Q3 2019 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp's third quarter 2019 earnings Conference call.

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

This time, all participants are in listen only mode.

Following the prepared remarks, there will be a question and answer session. If he would like to participate in this portion of the call. Please press star followed by one at anytime during the conference. If assistance is needed anytime during the call. Please press star followed by zero and coordinator, we'll be happy to assist you.

Today's call is being point anything will be available for replay at www Dot Cathay General Bancorp's Dot com not only to turn call over to Georgia, though investor Relations of Cathay General Bancorp.

Thank you Sherry and good afternoon here to discuss the financial results today are Mr. pizzi tie, our chief Executive Officer, and Mr. Hankin, Our executive Vice President and Chief Financial Officer before we begin we wish remind you got the speakers on this call may make forward looking statement within the meaning of the applicable provision of their private secure.

<unk> Litigation Reform Act is 1995 concerning future results an event and that these statements are subject to certain risk and uncertainties that could cause actual results could differ materially. These risks and uncertainties are there was describing the companys annual report on Form 10-K for the year ended December 31st 2018, I don't I'm wondering in particular and I know there would be.

Ports 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 data. This presentation. We undertake no obligation to update any forward looking statements or two publicly announce any revisions of any forward looking statements reflect future development. We then.

Except as required by law.

This afternoon, Cathay General Bancorp issued an earnings release outlining third quarter 2019 results to obtain a copy please visit us at our website at Www Dot Cathay General Bancorp Dotcom.

After comments by management today, we will open up this call for questions.

We'll now turn the call over to our Chief Executive Officer, Mr. Kintigh. Thank you as Julia and good afternoon.

Welcome to 2019, so called <unk> earnings Conference call.

Yes, absolutely.

Reported net income of 72.8 million well this quarter of 2018, a full on repurpose increased when compared to net income of 69.8 million, what it says well into 2018.

I do the earnings per share increased by 7.1 person 91 thing well the so called Oh, trendy 19, compared to 80 bison Shia well the same quarter yeah goals.

In the so called Elk trend Unitedhealth.

<unk> loans grew by 171.8 needed to 14.8 billion or an increase of 4.9% on an annualized b.

Increasing known well, so well delta and United He was primarily driven by the group and commercial as the loan.

190 million, well, you know pinpoint repurpose and you're right.

As I said, there's a multi soon including loan held for sale of 118.5 million, what Copeland person and your life.

Possibly offset by the decreasing come Muslim 104.9 Union and the sales all.

Equaled one median age of mortgage loans.

We anticipate don't grow 2019th of between 6% to 7%.

Well, the so called <unk> couldn't uniting all told to the policies, including 295.3 million or 8.6% annualized.

Who 14.7 billion.

We increased the policies.

The so called they'll try these Nike was primarily driven by the growth in London market be policies 186.2 meeting well 36.7% annually.

Non interest bearing demand deposits, a 181.6 million okay fly on fall isn't anyway.

Hi, Tony offset.

We can be Pasi 92.6 meters.

We continue our stock buyback program.

Oh, Gee 135000 shares of asphalt and it as these costs on a default Allison six cents per share.

Well ill 2019.

You had poaching Shia in the fourth quartile trend uniting depending upon spot price general business and multi condition and other casinos better.

With respect to the ongoing trade dispute between the U.S., China, we continue to monitor.

And you've already.

I wish to our loan portfolio.

Oh loss that we'd be deep could be at adversely impacted by the current terrorists whole across image the coupon life event, although total.

With that I'll turn the full bodes well, if you could vice President and Chief Financial Officer, Heng, Chen who discussed the so called to have trended downward trend uniting our needs more detail [laughter]. Thank you Karen and good afternoon, everyone.

The third quarter, we're now net income above 72.8 million or 91.

The leader.

Every one cents.

Earnings per share.

Our net interest margin was 3.56% in the third quarter of 20 lighting as compared to 3.83% in the third quarter of 2018 and 3.58%.

Second quarter of 2019.

In the third quarter 20 my team.

Interest recoveries and prepayment penalties added 12 basis points to the net interest margin compared to five basis points for the third quarter of 21 and three basis points.

The second quarter of 20 monkey.

We expect our net interest margin for the fourth quarter of 2019 to be between 3.4 or 5% and 3.5 all person.

