CATY
#Thank you, <UNK>, and good afternoon.
Welcome to our 2017 Fourth Quarter Earnings Conference Call.
Today, we reported net income of $25.9 million for the fourth quarter of 2017, a 46% decrease when compared to the net income of $48 million for the fourth quarter of 2016.
Diluted earnings per share decreased 46.7% to $0.32 per share for the fourth quarter of 2017 compared to $0.60 per share for the same quarter a year ago.
Fourth quarter results were impacted by the enactment of the Tax Cuts and Jobs Act.
As a result of the new tax law, the bank recorded a onetime revaluation adjustment of $22.3 million to reduce its deferred tax assets and a $2.6 million pretax write-down of low-income housing investment for a net impact of $0.29 per share.
Adjusted for these 2 items, fourth quarter earnings per share was $0.61 per share and were impacted by higher amortization expenses, which <UNK> will discuss in his remarks.
We made significant progress in 2017 from organic growth and from the acquisition of Far East National Bank.
The system conversion of the former Far East National Bank onto Cathay Bank systems is scheduled for April 2018, which will permit completion of the integration of our operations.
In the fourth quarter of 2017, our gross loans, excluding loans held for sale, increased $274.9 million to $12.9 billion, an annualized increase of 8.7%.
Including the acquisition, we grew our loans by $1.7 billion or 14.9% when compared to December 31, 2016.
The increase in loans for the fourth quarter of 2017 resulted primarily from residential mortgages and commercial mortgage loans, which grew by $139.5 million or 19.1% annualized and $107.7 million or 6.8% annualized, respectively.
Commercial loans increased $41.4 million or 6.8% annualized.
We anticipate organic loan growth in 2018 to be around 8%.
For the fourth quarter of 2017, our total deposits increased $128.2 million or 4.1% annualized to $12.7 billion.
Deposit growth for the fourth quarter of 2017 resulted primarily from time deposits, which grew by $234.2 million or 18.2% annualized.
With that, I'll turn the floor over to our Executive Vice President and Chief Financial Officer, <UNK> <UNK>, to discuss the fourth quarter 2017 financials in more detail.
Thank you, <UNK>, and good afternoon, everyone.
For the fourth quarter, we announced net income of $25.9 million or $0.32 per share.
Our net interest margin was 3.65% in the fourth quarter of 2017 as compared to 3.36% in the fourth quarter of 2016 and 3.75% for the third quarter of 2017.
The change in the net interest margin in the fourth quarter was due to interest recoveries and prepayment penalties, which added 7 basis points to the net interest margin compared to 16 basis points for the third quarter of 2017 and 8 basis points for the fourth quarter of 2016.
Noninterest income in the fourth quarter of 2017 increased $2.2 million to $10.2 million when compared to fourth quarter of 2016.
The increase was primarily due to increase in net income from venture capital investments, wealth management commissions and other fees recorded in the fourth quarter.
Noninterest expenses increased $12.9 million or 24.1% to $66.4 million in fourth quarter 2017 when compared to $53.5 million in the same quarter a year ago.
The increase was due to a $5.8 million increase in amortization of low-income housing and alternative energy investments, $3.5 million in salary and employee benefits expenses and a $1.2 million increase in professional expenses ---+ professional services expenses, offset by a decrease in other real estate owned expenses of $2.6 million.
In addition to the $2.6 million write-down of low-income housing investments as a result of the tax credit ---+ Tax Cuts and Jobs Act, the company booked a $1.8 million catch-up adjustment to the amortization of certain older low-income housing investments as a result of the new tax act, $900,000 in solar tax credit impairments as a result of the new tax act and $950,000 in legal settlements.
In addition, there were $844,000 of integration expenses related to Far East National Bank.
As mentioned previously, the Tax Cuts and Jobs Act was enacted into law.
And as a result, during the fourth quarter of 2017, the bank ---+ the company recorded a onetime revaluation adjustment of $22.3 million to reduce its deferred tax assets.
