Cathay General Bancorp (CATY) 2013 Q3 法說會逐字稿

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

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

(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, Philip, and good afternoon.

Here to discuss the financial results today are Mr. Dunson Cheng, our Chairman of the Board, President, and 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 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 the 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 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 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 2013 third-quarter earnings conference call.

This afternoon, Cathay General Bancorp reported net income of $32.5 million for the third quarter of 2013, or $0.38 per common share.

That compared to a net income of $30.4 million or $0.33 per common share for the third quarter of 2012, and $29.9 million or $0.35 per common share for the second quarter of 2013.

We are very pleased that our returned earnings and liquidity are sufficient to allow ourselves to complete the repayment of the Bancorp's remaining top preferred stock on September 30, 2013.

After repayment, our capital ratios remain strong.

Our Tier 1 risk-based capital ratio was 14.9%, total risk-based capital of 16.67%, and Tier 1 leverage capital ratio of 12.35%.

In the third quarter, we experienced solid loan growth.

Gross loans increased $138 million in the quarter, or a 7.2% increase from the second quarter of 2013.

For the first nine months of 2013, loans increased by $403 million, or 5.4%.

In the third quarter, our commercial loans increased by $27 million, construction loans by $36 million, commercial mortgage loans increased by $12 million, and residential mortgages increased by $69 million.

Originations of residential mortgages were about the same for the second and third quarter, but there was a slowdown in pay-off in the third quarter so the net growth of residential mortgages in Q3 exceeded that of the same quarter of $41 million.

New CRE origination was good, but payoffs reduced the net increase.

Our current expectation for loan growth for the entire year is still 7%.

For the third quarter of 2013, our total deposits increased $208 million or 2.7%, from $7.7 million at June 30, 2013.

Most of the increase centered around MMA accounts.

In July we signed an agreement to open an additional branch in Oakland, which is expected to take place in the first quarter of 2014.

Our other new branch in West Covina is projected to open before end of this year.

Net recoveries for the third quarter of 2013 was $3.6 million, compared to net charge-offs of $7.7 million in the same quarter a year ago.

Our loan loss provision was a credit of $3 million for the third quarter, compared to $0 in the second quarter a year ago.

Our non-accrual loans increased 4.4% or $4.2 million during the third quarter of $99.9 million -- during the third quarter to $99.9 million, or 1.27% of period-end loans.

On July 15, we successfully completed a 24-month effort to upgrade our computer system to a new core.

We expect the new system will provide quicker functionality, and allow us to streamline our internal processes in all of our operation areas, and therefore, to improve our efficiency ratio as well.

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

Thank you Dunson, and good afternoon, everyone.

For the third quarter, we announced net income of $32.5 million, or $0.38 per share.

Included in third-quarter results were $6.9 million in prepayment penalties, as well as $8.7 million in securities gains.

Our net interest margin was 3.35% in the third quarter of 2013, compared to 3.30% in the second quarter of 2013, and compared to 3.26% for the third quarter of 2012.

During the third quarter, interest recoveries and adjustments added 6 basis points to the net interest margin, whereas during the second quarter, interest recoveries only added 3 basis points to the margin.

In the third quarter of 2013, we prepaid $150 million of structural repos, with an average rate of 3.43%, with a prepayment cost of $6.9 million.

Looking forward, from July 2014 to January 2015, $400 million of structural repos, with an average rate of 3.85%, are scheduled to mature, which would help to improve our future net interest margin.

Non-interest income in the third quarter of 2013 was $16.7 million, including $8.7 million of securities gains, which offset a $6.9 million prepayment penalty incurred during the third quarter.

Non-interest expense, excluding costs associated with redemption of debt, increased $0.6 million to $43.8 million in the third quarter of 2013, compared to $44.4 million in the same quarter a year ago.

The decrease was due to a $5.6 million decrease in litigation accrual expense in the prior year, which was partially offset by a $4.3 million increase in salary, bonus, and employee benefits expense.

During the third quarter, expenses related to the core conversion were $1.1 million, compared to $2.6 million for the second quarter.

At September 30, 2013, our Tier 1 leverage capital ratio decreased to 12.35%, and our Tier 1 risk-based capital ratio decreased to 14.9%, and total risk-based capital ratio decreased to 16.67%, as a result of repayment of the remainder of our preferred stock.

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

At September 30, 2013, our Tier 1 common risk-based capital ratio was 13.35%.

Our classified assets ratio for Cathay Bank increased to 32.2% at September 30, 2013, compared to 31% at June 30, 2013.

Loans rated substandard or worse decreased from $411 million at June 30, 2013 to $402 million at September 30, 2013.

Net recoveries for the third quarter of 2013 totaled $3.6 million, or 0.18% of average loans, compared to net recoveries of 0.05% of loans during the second quarter of 2013.

The provision for credit losses was a negative provision of $3 million, compared to $0 for the second quarter of 2013, and $0 in the same quarter a year ago.

Total non-accruals increased by 4.4% or $4.3 million, to $99.9 million at September 30, 2013 compared to $95.6 million at June 30, 2013.

Thank you, Heng.

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

(Operator Instructions)

Aaron Deer from Sandler O'Neill & Partners.

