Cathay General Bancorp (CATY) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to Cathay General Bancorp's first-quarter 2014 earnings conference call.

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

(Operator Instructions).

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, Patrick 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, 2013, 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 first-quarter 2014 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 to all.

Welcome to our 2014 first-quarter earnings conference call.

This afternoon, Cathay General Bancorp reported net income of $31.3 million for the first quarter of 2014, an 8.7% increase when compared to a net income of $28.8 million for the first quarter of 2013.

Diluted earnings per share increased 30% to $0.39 per share for the first quarter of 2014 compared to $0.30 per share for the same quarter a year ago.

In the first quarter, we experienced strong loan growth.

Gross loans increased $218 million in the quarter compared to a decrease of $65 million in the first quarter of 2013.

The increase in loans in the first quarter represents a 10.8% annualized increase from the fourth quarter of 2014 -- sorry -- first quarter of 2013.

The driver of the increase came from CRE loans, which increased $170 million while simple single-family mortgages grew by $86 million and construction loans by $32 million.

C&I loans decreased by $68 million, many from the payoff of one large CD secured loan.

With the termination of our Smart Mortgage program, we are not expecting any meaningful increase in our single-family mortgages.

However, our current expectation of loan growth for 2014 would be about 8%.

For the first quarter of 2014, our total deposits increased $251 million to $8.23 billion from $7.89 billion at December 31, 2013.

The increase represents an annualized increase of 12% over the fourth quarter of 2013.

Our core deposits increased by 2.19% or $99 million.

In 2013, we signed an agreement to purchase a branch in Richmond District in San Francisco.

This will give us a second branch in the city.

Total deposits at the branch, about $36 million.

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

On March 17, we opened our second branch in Brooklyn at the fast-growing area in Bensonhurst.

We also relocated our Sacramento branch on March 31 to a more central district in the California capital.

Cathay Bank is committed to open or acquire new branches to better serve our customers.

Since our call [commercial] in July 2013, we have taken steps to make fuller use of the new system's capability to streamline our workflows.

Starting with the second half of 2014, we expect to begin to realize additional operating efficiencies, which (inaudible) part of the cost saves to develop more business in part to lower our efficiency ratio.

In the first quarter, our efficiency ratio was 49.44%.

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

Thank you, Dunson and good afternoon, everyone.

For the first quarter, we announced net income of $31.3 million or $0.39 per share.

Our net interest margin was 3.38% in the first quarter of 2014 compared to 3.30% in the fourth quarter of 2013 and compared to 3.35% for the first quarter of 2013.

During the first quarter, interest recoveries and prepayment penalties added 5 basis points to the net interest margin, the same as during the fourth quarter.

During January 2014, we repaid $100 million of structural repos with an average rate of 3.5% at a prepayment cost of $3.4 million, which were offset by security gains.

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 further improve our future net interest margin, the maturities of $100 million with a rate of 4.78% in July, $50 million at 3.75% in September, $100 million at 3.5% in November and $50 million at 3.5% in January 2015.

Noninterest income during the first quarter of 2014 was $8.6 million, excluding security gains of $6 million.

Noninterest expense, excluding costs associated with redemption of debt, increased by $1.2 million to $44.7 million in the first quarter of 2014 compared to $43.5 million in the same quarter a year ago.

The increase was due to a $1 million increase in legal expense in the first quarter of 2014 for two litigation matters.

We have implemented other enhancements in our data processing capabilities since the completion of the core conversion on July 15, 2013.

Starting with the second half of 2014, we expect to begin to realize operating efficiencies provided by our new core system in both our branch network, as well as in our backroom operations.

At March 31, 2014, our Tier 1 leverage capital ratio increased to 12.7%.

Our Tier 1 risk-based capital ratio decreased to 14.96% and our total risk-based capital ratio decreased to 16.28%.

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

At March 31, 2014, our Tier 1 common risk-based capital ratio was 13.63%.

Net charge-offs for the first quarter of 2014 was $4.4 million or 5 basis points of average loans compared to net charge-offs of $8.3 million in the fourth quarter of 2013 and $2.7 million the same quarter a year ago.

Our loan loss provision was zero for both the first quarter of 2014 and the first quarter of 2013.

Our nonaccrual loans decreased 15.4% or $12.8 million during the first quarter to $70.4 million or 0.85% of period-end loans as compared to the fourth quarter of 2013.

Dunson?

Thank you, Heng.

We will now proceed to the Q&A portion of the call.

