Cathay General Bancorp (CATY) 2013 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp fourth-quarter 2013 earnings conference call.

My name is Shaquana, and I will 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 Monica Chen, Investor Relations for Cathay General Bancorp.

Please proceed.

Thank you, Shaquana, 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 Chang, 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 results -- 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 statements to reflect future developments or events, except as required by law.

This afternoon, Cathay General Bancorp issued an earnings release outlining its fourth-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 fourth-quarter earnings conference call.

This afternoon Cathay General Bancorp reported net income of $31.9 million for the fourth quarter 2013, or $0.40 per common share.

This compared to net income of $28.3 million, or $0.31 per common share for the fourth quarter of 2012, and $32.5 million, or $0.38 per common share for third quarter of 2013.

In the fourth quarter, we continued to experience solid loan growth.

[Wells] loans increased $253 million in the quarter, or a 12.8% annualized increase for the third quarter of 2013.

For the full year of 2013, loans increased by $655 million, or 8.8%.

During the fourth quarter, we saw loan growth in all categories.

Commercial loans increased by $65 million, construction loans increased by $32 million, commercial mortgages increased by $102 million and residential mortgages increased by $61 million.

The net growth in four quarter exceeded that of the third quarter of $138 million.

Our current expectation is that loan growth in 2014 will be about 7%.

For the fourth quarter of 2013, our total deposits increased $63 million, or 0.8% from $7.9 billion at September 30, 2013.

For the full year of 2013, our core deposits increased by 10.3%, or $386 million.

In the beginning of this year, we signed an agreement to purchase a branch in the Richmond district of San Francisco.

This will give us a second branch in the city.

Total deposits at the branch are about $36 million.

We expect the purchase of this branch to be completed early in the second quarter.

Back in December 2013, we opened our new branch in Westminster, Southern California -- West Covina, sorry, in Southern California.

The opening of our second Brooklyn branch was delayed and now expected to be March 2014.

We are also relocating our Sacramento branch to a more centrally located area.

On July 15, 2013, we successfully completed a 24-month effort to upgrade our computer system to a new core system.

Since the conversion date, we spent time in learning and fine-tuning the new system.

We are happy to report that the new system is running smoothly.

In the coming months, we shall focus on streamlining our internal processes in all of our operating areas to improve our efficiency.

In the fourth quarter, our efficiency ratio was 44.65%.

With that, I will turn the floor over to our Executive Vice President and CFO, Heng Chang, to discuss the fourth-quarter results in more detail.

Thank you, Dunson, and good afternoon, everyone.

For the fourth quarter, we announced net income of $31.9 million, or $0.40 per share.

For the full-year 2013, our net income was $123.1 million, or $1.43 per share.

Our net interest margin was 3.3% in the fourth quarter of 2013, compared to 3.35% in the third quarter of 2013 when compared to 3.28% for the fourth quarter of 2012.

During the fourth quarter, interest recoveries added 5 basis points to the net interest margin, whereas during the third quarter, interest recoveries added 6 basis points to the margin.

Our fourth quarter 2013 net interest margin was impacted by lower security gain -- lower security yields as a result of sales without reinvestment.

Over $300 million of 30-year fixed-rate MBS securities during the second half of 2013 to reduce our exposure to higher interest rates.

We estimate that that, the lower security yields, impacted the margin by about 5 basis points.

During 2014, we repaid $100 million of structural repos with an average rate of 3.5% and a prepayment cost of $3.4 million, which we expect will be offset by security gains during the first quarter.

Excluding the $100 million that was paid off in January 2014, from July 2014 to January 2015, $300 million of structural repos with an average rate of 3.97% are scheduled to mature, which should help improve our future net interest margin.

The maturities are $100 million in July, $50 million in September, $100 million in November and $50 million in January 2015.

Non interest income during the fourth quarter of 2013 was $8.3 million.

Non interest expense, excluding costs associated with redemption of debt decreased $3.3 million to $40.3 million in the fourth quarter of 2013, compared to $43.6 million in the same quarter a year ago.

The decrease was due to a $2.7 million decrease in OREO expenses, which was partially offset by 1.1 increase in salary and bonus expense.