Looks like your residential mortgage and construction books showed some good growth.

Can you give some color on the residential mortgage, and why that was a little better, but C&I and CREs slowed a lot.

I'm wondering what kind of pipelines you are seeing for each of those categories.

Can you talk a bit about what types of construction opportunities you are seeing?

Yes.

First of all on the single-family mortgages, the origination, as I mentioned, was about the same for the two quarters.

And you may know that the bank has a smart mortgage program, which is a limited verification program, and that has been going on for a number of years, and it doesn't seem to slow down in the third quarter.

So also, the debt program, we have experienced very small delinquencies, and the way that we understand from the most pronouncements from CFPB on qualifying mortgages, that there might be some flexibility in retaining our smart mortgage program in the future, with some modifications.

At this point in time, we are in the process of discussing how our smart mortgage program can be modified so that it would satisfy the requirements of CFPB.

So with regard to single-family mortgages, there is some possibility at this point in time but we are not yet ready to say how this program may change in the future.

With regard to the pipeline, of the other types of loans that we have and typically for C&I loans, we are pretty much focused on imports/exports, trading in this area and the selling season of our stocking up season typically is in the second and third quarter, and the selling season of course during Christmas.

We see that the C&I portfolio would most likely stay about the same at the third quarter and then experience pay-off later in the fourth quarter and in the first quarter of every year.

With regard to commercial loans, we have good growth in the third quarter, and we are projecting that in the future, this quarter and beyond, we should still be seeing more origination in construction loans.

With regard to CRE term loans, the loan demand is still quite good.

However we are seeing quite a heavier payoff in the third quarter because of competition, and so on one hand, we are busy doing new loans, and on the other hand, busy defending our existing portfolio.

In whole, as I mentioned in my prepared statement, we still project our loan growth for the entire year of 7%.

Okay, that is great.

Thank you.

And then on the credit side, even though you've got a very big reserve, and have obviously been booking recoveries, it seems like the non-accruals aren't coming down as fast as I am sure you would like.

What you think is holding up the pace of improvements, and can we expect that to start to trend downward at a better pace going forward?

Yes, Aaron, this is Heng Chen.

We had a couple of -- three -- several loans that went non-accrual.

The biggest one was a commercial real estate project in West Hollywood.

That was about $9 million.

It went non-accrual late in the third quarter, and it repaid -- it was paid off a few weeks ago.

And we're hopeful that we will have another $10 million or so of paydowns in the fourth quarter on top of that.

They're will be, I think, a decent reduction in non- accruals in the fourth quarter.

This is Dunson Cheng.

The other one that went on non-accrual is a loan regarding a solar project, but this one is on the way of being worked down.

The reason why it is so sticky was in some of the [non-accrual loans] is because many of them are CRE in nature and the have to go through the bankruptcy process, and that would most likely take a little bit over two years.

And at this point in time, the economy is up for many of those loans.

We are hopeful that in the future, we will see a bigger reduction in our non- accruals.

That is great.

Thanks for taking my questions.

Joe Morford from RBC Capital Markets.

I was just looking for a little additional thoughts on the outlook for the margin, and should we continue to see some further debt repayments in the fourth quarter?

Any restructurings there?

And are you still looking for about a 4 basis point pick-up from TARP?

Joe, in kind of an order of your questions, one, we don't think we are going to prepay anymore in the fourth quarter, or in the first half of next year, except if we have a lot of -- if we have a one-time credit, favorable credit event.

We still have security gains, but they are getting fewer, so we don't want to spend all of that.

And two, just by itself, we have $400 million that if we don't do anything by January of 2015, they will be paid off, and there will be a pretty good-sized improvement in the margin.

I guess I am back of the envelope estimate, that $400 million, right now, we have about $400 million of treasury securities, that are yielding only 10 basis points.

So when that all matures, there is a 33 basis points improvement in the margin by Q4 next year.

We don't need to do much.

I think time will just take care of that.

I think I missed something.

And the TARP repayments, that is only 2 basis points to the margin, Joe.

The 4 basis points was for all $250 million.

Okay.

And then lastly, with the follow-up, the expenses on the conversion, are you still targeting about a $2.5 million total quarterly cost savings from that?

Maybe I missed what you captured this quarter.

It went down to $1.6 million in the third quarter.

And so in the fourth quarter, it should be $0.

We will just have a clean run rate, with no conversion expense.

$1.6 million to $0 in the fourth quarter.

That's all I needed, thank you so much.

Brett Rabatin from Sterne Agee.

Wanted to ask a follow-up to Joe's question, on the margin and thinking about it.

I believe you said $450 million repriced of the borrowings over the next six months.

Do you just let those roll off and don't replace them or what are your plans with the relative size of the balance sheet, and do you plan to continue to shrink the securities book?

And if not, what is the plan for excess capital?

Yes.

Brett, it is actually $400 million.

And they start maturing in July of next year.

And then they finish maturing in -- like on January 15, of 2015.

So we're not going to enter the new borrowings because we think interest rates are going to go up.

So that will help the leverage ratio, but it won't have much of an impact on risk-based capital.

