Cathay General Bancorp
NASDAQ:CATY
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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.
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 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 non-interest-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 may purchase additional shares in the fourth quarter of 2019 depending upon stock price, general business and market conditions and other pertinent factors.
With respect to the ongoing trade dispute between the US 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 a 0.25 point rate cut after the October 30th Fed meeting.
Non-interest 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.
Non-interest 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 non-interest 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%. The 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 includes 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 non-accrual 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.
Hi. Good afternoon, everyone.
Hi, Aaron.
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. 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?
Yeah. 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 of 2019 to September 30 of 2019. And two, we had a large influx of PBA [ph] money market deposits late in the third quarter, and 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 recoveries. So, I think since the guidance is round nickel basis within our view about whether it should be 3.43% or whatever, but anyways that's our expectation.
Sure. I understand. I guess sticking with the same theme, I think you guys probably toward the tail end of – or maybe you've completed your summer CD campaign. Maybe where are the offered rates now on your one-year CDs relative to what they were a year ago?
Yeah. 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 – four quarters from now, which reflects the CDs that were repriced this quarter, the rate has dropped down to 1.78% versus our 09/30 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 – right now, I think our 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 deposits 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.
That's great. Thanks for taking my questions.
Sure. Thank you, Aaron.
Thank you. Our next question comes from Matthew Clark with Piper Jaffray.
Hi, good afternoon.
Hi, Matthew.
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 non-performers and your TDRs are both down. Can you just speak to your appetite to buy back stock and how much is left remaining under the current authorization?
Yeah. I believe there is $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.
Great, okay. Thank you.
Yeah.
Thank you. Our next question comes from Lana Chan with BMO Capital Markets.
Hi, good afternoon.
Hi, Lana.
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 for the 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. But that's the extent of residential mortgage loan sales for this quarter.
Okay, thank you. 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?
Yeah. 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%.
Thanks, Heng.
Sure, thanks.
Thank you. Our next question comes from Michael Young with SunTrust.
Hey. Thanks for the question. I wanted to follow back up on the loan growth question. Just C&I balances were down pretty significantly this quarter. Can you provide a little bit of color around what was driving that?
Yeah. Go ahead, Pin, you want to...
We had some pay down and pay off during the third quarter that probably caused around a decrease of $15 million. And we also have a certain amount of loans that we are trying to close in the third quarter that got pushed into October that caused a decrease in the C&I loan outstanding.
And should we…
Yeah, for lack of anything else. Go ahead, yeah.
I was just going to ask, should we expect kind of a rebound in C&I balances in 4Q with capital call lines and some other things kind of kicking in in the fourth quarter? Just was curious what you're seeing in pipeline there. And also, if you'd seen any change in demand for the one to four family mortgage product.
Yes. We expect some increase in the fund financing lending. And also, for the syndication department, I talked to them today. They are expecting kind of an increase in 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 clean-up 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…?
Yeah. Around $4 million this quarter versus $6 million last quarter.
No. I think it's -- yeah, I'm trying to think. I think in the second quarter, we had higher off balance sheet reserve for off balance sheet commitment. That was about $700,000. And I think that's pretty much it. And I think in the fourth quarter, we're hopeful that we could get a good decrease in that expense as well from reserve for off balance sheet commitments.
Okay. Thanks.
Thank you. Our next question comes from Chris McGratty with KBW.
Great. Thanks. 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 [indiscernible] business? What's a reasonable range of expense growth for the franchise?
I think we're hopeful that it could be like 2.5%. Now, to the extent – I was reading some other conference call scripts. 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 part of our planning for 2020. We're going to be very focused on that.
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 [indiscernible] kind of outlook for kind of demand given the tariff situation? Thanks.
Yeah. I did speak to many of our customers in different regions. And many of them have planned – they already hit the better plan, including moving 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, since then, most customers already have some plans. And we're not seeing any performance negatively – severely impacted by the tariffs so far.
Great. Thank you very much.
Yeah. Thanks, Chris.
Thank you. Our next question comes from Gary Tenner with D.A. Davidson.
Thanks. Good afternoon.
Hi, Gary.
Hi. Just had another question actually on that same topic of tariffs. Really, I was curious about – I know it's still a bit early in the fourth quarter. But where you're seeing drawdowns in the 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've not seen an increase because of the tariff issue.
And then, you're also not seeing a seasonal increase in drawdowns related to kind of the inventories?
No, no, no. Right.
Okay. All right.
Thank you. [Operator Instructions]. Our next question comes from David Chiaverini with Wedbush Securities.
Hi, thanks. 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 pre-pay fees, you said was about 4 basis points. Now, you're 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 that 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 promotion. 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 the, 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 just talk about the competitive dynamics there?
Yeah. Well, first, I check with the head of our residential mortgage department. We are primarily a purchase lender. So, historically, 80% of our originations have been from purchases. Now, 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 is 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 non-resident alien mortgages. So, there, we're pretty competitive with our 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, as the months go on, we'll get a better idea as to the extent of the refinancings.
Got it. Thanks very much.
Okay. Thank you.
Thank you. And our final question will come from K.H. Lee [ph] with Taiwan Holdings.
Good afternoon. This is K.H. from Taiwan Financial Holdings Institutional Investors. 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 alleged problems with the deal, strongly suggesting that Cathay [indiscernible] SinoPac's President, Michael Chang, has engaged in illegitimate arrangements in order to get the deal at an unfair price. My question is, does Cathay ever provide a benefit for Michael Chang in private in return for an underprice purchase of FENB and not accepting Preferred Bank's Chairman Yu Li's 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.
Okay. Thank you.
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.