Based on the quarter point rig correct.

After the October 31st meeting.

Noninterest income during the third quarter 2019 increased by 2.6 million to 10.4 million when compared to sort of quarter of 20 Pete.

The increase was primarily due.

<unk> increased a 1.5 million in the valuation of interest rate swap contracts.

And point Eightmillion gain on the sale of residential mortgages.

Non interest expense decreased by <unk> point, fourmillion or 0.6%.

65 point.

Smoking a third quarter 29 team when compared to 66 million in the same quarter a year ago.

The third quarter 2019, a decrease in non interest expense was primarily due to a 4.1 million decrease.

And the amortization of the investments and 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 point 7 million increase in professional services.

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

Third quarter effective tax rate.

Reflects a year to date adjustment.

For your effective tax rate.

The third quarter 2019 income tax expense includes a 1.4 million.

Just one.

To reflect the impact of a delay in installation of solar systems.

And 8.8 million adjustment for lower than expected loan come housing tax credits.

We anticipate that our effective tax rate.

For the fourth quarter was 29 team will be approximately 20%.

So although tax credit amortization.

Well, it's 3.3 million in third quarter 2019.

We project.

All the tax credit amortization.

Have a approximately 5 million in the fourth quarter of 2019.

At September Thirtyth 2019, our tier one leverage capital ratio decreased to 10.81% as compared to 10.83% as December 30 120 team.

Our tier one risk based capital ratio decrease.

12.41% from 12.43% and keep some volatility on 28, King and our total risk based capital is show decrease.

To 14.6% from 14.15%.

December 31 2080.

Net recoveries for the third quarter of 2019 were 5.3 million compared to net recoveries of point 1 million in the second quarter 2019.

And net recoveries, the 3.1 million you know sort of quarter of 2018.

It was a loan loss reversal of 2 million for the third quarter 2019 compares to know loan loss provision in the second quarter 2019.

The loan loss reversal.

1.5 million third quarter 20 T R.

Our non accrual loans decrease.

Hi, 7.5 million to 47.2 million or 0.32% of purely downloads as compared to the end of the second quarter of 2019.

Thank you Hank will now proceeds through the question and answer most of the call.

Ladies and gentlemen, if you have a question at this time. Please press. The Star then one keen on your Touchtone telephone we ask that you. Please limit yourself to one question and one follow up question. You May then returned to the Q.

Good question has been answered or you wish to move yourself from the Q. Please press the pound key to prevent any background noise. We ask that you. Please place your line I mean once your question has been stated.

Our first question comes from Aaron Deer, with Sandler O'neill partners.

Hi, good afternoon, everyone.

Oh I higher.

Hi, Thanks.

If I back out the interest recovery and and prepayment penalties. It looks like the core margin was around 344 in the third quarter and your guidance for the fourth quarters 345 to 350, if I heard you correctly I'm just wondering given some of the yields pressures that we're seeing across the industry. What gives you confidence if we're going to see.

Kind of a flattish to maybe even up margin here in the fourth quarter.

You know that like guidance.

It's more art than science, but.

One thing is.

We have a on RCD.

On a point to point basis or they declined by.

Six basis points from the.

From June 30 of 2019 too.

September Thirtyth 2019, and too we had a.

Large influx of TV and money market.

Deposits.

Late in the third quarter and.

And Matt those deposits.

Our still here so.

So we think we'll get some.

Some benefits.

In the in the NIM.

From that in the fourth quarter and then we typically we typically get you know about four basis points or in a prepayment penalties and interest recoveries. So.

No I think since the guidance is and you know rounding Nicole basis, which can argue about whether it should be 343 or whatever but anyway thats our.

That's our expectation sharp I understand I guess sticking with the same theme the.

Hi.

I think you guys probably towards the tail end of or maybe have completed your your summer CD campaign.

Where.

Maybe where are the offered rates now on your tier one year Cds relative to what they were a year ago.

Yeah.

I think we've learned from.

From experience so.

We are leaving.

We have general guidance to our.

Branch managers.

So that we don't lined up for us overpaying for smaller Cds.

But I think the best.

The best reflection of that is.

In the.

In the.

Four quarters from now that.

Which would reflects the or.

The Cds that were good price this quarter the wave has dropped down to 1.78%.