We plan on making new investments in 2018 in solar tax credit investments, which would bring our effective tax rate in 2018 to between 17.5% to 18.5%.
We expect solar tax credit amortization of about $20 million in 2018, most of which will be in the second half of 2018.
At December 31, 2017, our Tier 1 leverage capital ratio decreased to 10.31% as compared to 11.57% at December 31, 2016; our Tier 1 risk-based capital ratio decreased 12.14% (sic) [decreased to 12.14%] from 13.85% at December 31, 2016; and our total risk-based capital ratio decreased to 14.07% from 14.97% at December 31, 2016.
All ratios significantly exceeded well-capitalized minimum ratios under all the regulatory guidelines.
At December 31, 2017, our common equity Tier 1 capital ratio was 12.14%.
Net recoveries through the fourth quarter of 2017 were $1.7 million compared to $1 million in the fourth quarter of 2016.
Our nonaccrual loans, excluding loans held for sale, decreased by $25.3 million or $16.6 million to $48.8 million or 0.4% of period-end loans as compared to the third quarter of 2017.
Thank you, <UNK>.
We will now proceed to the question-and-answer portion of the call.
Wanted to start maybe just with credit costs actually.
Full year 2017 ended up still in the negative with net recoveries.
As we look out to 2018, should we expect that to return to positive provisioning.
And any other color you could provide around that.
Yes, <UNK>, this is <UNK> <UNK>.
We think that our loan growth will be about $1 billion.
And absent any large net charge-offs, our ---+ we probably will try to provide around $10 million for 2018.
At which ---+ it probably would start in Q2 based on what we know right now as to our ---+ all levels.
Okay, great.
And maybe just on the deposits, the growth was good this quarter, but what's kind of the outlook for next year in terms of deposit pricing pressure that you may see.
And did that influence your NIM outlook of kind of gradually increasing throughout the year.
Yes, I think it's a new role for us in terms of the Fed increasing ---+ or the Fed fund futures imply 3 primary increases.
And so far, we've not had to increase our core deposit levels ---+ rates.
But ---+ and for the incremental funding, we've gone to the brokered deposit markets.
I would think at some point, as we would ---+ other banks ---+ us and other banks will start to increase deposit rates, particularly in jumbo CDs and some of the larger money market balances.
So that's ---+ yes, we're not sure, but it's ---+ and that's why I think our guidance is in that range of 3.7 to 3.8.
Yes.
Well, first, on the solar amortization, that looks to be almost all in the second half of the year based on the ramp-up.
Then on low-income housing, we think it will be $5.5 million of expense per quarter, starting in Q1.
And then as to overall expense levels, we ---+ our fourth quarter run rate has just a modest amount of cost saves from Far East.
We think once the system conversion is completed and that during the course of 2018, we would save around $8 million from Far East and with onetime expenses, severance and conversion of $1.5 million to $2 million.
So put all that in there, we're thinking our core expenses, excluding the amortization, will go up around 4% for next year because we are getting the savings from Far East.
Yes, we've switched mainly to a 15-year MBS portfolio.
That was ---+ we're gradually shifting to that, and that tends to not have a lot of prepayments versus 30-year MBS.
And then in terms of the size, we are ---+ we have about $300 million in treasuries at the end of the year, so we're going to move $100 million of the treasuries into MBS.
And in terms of the pace of the investment, for the first half of the year, we're going to invest about $50 million per month.
So that would imply a net growth in the securities portfolio of about $200 million.
And as a result, the cash at the Fed would go down by about $200 million.
Yes, yes, yes.
Yes, yes.
So in terms of the unusual expenses, we have, first, the $2.6 million write-down of low-income housing.
Most banks are on a proportionate amortization for low-income housing.
So that shows up in income tax expense.
We're on the equity method, so that shows up in noninterest expense.
And then we have $1.8 million catch-up adjustment for low-income housing and then $900,000 in solar tax credit investments where we made those investments when they were at 35% federal tax rate.
And if you factor in a 21% federal tax rate, there's an impairment there once again of $900,000.