Ladies and gentlemen, we are ready to open the lines up for your questions.

(Operator Instructions).

Joe Morford, RBC Capital Markets.

Thanks, good afternoon, everyone.

First question was just on the loan growth.

A big part of it came from the CRE portfolio.

And I just wondered if we could get a little more color on the type of projects that you were lending on, the markets and the kind of pricing you were getting as well.

Joe, this is Dunson Cheng.

The mix of the CRE increases (inaudible) we have been doing that for a number of years.

We have shopping centers, offices, hotels and it's quite a diverse mix and that is what we have been experiencing.

With regard to pricing in the first quarter, this was somewhat an increase in loan requests with fixed-rate loans, which is something that we are trying to deter and typically those are five-year fixed for the first five years, prime-based in the next five years.

Pricing-wise, I haven't seen much deterioration from the fourth quarter and as a matter of fact, as treasury went up, we are seeing some of our five-year fixed-rate loans closer to 5%.

(multiple speakers)

Thanks, Dunson.

I guess the other question I had was for you, Heng, on the expenses.

The salary and benefits were up about $2.5 million from the fourth quarter and I just wondered how much of that, if any, was seasonal for benefits, that type of stuff, and what's kind of a good run rate to build off of.

Yes, Joe, we had about a $1 million catch-up adjustment on the bonuses, which were for last year, so that should be nonrecurring.

We had a similar problem in the first quarter of last year in part because we fully repaid TARP on September 30 and we had some calibration issues on the right bonus accrual.

Then in terms of the FICA tax, we will have --- we paid the bonuses last Friday, so that's in the second quarter.

So the FICA impact for us is maybe $500,000 or $600,000, so that'll be in Q2.

And then lastly, we have some restricted stock amortization that's going to get completed in the second quarter of this year.

So that's --- those are kind of the moving parts.

And then, lastly, our salary increases are effective April 1 and our target is 3% for officers.

Okay, that's helpful.

Thanks so much, Heng.

Brett Rabatin, Sterne Agee.

Hi, guys.

Good afternoon.

Wanted to maybe talk a little bit about expenses a little more.

Just wanted to get a little more color around -- I know we've been having this conversation for a few quarters about the improvement in efficiencies that you're going to get with the new core system, but was just hoping for maybe an update on where you thought the efficiency ratio could go in the back half of the year and then maybe just also considering the fact that you are continuing to open some branches.

I know we kind of talk about that having an offsetting impact, but maybe just a little thought around your efficiency ratio as you go into the back half of this year.

Yes, well, Brett, I think there's two parts.

One, we expect our revenue part to increase.

We have this $100 million that will mature, I believe, on July 7 at 4.95% or whatever.

So that will help lower our efficiency ratio.

And then in terms of the cost saves, as I mentioned at some of the conferences, we've taken a look at our branch footprint and how we deliver customer service in our branches and over the last three or four years, there's been a significant migration to the Internet for us as well.

So we find that we are now putting in a benchmarking model that measures branch staffing by time of day and so forth.

So we think we will have quite a bit of savings.

We are rolling it out in waves in the second half of the year as we go through and optimize our branch staffing, as well as our backroom operations.

So I think that's sort of the --- and in the backroom for example, our wire room, there has been some improvement in processes that will save some duplicate work in the wire room, as well as from the core system where the no processing -- as we learn the system better, there's going to be more streamlining on that.

So with all adds, we don't --- we are not going to give out a target efficiency ratio, but I think we are optimistic that with some of these other environmental costs, which were clearly high in the first quarter, that we can probably see maybe a 2% drop in our expenses in the second half.

Okay.

And then the other thing, you mentioned the prepay in the C&I portfolio, what would the growth have been or what would that have looked like without that prepayment, i.e.

how big was that loan and then what does the pipeline look for the C&I piece?

Again, that particular loan I believe was --- I'm just doing this from memory --- about $53 million and so you have to add that back.

That was a CD secured loan and then the pipeline, the commercial real estate pipeline is very strong.

So one reason is, with these changes in interest rates, we have a rate lock pipeline, where the borrower pays us 1% and that's nonrefundable if they don't close the loan and those are generally 45-day rate locks.

So we see a pretty strong pipeline that's paid for.

So we are optimistic that --- we are pretty confident that they will close for CRE.

Okay, great.

Thanks for the color.

Aaron Deer, Sandler O Neill.

Good afternoon, guys.

Heng, just following up on Brett's question on the commercial pipeline, how about on the C&I side, is there any expectation that we see some better gains there?

