Cathay General Bancorp (CATY) 2013 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's first-quarter 2013 earnings conference call.

My name is Caris and I will be your coordinator for today.

At this time, all participants are in 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 Monica Chen, Investor Relations for Cathay General Bancorp.

Thank you, Caris, and good afternoon.

Here to discuss the financial results today are Mr. Dunson Cheng, our Chairman of the Board, President, and Chief Executive Officer; Mr. Heng Chen, our Executive Vice President and Chief Financial Officer; and Mr. Kim Bingham, our Executive Vice President and Chief Credit Officer.

Before we begin, we wish to remind you that the speakers of 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, 2012, 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 earning release outlining its first-quarter 2013 results.

To obtain a copy, please visit 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 Chairman of the Board, President, and CEO, Mr. Dunson Cheng.

Thank you, Monica, and good afternoon.

Welcome to our earnings conference call.

This afternoon, Cathay General Bancorp reported net income of $28.8 million for the first-quarter 2013, or $0.30 per common share.

That compared to a net income of $28.9 million, or $0.32 per common share, for the first quarter of 2012 and $28.3 million or $0.31 per common share for the fourth quarter of 2012.

In the first quarter, we saw an overall decrease in loans of $65 million or 1% compared to a decrease during the first quarter of 2012 of $151 million or 2%.

Commercial loans decreased by $86 million; residential loans increased by $37 million; and commercial mortgages decreased by $18 million.

The decrease in C&I loans was mostly due to seasonality and the repayment in January 2013 of several loans originated in December '12, as well a $21 million decrease in C&I loans in the Hong Kong office.

In the first quarter of 2012, our C&I loans decreased by $23 million.

For the full year of 2012, increase in C&I loans was $259 million.

Based on our internal forecast, we still expect full-year of loan growth of 5% to 6%, about the same as last year.

For the first quarter of 2013, our total deposits increased $42.4 million, or 0.6%, from $7.4 billion at December 31, 2012.

Core deposits increased 4% annualized during the first quarter.

During the first quarter, we signed agreement for two new branches and expect to sign another lease for the third one in the second quarter.

Net charge-offs for the first quarter of 2013 was $2.7 million compared to net charge-offs of $8.1 million, the same quarter a year ago.

Our loan loss provision was $0 for the first quarter of 2013, compared to a credit of $4 million in the first quarter of 2012.

Our nonaccrual loans decreased 3%, or $3.6 million, during the first quarter to $100.3 million or 1.4% of period-end loans.

On March 20, 2013, we redeemed $129 million or 50% of Bancorp's preferred stock issued under the US Treasury's TARP Capital Purchase Plan.

On April 5 of this year, the Federal Reserve Bank terminated its MOU on the Bancorp.

With that, I will turn the floor over to our Executive Vice President and CFO, Heng Chen, to discuss the first-quarter 2013 financials in more detail.

Heng?

Thank you, Dunson, and good afternoon, everyone.

For the first quarter, we announced net income of $28.8 million, or $0.30 per share.

Included in first-quarter results were $5.6 million in prepayment penalties, as well as $6.3 million in security gains.

The prepayment of TARP resulted in an after-tax charge of $1.3 million for the remaining unamortized discount related to the TARP stock redeemed.

Our net interest margin was 3.35% in the first quarter of 2013 compared to 3.28% in the fourth quarter of 2012 and compared to 3.33% for the first quarter of 2012.

In the first quarter of 2013, we prepaid $100 million of structural repos with an average rate of 4.61%, with a prepayment cost of $5.6 million.

We expect a continued improvement in the net interest margin during 2013 as a result of the full-quarter impact of the first-quarter action.

The repayment during the second quarter of 2013 of $200 million of structural repos with an average rate of 3.65% and the resumption of strong loan growth.

Noninterest income during the first quarter of 2013 was $14.9 million, including $6.3 million of security gains which offset the $5.6 million prepayment penalties incurred during the first quarter.

Noninterest expense, including costs associated with redemption of debt, decreased $1.6 million to $43.5 million in the first quarter of 2013 compared to $45.1 million in the same quarter a year ago.