Versus our.

Nice to have the average rate of 2.07.

And then for the upcoming quarter. The average CD rates is 2.06, so I think roughly.

We are picking a picking up maybe.

30 basis points.

From the repricing and we're hoping that.

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It's right now I think Bob.

Positive or a little sticky.

The weak pricing side, because there's still a few banks that are.

Offerings, CD promotions and it takes a while core deposits to get used to the.

And now lower rates, but we think as time goes on in the fourth quarter.

Well, we'll continue to improve on that.

Okay. Thanks for taking my questions.

Sure. Thank you.

Thank you. Our next question comes from Matthew Clark with Piper Jaffray.

Hi, good afternoon.

Hi Murphy.

Just to clarify your NIM guidance of 345 to three cities on reported basis, including four basis points of prepay and.

Recoveries correct, yes, yes.

Okay.

And then.

Just on the on the buyback activity slowed this quarter is assume that's partly.

Just given your concerns around the trade war, but.

Then again your non performers and year to yours are both down.

Can you speak to the your appetite.

To buy back stock and how much is left remaining under the current authorization.

Yeah, others, there's a I believe those.

20 million, that's left and you also said recently changed or.

The requirements, so bank holding companies.

They don't need regulatory approval.

For new buybacks and then in terms of appetite I would think.

We look at as the.

As a fairly long campaign rather than.

Trying to.

She had a particular amount every quarter so I think.

As I mentioned in size it depends on the circumstance and you know for sure we'll do some amount in Q4.

And then.

2020 is a new your and you know obviously, we'll have to do.

A fair amount given the.

Compression on them.

Great. Okay. Thank you.

No.

Thank you. Our next question comes from wanted Chan with BMO capital markets.

Hi, good afternoon Atlanta.

You slowed the loan growth.

Guidance for the full year, two 6% to 7% from 7% to 8% before thanks.

Because you're planning on selling more ready mortgage.

Uh huh.

I think the allows the issue is that you're not we almost have a 4 billion dollar residential mortgage portfolio and for the lower rates, we are seeing more.

Prepayments or refinancings and so that's that's the main driver for that and then we didnt move a 37 million of loans.

To held for sale and we sold them last week so.

But that's the that's the extent of residential mortgage loans sales.

For this quarter.

Okay. Thank you.

Good question is can you give us an update on the.

Expected tax credit amortization expense in 14, you asked about the tax rate.

Oh yeah.

The the amortization.

Is 5 million for solar.

Probably a 5 million for low income housing and the tax rate for the fourth quarter would be 20%.

Thanks.

Sure. Thanks.

Thank you. Our next question comes from Michael Young with Suntrust.

Hey, Thanks for the question wanted to follow back up on the loan growth question, just see Eni balances were down pretty significantly. This quarter did you provide a little bit a color around what was driving that.

Yeah.

Apparently was yes.

We had some pay down in pay off during the third quarter, that's probably caused that I'm not competing union and we also have Uh huh.

Isn't a mild loan that we could you quantify nickel pushed.

He will build.

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And Jeff.

Hi, yes for for lack of the.

Get off.

For lack of a or anything else going out yet.

I was just going to ask should we expect kind of a rebound and have seen I balances in fourq you its capital call lines and some other things kind of kicking in in the fourth quarter. Just was curious what you're seeing them pipelines. There and also if you'd seen any change in demand for though one to four family mortgage product.

Yes, we expect some increase in the on fundraising.

Lending and also for this indication.

On than that.

They are they spending ever increasing a worry a little less.

And residential mortgage risk, including strong.

So as to get ideal.

This headwind.

Yes.

Okay and one just cleanup question for me just on other expenses dropped down a good bit this quarter any anything that changed their inc.

Well other expenses I think the.

Yeah, Michael you're talking about other other or.

Yes.

4 million this quarter versus six last quarter.

No I think it.

Yeah.

And Chris I think I.

I think in the second quarter, we had some we had higher.

Oh off balance sheet.

The user for off balance sheet commitments.

That was about 700000 and.

I think that's.

That's pretty much yet either.

And I think in the fourth quarter World, We're hopeful that we should get a oh.

Good decrease in that expense as well from a reserve for off balance sheet commitments.

Okay. Thanks.