Yes, Aaron, This is Dunson Cheng.

The C&I loans going back into the first quarter were pretty strong because, if you recall in the previous year, the first quarter, we typically would see a pretty large decrease in C&I balances because of our trade customers collecting on the (inaudible) pay down the loan.

But last quarter, the effect of that was not as big.

(inaudible) that our customers are using the line much more at a higher degree.

The C&I loans by no means are easy to acquire.

However, looking at our pipeline, I'm still pretty optimistic of the continuing growth of C&I.

That's great.

Thank you, Dunson.

And then I'm curious.

Obviously, you are looking to grow the San Francisco market here.

Can you talk about what your current loan footings are here in the Bay area and kind of to what size you would like to see this market grow?

Aaron, I think we have it as Northern California and, can't be sure, I thought it was like 12% of our loans or something like that, which would be about $600 million or $700 million.

Yes, it's about a third of our California exposure is in Northern California.

But it's mainly outside of the city of San Francisco.

And what we find is that most of the businesses are really centered around the Bay area and not in the city proper.

However, the city itself is a good deposit region area, so it's very difficult -- I don't think loans generating from the San Francisco city itself would have a big impact on us.

Okay, that's helpful.

I appreciate the color.

Thanks, guys.

Lana Chan, BMO Capital Markets.

Hi, good afternoon.

I wanted to ask if you'd go through DFAST with the regulators.

Can you remind us what your, I guess, capital plans are for some of the uses of your excess capital, (multiple speakers)?

Well, on the DFAST, [Raz] is sitting right beside me, our Deputy CFO.

That is almost a full-time job for him, but we submit it at the end of a quarter.

So they -- we can't talk about -- there has been a lot of review of our particular submission.

So it's a learning -- I guess we've turned in capital plans before to the regulators and the DFAST review is much -- it's a different process and a lot of the focus initially for us is mainly on the process as to balancing procedures, review procedures, the fact that the -- that our Excel templates -- to make sure they are linked so there's no input errors and things like that.

So with that, as you know, for the $10 billion to $50 billion banks, the regulators will not -- one, this year, the results are not going to be public and two, we are not going to get a yes or no.

We would get -- I know we will get suggestions and recommendations to improve our process, but in terms of capital -- one, with our strong loan growth, our capital ratios actually dropped slightly in the first quarter.

So what we -- sort of in general order, we want to increase the dividend and DFAST will have an impact on how much we can pay.

So our goal long term is to get it back up to 30% of the prior year's earnings.

Then we have loan growth, as I mentioned before, so that should keep our capital ratios from building given what we see in our pipeline.

And then we hope to be able to do an occasional acquisition here and there mainly for cash.

And then lastly, I think based on the last couple conferences I went to, the investors that I talk to sort of discourage banks from buying back stock at these price to book (inaudible).

So we have taken that input and that's -- we may do some buybacks to offset stock option dilution, but -- so that's where we are.

Okay, and any thoughts or are you getting any feedback from the regulators potentially about the loan to deposit ratios that are near or above 100%?

We are hearing some concern from the regulators from some other banks that they want to see that coming down.

Our internal policy is that our loan to deposit ratio is -- should not exceed 100%.

That's (inaudible) loans and deposits.

So we have been at about 98% for the last two or three quarters and we are fortunate that our core deposit -- our deposit growth has more or less kept in line with our loan growth.

Here in the second quarter, because we see pretty good loan growth, we are going to have a -- we have not had a deposit promotion for many years.

We are going to do a deposit promotion that's tied to one, two, and three-year CDs, mainly one and two-year CDs where we pay an additional spread if they bring in a NOW account.

So to resummarize, we have not gotten any input as to lowering our loan to deposit ratio.

In addition, this is Dunson Cheng, for 2013, our loan growth was about -- a little bit -- sometime like 8%, something like that and the first quarter was a little bit higher, but I think the -- my guess is that the regulator would pay more attention if your loan growth is, I don't know, 15% or 20% higher.

And as Heng mentioned, in addition to promotion, we are focusing more and more energy on deposit gathering and that's why you are seeing that we are buying branches, taking over deposit at those branches.

So that is one of our strategies to generate deposits.

Okay, thank you, very helpful.

Gary Tenner, DA Davidson.

Hi, good afternoon.

I just had a couple of follow-up questions on the expense lines, particularly the professional services expense declined this quarter from the fourth quarter, but I thought it was going to be declining more coming out of the spend on the initiatives.