At December 31, 2013, our tier 1 leverage capital ratio increased to 12.48%, and our tier 1 risk-based capital increased to 15.03%, and our total risk-based capital ratio decreased to 16.34%.

During the fourth quarter, we prepaid $50 million of Cathay Bank sub debt as part of our capital management process.

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

At December 31, 2013, our tier 1 common risk-based capital ratio was 13.66%.

Turning to credit, net chare-offs for the fourth quarter of 2013 was $8.3 million, or 10 basis points of average loans, compared to net charge-offs of $1.4 million the same quarter a year ago, including the fourth quarter of 2013 net charge-offs was one charge-off of $5.7 million, which was fully reserved for as of the end of the third quarter.

Our loan loss provision was zero for both the fourth quarter of 2013 and the fourth quarter of 2012.

Our nonaccrual loans decreased 16.7% -- or $16.7 million during the fourth quarter to $83.2 million, or 1.03% of period end loans.

Loans rated substandard or worse decreased from $402 million at September 30, 2013 to $368 million at December 31, 2013.

Thank you, Heng.

We will now proceed to the questions and answers portion of the call.

(Operator Instructions)

Your first question comes to the line of Julianna Balicka representing KBW.

Good afternoon, this is actually David Gong for Julianna.

Hello, David.

Just had a question on your residential loan growth.

What's your outlook for resis going into 2014, just given where rates are?

As you know that -- you may know that on January 10 we had stopped doing our smart mortgage program.

And for the first quarter, we are projecting the origination probably stay about the same as the last quarter of 2013 just because of the onrush of applications that received before the January 10 deadline.

And then for the rest of the year, we are projecting that origination may drop by 40%.

Yes, David, for our budgeting purposes, we are assuming that residential mortgage loans will increase 7% December to December.

Okay, thank you.

And also switching to commercial real estate growth for next year, what is your outlook on that, and what kind of yields are you getting on the new originations in that space?

On the C&I loan --

I think he's talking commercial real estate, right?

The CRE, yes.

On CRE loans, our pipeline is pretty respectable, and we feel that in 2014 our origination should be a little bit higher than 2013.

As far as [view] is concerned, right now, we are encouraging customers to do floating rate loans instead of fixed-rate loans.

And for cases that customers insist on fixed rate loans, we would usually hedge it.

And at this point in time, it does depend on the movement of treasury.

We are getting anywhere from 4.5% to 5% as floor rate.

Okay, thanks for the color.

Brett Rabatin representing Sterne Agee.

Wanted to ask a few colors on capital and then managing the balance sheet around that.

Can you guys give -- you gave loan growth guidance for the year?

Can you give us any thoughts on the excess capital and what you will do?

I know everyone is trying to steer away from doing longer duration loans at this point.

Can you talk about your thoughts on managing excess liquidity with the balance sheet this year and what you will do with capital?

Yes, Brett, Heng Chen.

I think the first thing we want to do is increase our dividend, which we are hopeful that in Q2 or Q3 we will be back up to the $0.105 level.

Then in terms of the capital management, we did a couple things in the fourth quarter.

As I mentioned in my remarks, we had $50 million of bank sub debt, and we prepaid that.

The prepayment penalty was only, breakage was the LIBOR breakage that was only $2,000.

And then we also had $8 million of weak preferred stock, and we called that.

So, those are -- and then I think our capital will not build up too much in 2014 from our current levels because we are expecting 7% or so loan growth.

Our preference would be to use some of it for acquisitions, and then with the run up in bank stock prices, I think the stock buyback would be the least favored use of capital.

Okay, and then the other question was around expense initiatives.

I know you guys have done a conversion and then doing some efficiency projects.

Any thoughts on further efficiency gains?

You are already a very efficient bank, but any thoughts on operating leverage into 2014?

Yes, Brett, this is Heng Chen again.

We are pretty optimistic that our operating expenses for 2014 are going to grow slower than our revenues.

There is a few things.

One, we think the other real estate expense will be -- will continue to be low, if not to be a net credit.

And then we have the core deposit intangible.

That was -- that will be much lower next -- in 2014.

So, we are budgeting about $700,000 for that versus $4.5 million in 2013.

But we spent about $2.5 million per quarter on the conversion.