Thank you. Our next question comes from Chris Mcgratty with KBW.

Great. Thanks.

Elaborate on the expense question, Hey, if we kind of it.

Looking at next year, obviously that the industry is facing a bit of revenue pressures with with margins. How do we think about the pace of investment for the franchise, maybe excluding taxes tax EM business.

What's a reasonable range of expense growth for the franchise.

Well, we're oh I see.

Well hope full 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 oh.

Until revenues are higher and.

I think.

Well look at.

Yeah, Rob branch network.

In always.

We said, we could always find a branch the clothes and.

And then.

I think that's.

As part of our planning for 2020, well go to be for a focus on back.

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 out [laughter].

And what kind of outlook for kind of demand given the tariff situation. Thanks.

Yeah, I did speak too many of a cut them and deepen region and many of Dan has no pain daily pain.

Including moving those that's been a facility from China to Wi Lan and Cambodia, and also looking finance all seeing Uh huh.

And then also buying from either the pipeline between countries.

What did that Henry.

So he'd been most customer already hit on plan and we're not seeing any.

Performance, then that could be she didn't impact so far.

Great. Thank you very much.

Thanks Russ.

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

Thanks, Good afternoon.

Hi, Gary Hi, just another question actually on that same topic of of tariffs and really I was curious about.

I know just little bit early in the fourth quarter, but where you're seeing drawdowns in trade finance or you're seeing.

Were you are now being much different from where you would have experienced in years past.

In fact, when we look at some cut them no outstanding.

They yeah adrenal.

Paying down the unknown.

From the December on there.

Yes, the inventory.

So the outstanding so fly.

We had in the increase because of a 10 east.

Well I know you're also not showing a seasonal increase in drawdowns related to kind of Illinois.

Right.

Thank you.

Thank you again, ladies and gentlemen, if you have a question at this time. Please press the Star then one keeping your touchtone telephone.

Next question comes from David Shamis, Perini with Wedbush Securities.

Hi, Thanks, a couple of questions for your 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 four 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.

In the 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.

We prices in the first quarter.

So the.

[noise] and this is.

This is from our Chinese new year promotions. So we have 2.6 billion repricing.

In the first quarter and that's portfolio has the highest.

Average rates, it's 2.20 right now.

So we're hopeful that.

When those.

See these matures you know we can roll on that let's say 160, or 170 or or less some of them. We'll go back to money market.

Balances.

Got it Okay. That's helpful and then.

Shifting gears to the loan growth you mentioned about.

The lowered guidance due to refinance 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 street and you're not willing to kind of match that reaches could you talk about.

The competitive dynamic.

Yes, let me well first you know we.

I check with the head of our moral residential mortgage department and we are primarily a purchase lender so.

Huh.

Historically.

80% of our originations.

Been from.

Purchases now.

Pipeline.

That has dropped to about 60%.

But the bulk of our production is coming from purchases.

And then in terms of.

Pricing you know you know products we offer.

Our.

Or kind of unique there's not a mainstream banks don't offer this sort of stuff going on in terms of the.

Low dock.

Mortgage and also to a smaller extends the nonresident equally in mortgages. So there were.

Pretty competitive for our with our other Chinese American peers, but we don't see these Ah depositors.

Refinancing.

So wells Fargo or somebody else, but.

Its a.

It's a fairly recent developments so we're up.

We.

As as is amongst go on we'll get a better idea as to extend over on the refinancings.

Got it thanks very much.

Okay. Thank you.

Thank you and our final question will come from K, H., Lee with Taiwan Holdings.

Good afternoon cage from towers furniture.

No investor.

Whereas adding that we've been type is is there some articles on your M&A deals of.

National Bank.

Holdings alleges problems with the deal probably suggesting that can't they implement thing and opex precedence for channel I think.

Just had arrangements to work together.

Oh, they're probably a question though.

I think never provided benefits from assessing imply that we track underpriced purchase.

And that we prefer Ben Sherman.

Hi.

I would there be.

In the future.

Does that Kathy reputation.

Good afternoon differently. It came out of the general counsel of Cathay General Bancorp.

We are aware of the issues that are going on in Taiwan, but we are right 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. We look forward to speaking with you at our niche poverty ending the state.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the presentation. You may now disconnect can have a good day.