The decrease was due to a $4.1 million decrease in OREO expense, which more than offset a $3 million increase in salary and employee benefits expense.

At March 31, 2013, our Tier 1 leverage capital ratio decreased slightly to 13.07%; Tier 1 risk-based capital ratio decreased to 16.41%; and total risk-based capital ratio decreased to 18.19% as a result of the repayment of $129 million of TARP.

All ratios significantly exceeded well-capitalized minimum ratios under all the regulatory guidelines.

At March 31, 2013, our Tier 1 common risk-based capital ratio was 13.26%.

We continue to have discussions with our regulators concerning the repayment of the remainder of TARP using dividends from Cathay Bank.

With that, I would like to turn the call to our Executive Vice President and Chief Credit Officer, Mr. Kim Bingham.

Thank you, Heng, and good afternoon, everyone.

Our classified assets ratio for Cathay Bank decreased to 30.8% at March 31, 2013 compared to 33.5% at December 31, 2012.

Loans rated substandard or worse decreased from $437 million at December 31 to $408 million at March 31, a decrease of $29 million.

The decrease in classified loans during the first quarter resulted from $37 million of net payments, $12 million of downgrades net, and $4 million of charge-offs.

Net charge-offs for the first quarter of 2013 totaled $2.7 million, or 0.15%, of average loans compared to net charge-offs of 0.07% of loans during the fourth quarter of 2012.

The provision for credit losses was $0 compared to $0 for the fourth quarter of 2012 and a negative provision of $4 million in the same quarter a year ago.

We anticipate that a continuation of current trends will allow for a $0 or low quarterly loss provision throughout 2013.

Total nonaccrual portfolio loans decreased by 3.4%, or $3.6 million, to $100.3 million at March 31, 2013 compared to $103.9 million at December 31, 2012.

During the first quarter, total inflows to nonaccrual loans were $12.8 million; transfers to OREO were $0.4 million; charge-offs were $4.1 million; and [cures] and repayments were $11.9 million.

With that, I would like to turn the call back to Dunson.

Okay, thank you, Kim.

We will now proceed to the question-and-answer period of the call.

(Operator Instructions)

Aaron Deer, Sandler O'Neill & Partners.

To begin, I'd like to talk a little bit about the loan growth expectations.

It sounds like you're fairly optimistic for loan growth for the year.

So just wondered, as you look at the first quarter results, can you talk a little bit about the decline in commercial balances and how much that was related to maybe seasonal trends in the quarter with trade finance or where line usage stood and where the pipeline is today versus a few months ago?

Yes, Aaron.

As I mentioned before, as I look at our C&I loan decreases in the quarter, most -- I would say most of it -- were related to seasonality in the sense that after Christmas season, our trading customer or commercial customer collected from receivables and obviously they used the money to repay the line.

And I would imagine roughly -- I want to say roughly 60% to 70% of the decrease of the $80 million some came from this.

And obviously, unexpectedly, in our Hong Kong office, there was a couple of loans that were repaid.

And that amounts to, as I mentioned, in -- $21 million.

And we also participate -- our -- couple of loans to other banks and that is the extent of our decrease.

Okay.

Thank you.

And forgive me if I missed that at the beginning of the call.

I came on a little late.

No, that's okay.

At this point in time, we are still pretty optimistic about our loan growth.

And right now, our internal projection is that we will grow roughly about 5% to 6% this year.

Okay.

And then as I recall, you were planning to do some mortgage loan sales.

How much of that was done, if any, during the quarter and what kind of premiums were you getting on those sales?

Yes, Aaron, I believe it was about $25 million.

And the total gain -- counting -- we cap our servicing at 1%.

The total gains were about $800,000.

So it was a little less than 2%.

Something like that.

Or -- anyway, we can do the math.

That's what it was.

Okay.

And lastly, just one more if I may, the compensation bumped up in the quarter.

I'm guessing some of that is a higher anticipated bonus accruals for the year, particularly after TARP is repaid, but how much of that was just seasonal in nature that we might see drop back down here in the second quarter?