And then we had a onetime legal settlement in the fourth quarter from some long-standing claims of $950,000.
So those are the general onetime things.
Yes, it's in the income statement on the press release, but it's $844,000.
About 3.3, that ---+ I mean, that's what the Fed fund future is showing, yes.
3.
<UNK> may add in, but I think, first, we think we have pretty good loan growth.
So that's our first priority.
I mean, if we can have higher than 8% loan growth, we ---+ that would be good.
Then the second one is we would increase our dividends probably in second half of the year.
We normally pay out 40% of our earnings.
And with the higher ---+ because the tax rate is lower, our earnings are going to be higher.
And then I think acquisitions are a possibility, but we're focused ---+ we want franchises with true longevity in customer base, particularly in deposits.
And so there aren't that many that would be Chinese.
And then buyback, I think we're probably not going to be buying back our stock at the current levels.
Well, we are always open to possibility of acquisitions.
However, we are very careful picking the target.
We want to make sure that it's a good match for us, synergy accretion to our earnings.
So given all these conditions, that there aren't too many in the marketplace right now.
I think the most promising in terms of growth is still residential mortgage.
We did very well in 2017 and we still have a very good, solid time line.
And another area of growth is the C&I.
We started to see results from our expansion into oil and gas industry.
And also, we're acquiring, recruiting experienced relationship managers.
So we start to see the outcome, the results coming in from those new hires.
I think that it's still very competitive in terms of loan market.
So we see a new squeeze in the net interest margin.
For the new loan coming in, there's many banks bidding on the new loans.
So I would say given the rate rising environment, we'll see some growth in the new ---+ in our loan asset.
But it won't be too significant is our guess, based on the competition.
Yes, I think ---+ sometimes I get involved in loan pricing as well.
But I ---+ one of the good things about our loan base is that so many of the loans are longer-term loans, like residential mortgage.
We haven't seen much ---+ it's a normal pricing that's linked to 5-year treasuries, which is kind of where we land.
And then on CRE, the great bulk of our loans tend to be 5-year or multiyear loans.
So we may see places where there's very competitive pricing on a couple of customers, like for the ---+ we have a big legacy book that will carry pretty good spreads.
So that's ---+ I mean, we want to do what's right for the shareholders in terms of delivering operating leverage and having net interest income continuing to grow.
For residential mortgage, yes, primarily 3/1 and 5/1 ARMs.
We do some fixed ---+ 15-year fixed.
Well, for new single-family residential mortgage, it's probably about 40 basis points.
And then I think C&I, it's probably closer to 1% all in, and the same thing with CRE.
And then construction, it's a little bit higher because of our historical losses.
Well, we have so-called 2 notes.
That's probably the primary driver.
Yes, yes.
One was sold off in November from the East ---+ from our Eastern region.
And the second one, we moved to held for sale.
And that deal ---+ that sale closed a couple weeks ago.
Those are both par deals, so we're happy.
Yes, yes.
They're both from the Eastern regions.
Well, we're ---+ that's ---+ we're using broker CDs that keep our net loan to deposit ratio at 100%.
Because we have such strong loan growth in the ---+ in December, we were ---+ we went a little over 100%.
But the CD market, it's a very broad market.
We black out the 2 main states that we're in, California and New York, and so if we need to, we can generate easily $100 million per month.
But they're at market rates which tend to be treasuries plus 10 basis points or thereabouts.
So far, there's no surprises.
So it's ongoing, and then we will have the systems conversion in April.
Then we'll be able to generate more cost savings.
Yes, and then we also have some ---+ I believe we moved one of the branches last week.
It's right across the street from us.
And then their main branch is in downtown, and they own ---+ it's pretty expensive in terms of operating expense because it's a whole ---+ it's a 4-story office building.
So we moved most of the people out of there and that branch is scheduled to close in the middle of February.
So starting then, we'll report that as ---+ those idle facilities as integration expense.
So you'll get ---+ so investors will get an idea as for the clean run rate.
Thank you for joining us for this call, and we look forward to speaking with you at our next quarterly earnings release date.
