now, so. And then the in terms of what kind of goal lower, well, it's the same factor and then if the risks for banks such as us is if money market deposit rates start to move significantly we'll - it only increased by 8 basis points in the Q3 from 68 to 79 and so let's say 11 basis points. So it - we're starting to see movement there, but it's - that's always a concern for us, if we have money market pricing.
And that's helpful. And then can you provide what the period and deposit rate was? I think the average was 1.05% for the quarter? Do you have what it was at September 30th?
Well we just have it for the month of September and we normally don't compute it. So the month of September, the average rate for interest bearing liabilities is 1.22 versus the 1.15 for the quarter.
And do you have a similar number on the - for the loan side, loan yield?
Yeah, I mean its 4 point - well, for earning assets, it's 4.74 versus 4.67, yeah.
Got it, 4.74 was for the month of September?
Yeah, but we would book our - push this accounting [ph] accretions only at the end of the quarter, so it's skewed by a little bit buyback.
Got it, thanks very much.
Sure. Yeah.
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 your participation in today's conference. This concludes the presentation. You may all disconnect and have a wonderful day.