Yes, actually, this is Heng Chen, there is two parts -- the FICA that relates to the higher -- to the bonus payments, that's -- and the fact that at the beginning of the year, the FICA is higher until people go through the annual limits.

That's about $1 million.

And then we had a catch-up adjustment for 2012 of about $1 million.

Okay.

For bonuses.

So right now, there is no -- we're paying salary stock for the Executive officers, so there's really nothing additional that might -- or, we're not accruing anything in anticipation of TARP repayment.

So if -- once you do have full repayment, assuming that that's done here in the second or third quarter, could we see a bump up then in compensation in the third or fourth quarter as a result of higher accruals there?

Yes.

A small amount.

We're still not sure as to the exact compensation program, but some of our cash bonuses may be paid out on a longer-term basis, in which case we would accrue that expense over the payment period.

Okay.

That's helpful.

Thank you for the color.

(Operator Instructions)

Joe Morford, RBC Capital Markets.

First question, just on the margin, were there any interest recoveries that boosted that this quarter and can you remind us what the benefit may be going forward from even just this 50% repayment of TARP?

Yes, Joe.

There's -- I looked at over the different quarters, there is maybe $800,000 more in interest recovery this quarter compared to -- actually, compared to a year ago, it was about $400,000 more, compared to about four quarters, it was about $800,000 more.

And then the TARP repayment, that should add 4 basis points to the second-quarter margin because we paid on March 20.

Okay.

And then could you also talk about the rationale for reclassifying your health and maturity securities to AFS, was that primarily just for the purposes of capturing the gain that can use to prepay these structural repos and, related to that, where do you see the margin plateau-ing out, whereas in the past you've said maybe around that 3.40% level?

Yes, Joe.

We'll put more disclosures in our 10-Q, but the main impetus is that we had $129 million of munis and they are bank-qualified munis.

And there was talk during the first quarter about the corporate tax rate being lower, so we had some concerns that if the corporate tax rate went from 35% to, let's say, 30%, or some lower number, that there would be some reduction in the gains.

So that was the primary impetus, was to be able to sell the munis, which by the way had about $10 million of unrealized gains.

And then, given the FCC's posture on if you take the health and maturity -- any part of the health and maturity portfolio, you have to transfer everything else to available for sale.

So that's what we did.

And then the margin, we would -- we want to be positioned for higher interest rates, so as soon as we get to a 3.40% margin, which hopefully will be in the third quarter, we're going to start shortening the duration of our securities portfolio.

So that's where we hope to be.

Okay.

That's helpful.

Thanks, Heng.

Brett Rabatin, Sterne Agee.

Wanted to get a little more color if I could around the expenses that you were talking about earlier.

Basically I'm looking at the personnel and that was up $3 million link quarter.

And you talked about in the press release, some hiring and some expenses related to the core conversion that you have ongoing but you also mentioned earlier the FICA of $1 million and the $1 million catch-up.

Does that mean the other $1 million is essentially the conversion expenses for the quarter and how do we think about those various components as we go through '13?

Yes.

The conversion expense is about $2.5 million a quarter so we see that as $2.5 million in Q1, the same amount in Q2, and maybe $1 million in Q3.

We have been adding more people, so that may have been -- as well as we had increases.

And there's some seasonality to our benefit number, so in the first quarter, we had about $200 million accrued for vacation expense, because very few people go on vacation in the first quarter.

And last year, we had in the fourth quarter, for the holidays, I believe that vacation accrual adjustment was $200,000 or $300,000 downward, reducing salaries.

And then we had some forfeitures from some people that quit in the fourth quarter last year on -- so that was about $300,000 or $400,000.

So there's some amount of noise, but that's the background.

Okay.

And then also I wanted to follow-up back on the loans, could you give us any idea maybe of production for the quarter versus 4Q?

And maybe just your thoughts -- any updated thoughts on QM and how you view the mortgage market?

Yes, Brett.

This is Dunson Cheng.

The first quarter of the year has been traditionally our slow quarter.

And I believe that the production of new loan in the first quarter is roughly about $160 million, $180 million, and in the fourth quarter, we did about $300 million.