So, that we had in each of the first three quarters in 2013, and that has pretty much gone away in the fourth quarter.

And then lastly, we expect our legal and collection expense to be lower in 2014.

And then I will let Dunson talk about the rationalization that we hope to see in the second half.

Offsetting those reduction in expenses.

On the other side of it, as you have seen that we are going to open -- we have opened one and we're going to open two more branches, and then of course would incur additional expense, both in personnel and infrastructure.

And the other area that we will be putting resources in the regulator side of things.

And we are all well aware that the increase in regulatory burden would necessitate us to put in several more headcount and -- into our back office.

And so those are the sort of things that we are doing.

We continually would like to look for opportunities to increase our branch network, and so there may be a few more branches that we might think about towards the second half of this year.

Okay, that is great color, Dunson, I appreciate it.

Herman Chan representing Wells Fargo US Securities.

Looks like loan growth guidance represents a slowdown, but it does look like you also have leverage on the cost of funds side.

Putting it all together, can you talk about the outlook for net interest income dollar growth for 2014?

Thanks.

Yes, this is Heng Chen, Herman.

We think it is going to go up between 3% to 5%.

That is in part primarily because we paid off higher cost borrowings in 2013.

Got it, and then on your construction loan balances, that seems to have hit an inflection point.

Can you talk about what you're seeing within that particular loan type and the like?

Thanks.

Yes.

We are serving -- our construction portfolio has increased quite a bit in the fourth quarter, and our expectation is that it is going to continue to increase because the commitment that we are making on construction loans is much higher at this point in time than any time during 2013.

And so our expectation is that this year, our construction portfolio should -- outstanding should increase somewhere in around the 12% area.

Got it.

Thank you very much.

Thank you.

(Operator Instructions)

Your next question comes from Lana Chan representing BMO Capital Markets.

Good afternoon.

Can you talk about other -- do think it's going to be any opportunities to prepay the rest of the structured repos earlier in 2014, or is there a plan to let those mature on schedule?

We like to prepay them where the crediting amount is at least 20 basis points so we are not losing too much yield.

The -- we canvas -- we only have three counter parties that hold the structural repos, so we canvas all three of them in January, and we are going to do that again in April.

But we have $100 million that is maturing in early July, and that is at 4.78%.

Even if we don't prepay it, certainly by Q3, that benefit will show up.

Outside of the structured repos benefit later on in the year, what is the near-term outlook for the margin?

Should we expect a little bit more pressure with the securities -- or, earning asset yields?

Well no, I think typically the first quarter is a better quarter for the margin because of, we have a lot of MBS, and February is a 28-day month.

But one of the things is that we have a table in our press release that shows the [earning assets at the fed], so that is deposits with banks and in Q4, that was $190 million.

And we hope to run Q1 with that being basically less than $25 million, so that by itself will add 4 or 5 basis points to the margin, and that's a function of the prepayments.

So, we think Q1 will be better than Q4.

And then if we do something in terms of prepaying some additional structured repos early in Q2, we should finally hit 3.4% by Q2.

But I have been trying to get there for two years, so I don't want to be too confident.

Okay, thanks, Heng.

Brett Rabatin representing Sterne Agee.

I just wanted to follow-up on the loan growth this year, and you discontinued the mortgage product.

I just wanted to make sure I wasn't missing anything around your thinking about mortgage and QM and the implications of that.

And it sounds like most of the growth this year is going to be commercial and CRE.

Just wanted to make sure I had that right.

Brett, you are correct.

We just don't see that much growth in our single-family mortgages this year.

And we feel we are -- we believe that the slack can be taken up by the resurgence of CRE and especially construction loans.

We are still projecting about 7%.

And remind me what you guys are doing, again, on construction presently in terms of spec versus presold and what kind of developments you are mostly getting into.

It is a mixture of products, residential is one area that we do a quite a bit of it.

Construction of -- currently hotel is very much in demand, and then the rest of it would be some shopping centers.

Okay, great, thank you.

Thank you for your participation.

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

Thank you again for joining us for this session of webcast, and we'll come back and talk to you again for our first quarter earnings release.

Thank you.

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

This concludes the presentation.

You may now disconnect and have a great day.