Is that $5.2 million a run rate that you would expect for the remainder of the year or should that number itself come down more?

Yes, Gary, this is Heng Chen.

There's a couple things.

One, the legal expense was a little higher than -- we expect that to drop in future quarters because of the litigation accruals and payments.

And then I believe we had something like a couple hundred -- $200,000 or $400,000 of conversion-related professional expense that we booked in the first quarter.

So that should be the last of it.

Okay, so the $1 million of litigation expense, that was captured on that line item, part of the $5.2 million?

I believe that the litigation expense would be in other, other operating expense (multiple speakers).

Other, right.

Okay.

Okay, fair enough.

And then you had said earlier I believe that you expect -- I just want to make sure I heard this correctly -- that you expect to reduce expenses by 2% in the back half of the year or was it the efficiency ratio by 2 percentage points in the back half of the year?

Yes, well, actually, what I meant to say is that the savings from these streamlining initiatives we believe are 2%.

As Dunson mentioned, some of it we may reinvest in new business development efforts.

So it's not -- it's certainly not a change in the efficiency ratio, but a savings as a percentage of our expense base.

Okay, off the [fold], first-quarter expense (multiple speakers)?

Right.

Okay, all right, perfect, thank you.

Julianna Balicka, KBW.

Good afternoon.

So I have a couple quick follow-ups on deposits.

I'm sorry I missed your full remarks about the gateway branch that you are acquiring.

What was the expectation of deposits that are going to be coming in during the second quarter?

It was about $36 million.

$36 million and that San Francisco branch that you referenced that you're opening up the second branch outside of that, right?

No, no.

That is the gateway branch.

That is the gateway branch.

On [Clement] Street, yes, yes.

That's right, that's right.

And then in terms of your deposit growth this quarter, the retail deposits increased, so was that your annual Chinese New Year promotion or was that something else and at what rate were the new lines coming in at?

I mean new deposits?

Our Chinese New Year promotion, I heard it was not that successful.

It was -- I think it was a 14-month CD or something like that ----

13-month CD.

Yes, 13-month CD and you got a little -- I think it is the Year of the Horse, but it's not -- once again, we didn't get that much in the way of deposits.

So there wasn't any particular promotion driving the retail deposit growth this quarter as opposed to the other kind of categories?

Well, we had $102 million of brokerage CDs, which will show up in the under $100,000 deposit.

Oh, I see.

Okay, I understand.

(multiple speakers).

Go ahead, sorry, I didn't mean to cut you off.

Oh, yes.

So we generally -- our intent on the brokerage CDs is to add duration to our liability book.

So most of them are 2.5 year to 3-year brokered CDs.

2.5 to 3 year and what kind of rate are they at?

About 1%.

1%.

Okay, and this might be a micro question, but the $1 million increase in legal expenses, is that something that will go away next quarter or ----?

Yes, almost all of it.

Yes.

Okay.

Kind of going back to the DFASF discussion, maybe a little bit on the stress tests, in terms of what you are internally submitting for expected losses in CRE versus any feedback from the regulators, are there any conversations along those lines?

Can you repeat the question on the ----?

Yes, sorry, on stress testing with the regulators, are you having any conversations with them?

Is there any feedback with them as far as your stress case expected losses on CRE versus their viewpoint?

Oh, not quite yet as to that particular one.

I mean we -- as I mentioned before, right now, the discussions are ongoing, but right now the focus is more on process and more on the C&I portfolio because of just certain things that are -- and then CRE, once again, they haven't -- it may be just a matter of days, but they really haven't -- we haven't had much discussion there.

Our results are I think a little bit higher than they were in the past in terms of a percentage, but that I believe is due to the guidance as to the severity of the recession as it impacts CRE values.

Got it.

Okay, thank you very much.

Okay, great, thank you.

Brett Rabatin, Sterne Agee.

Hi, I missed it if you discussed it, but just what you sold in the securities portfolio during the quarter, kind of what you took the gains in.

Yes, Brett, we sold about $120 million of 15-year MBS and then we sold about $10 million of corporates, $10 million or $15 million of corporates.

Those we had very low way of gains and we sold about $900,000 of agency preferred stock and that's all gain, so almost all gain.

Okay.

Great, thank you.

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

(Operator Instructions).

Thank you for your participation.

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

Okay, thank you and thank you for joining us for this call and we look forward to talking with you at our next quarterly earnings release.

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

This concludes the presentation.

You may now disconnect.

Good day.