And then on the qualified mortgage, Brett, we continue to study that as to what the impact will be but we're not -- it's a work in progress.

Okay.

Fair enough.

Thanks for the color.

Herman Chan, Wells Fargo Securities.

Thanks.

With the sale of the munis in the quarter, can you talk about what your expectations are for securities yields going forward?

The -- Herman, this is Heng Chen, the security yields -- the munis that we sold on a fully taxable equivalent basis were -- there's a table, maybe in -- they were at 4.86%.

So that's going to lower our overall securities yield somewhat.

It's a very small part of our portfolio.

It's only $129 million.

But in the first quarter, we did buy -- when the 10-year treasury was above 2% -- we did by $0.5 billion of 30-year MBS, so that more than offset whatever net interest income loss we would have from selling the munis.

So I would -- and then we still have a barbell portfolio to some extent, so for most of the first quarter, we had $0.5 billion of six-month treasuries that yielded 15 basis points and we're just holding on to that, waiting for loan demand to increase.

Got it.

Thanks.

And I also want to ask about commercial real estate.

It was down slightly in the first quarter.

Can you talk about the outlook there and how much that can contribute to that 5% to 6% loan growth you're expecting in 2013?

Thank you.

Yes.

The decrease of the first quarter in CRE was caused by a pay-off in several loans.

And it -- but however is a slight decrease and in going forward, I would -- let's see, I don't have a good number for you.

I would imagine that CRE would contribute about 30% to 40%, wouldn't you say, Heng?

Yes.

The -- going by our budget, we think that the CRE would carry its weight in that it would grow at 5% to 6%.

And then residential mortgage, we were thinking it was going to be 10% to 15% growth in 2013.

And then commercial would be higher than average, so.

Great.

Thanks for the color.

I appreciate it.

Julianna Balicka, KBW

I had a few questions on the branches that you discussed that you are opening.

Are the costs in your expense run rate and if not yet, what can we expect for the increase for the costs for those branches and what kind of revenue and balance sheet growth contribution are you thinking about those from either a loans or deposits perspective or both?

And then in terms of the second half of the year, any further branch opening plans?

Yes, Julianna, the -- I'll speak to the further opening of branches.

Our plan is to open five branches this year.

And with three branches, we feel comfortable that it's going to open -- one in second quarter and two in the third quarter.

So maybe in the fourth quarter we hope to do two more.

And in two of the branches that we have agreement -- will be in area -- in states that we already have some presence and then one would be [out-of-] state.

And most of the branches we are looking at -- as far as investment is concerned, I would imagine it's about $300,000 range -- those are not very big branches.

And a couple of branches that we are opening already have existing fixtures and some furniture in it, so investments will not be very high.

Typically, we figure that we reach a breakeven total deposits and loans about in two years.

Yes.

About $30 million to $40 million in deposits.

Okay.

And to follow-up on the expense side, you've discussed before the improved efficiency that you can get from your core system conversion.

And part of it also from having a little bit more flexibility on capital management, et cetera, et cetera.

So could you talk a little bit about your expected efficiency improvements in the second half of the year that you are potentially looking at?

Not just the cost -- the upfront costs of the conversion going away but just the improved operating costs?

Yes.

Julianna, this is Heng Chen.

First, as I mentioned, it's $2.5 million per quarter of consultants and -- as well as FIS charges related to the conversion.

So that would disappear.

Also, we have environmental costs and they're still fairly high in the first quarter for OREO and legal and workout expense.

So one of the things is that our OREO expense in the first quarter was relatively low at $600,000.

We have several OREOs that are in escrow, all of which would produce gains, some of them might be a little larger than others, so that would help temper the OREO expense.

And then once again, going back to the environmental expense, we were estimating that's about $2 million a quarter.

And if our non-accruals in OREO drop as we expect they will, that expense should be much, much lower in the third and fourth quarter.

So that's--

And then do you have any expected improvement in just a run rate efficiency from having a more efficient core operating system?

Not this year.

We're -- the -- we think that the staff will take a few months to learn how to -- to learn the new system before we can start reducing staff.