In terms of what we will do it the capital, first we like to raise the dividend, starting in the fourth quarter.

We're in the process of evaluating that $0.05 a quarter, for a couple quarters, and then we will go back to our historical rate of $0.105.

Then we have buybacks, but with bank stock prices at four- or five-year highs, that is a less attractive use of capital.

We will continue to try to grow our loans and selectively look at cash acquisitions in smaller banks.

Okay, and maybe as a follow-up, just your thoughts on the M&A market, as you see it in your opportunities?

Yes, this is Dunson Cheng.

As Heng mentioned, we are more interested in looking at the smaller banks, and there is always some conversation going around, but however at this point in time, there is nothing that we can announce.

Right, okay.

Thanks for the color.

(Operator Instructions)

Herman Chan from Wells Fargo Securities.

Another question on credit.

With narrowing credit losses, you are seeing a pick-up in recoveries and also your healthier reserves.

How should we think about provision expense in 2014?

Herman, this is Heng Chen.

I think, generally, if we have net recoveries, we would book a negative provision equal to that amount.

And we -- if things go well, we're hopeful that the fourth quarter will have net recoveries.

And then we have -- we still have about $40 million or $50 million of these A/B note splits, where the B note has been charged off.

We think they will come in over time.

This quarter we had two of them, I believe.

One or two of them.

That was the bulk of the recovery.

In terms of reserve needs, we are moving to where more and more of the reserve is supported by general environmental factors, because the migration itself is off of the last four quarters of net charge-offs, and that number is fairly low for us.

Long story short, as our loans grow, we don't think we will have to provide for a while and that percentage of the reserve to loans will drift down over the next couple of years.

Understood, thanks for that.

And can you give us an update on pricing and what you are seeing there from new originations?

Have you seen some improvement on pricing with the pick-up of the belly of the curve?

No, we have not seen any improvement in pickup of pricing.

The competition is still very keen outside, especially for C&I loans.

So we -- however, I don't think that the deterioration is going to be significant from this point onwards.

However, it's really difficult to tell, but the competition is still there and there are not that many new businesses -- business formation, and I think that is one of the problems.

Herman, we are generally getting 300 basis points over the five-year treasury for fixed-rate loans.

That is our target, and to the extent that the five-year moves up in the future, that will make things better.

But there's been a recent pullback in interest rates.

So that has had a factor as well.

Understood.

Thanks a lot.

(Operator Instructions)

Julianna Balicka from KBW.

I have a couple questions.

One, in terms of the -- elaborating more on your recovery expectations, driving your net negative provision credits, to have a pipeline where you can size up the expected recovery opportunity in the next few quarters, that you can share with us?

It is $40 million to $50 million, but that is a two to three-year process.

So it's not -- there was scheduled maturity dates, but sometimes the borrowers, even when you get there, they can't refinance and pay us off in full.

We're just waiting for the economy to continue to improve, to realize all those B nodes.

Okay, and then on the expenses side, the $1.6 million filling out next quarter is an immediate benefit.

But more going forward, the benefit from your improved operational streamlining that you referenced in your press release, is there any additional expense optimization that we should be looking for?

This is Heng Chen.

Probably towards Q2 and Q3, it is the second half of next year.

It is a new system, where we are learning how to get familiar with it.

Everything is -- there are quite a few differences, and so in terms of places, it should help us lower our headcount in our branch system, as well as how we underwrite credit in terms of everything that is now being converted to all the electronic format.

It will take time for that to show up in the expense level.

This is Dunson Cheng.

Yes, there is a projected savings in expenses, because of the new system.

On the other hand, we're seeing more and more new regulations coming down online, and that requires us to put in more resources, in the backroom.

And of course we would like to see the bank to grow and adding new branches, and then also offsets part of the cost savings in our new system.

Makes sense.

And final question, with the two new branches that you have scheduled opening, and generally looking out at your deposits' trajectory, what are your thoughts about sizing up the opportunities for new branches, and also what kind of deposit growth are you thinking about for the next few quarters?

Typically, we are projecting that in order to get to $30 million, $40 million in deposits, it would probably take two or three years.

And that is why we have been pretty active in trying to find branches that we can buy, existing branches that we can buy, with existing customer base.

So at this point I think our projection for deposit growth for this year, organically about 5% or so.

We're trying to push the line units to hit 7%.

Hopefully, they are not calling in.

But it is 7%.

That is the budget instructions at this time.

Understood, thank you very much.

Aaron Deer from Sandler O'Neill & Partners.

Heng, just a quick follow-up on expenses.

If I'm not mistaken, I think the CDI amortization from General Bank comes to an end at the end of this year.

What is the benefit of that going to be?

I think it's around $1 million a quarter, is that right?

Yes.

The third quarter we had -- it is $1.4 million roughly.

That is -- almost all of that goes away.

We still have a little bit from the Las Vegas branch but yes, you can figure out $1.3 million a quarter.

Very good, thanks for the help.

Thank you everyone for your participation.

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

Thank you for joining us for this call, and we look forward to talking with you at our next quarterly earnings release, that will be 2015.

2014.

Okay.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation, and you may now disconnect.

Have a great day.