There is process improvement that we've laid out.

And so we'll probably see that in the first quarter of next year.

Yes.

Okay.

Very good.

Thank you.

(Operator Instructions)

Gary Tenner, D.A. Davidson.

Just two questions, first on the mortgage sale front, do you expect that to be an ongoing strategy in terms of selling those mortgages, or is that more of a one-time process here in the first quarter?

Yes.

Gary, it's Heng Chen.

It's ongoing.

We may reconsider it, but with the 15-year conforming mortgage at 2.5 % versus a 2 or 3-point gain from funding and selling it, that's pretty attractive.

And then the 30-year -- on the conforming basis, we're getting in the, maybe 3.75%, so it depends on where interest rates are as to whether we'll keep the 30-year production if -- and then the bulk of our production is from our Smart Mortgage, which is -- as well as jumbo mortgages, so the Smart Mortgage is priced 1% higher than the conforming rate so we've been keeping those.

Okay.

And I may have missed this but the timing of repaying those repos in the second quarter, the $200 million?

What's the time on that?

Could you repeat that?

I didn't hear--

I thought I heard you say -- I may have misheard -- that you were going to repay another $200 million of structural repos in the second quarter?

Yes.

Yes.

We've committed to do that.

Yes.

And when during the quarter would that happen?

It's $100 million in April, $50 million in May, and $50 million in June.

Okay.

Thanks very much.

Brett Rabatin, Sterne Agee.

I just want to follow-up on capital and just thinking about strategies, obviously past the TARP repayment, and just was wondering, Heng or Dunson, if you could give us some thoughts on the dividend policy and share buyback potential and then maybe your thoughts on M&A in the next year or so?

Thanks.

Yes.

First priority, once we repay the second installment of TARP would be to increase the dividend.

We probably would do it in steps so that we go to maybe $0.05 per share and then go back to our old ways of [$0.15].

Then buybacks, it depends -- we're generating a lot of excess capital because our balance sheet is not growing that rapidly, so we would consider that but we haven't had any sort of formal discussions with our regulators on buyback, so we don't want to get too far in front of that.

Certainly we'll consider it in 2014 when we turn in our capital plan.

And then on acquisitions, Dunson, do you want to talk about that?

Yes.

Right.

And we are -- I would say that we are looking to see whether there are partners out there that we can get together and grow our balance sheet so that we can be more efficient.

And we look at both out-of-the-market and also in-market positions acquisitions as with -- and it made the opportunity -- it's really very difficult to quantify, but we have been talking to some of the parties that may be interested in getting together and we have at this point in time, it's very difficult for us to give you any time schedule as to -- and the size of the deal that we will be looking at, but in general, the Bank is poised to resume expansion and expanding our [asset space].

Okay.

That's great color.

And then as a last follow-up, in terms of the new rules, how do you guys think about your level of excess capital?

In terms of where you'd be comfortable with, in -- either Tier 1 or a dollar amount?

Yes, Brett.

We're geared to a Tier 1 risk space -- Tier 1 common risks space.

And in terms of our limits, we're geared to that not being lower than, I believe, 7% on a stress basis.

And we're fine-tuning that as to whether we use the adverse or the severely adverse case.

So that's where we are.

Yes.

Okay.

Fair enough.

Thank you.

(Operator Instructions)

Aaron Deer, Sandler O'Neill & Partners.

Just one quick follow-up on the tax rate.

It looked like it was a little bit higher this quarter than the run rate from last year and given the muni sales, I'm just wondering what the anticipated effective rate should be going forward?

Yes, Aaron, this is Heng Chen.

The rate for the first quarter is good for the full year.

Okay.

Yes.

It's 36.9%.

Okay.

Good enough.

Thank you.

At this time, there are no further questions in queue.

Thank you for your participation.

I will now turn the call back over to Cathay General Bancorp's Management for closing remarks.

Thank you again for joining us for another earnings call.

And we look forward to seeing you all and talking to you again next quarter, probably sometime in July.

Thank you very much.

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

This concludes the presentation.

You may now disconnect.

Good day.