Cathay General Bancorp (CATY) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cathay General Bancorp Second Quarter 2014 Earnings Conference Call. My name is Jasmine. 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'd like to turn the call over to Monica Chen, Investor Relations for Cathay General Bancorp.

Thank you, Jasmine, 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 end December 31, 2013, 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 second 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, everyone. Welcome to our 2014 Second Quarter Earnings Conference Call.

This afternoon Cathay General Bancorp reported net income of $35.1 million for the same quarter of 2014, a 26% increase when compared to a net income available to common stockholders of $27.8 million for the same quarter of 2013. Diluted earnings per share increased 25.7% to $0.44 per share, for the same quarter of 2014 compared to $0.35 per share for the same quarter a year ago.

In the second quarter, we continued to experience a strong loan growth. Gross loans increased $263 million in the quarter, representing an increase of 12.7% on an annualized basis. For the first six months of 2014, our loans increased $481 million or 81.5%, over the increase of $265 million for the six months ended June 30, 2013.

The driver of the increase came from CRE loans, which increased $285 million, while single-family mortgages grew by $114 million, construction loans by $64 million and C&I loans by $24 million. At this time our expectation of loan growth for 2014 will come in around 10%. For the second quarter of 2014 our total deposits increased by $348 million to $8.58 billion.

In the first half, the increase in deposits was $599 million which represents a 15 annualized increase -- percent increase from December 31, 2013. Our core deposits increased by 13.4% on an annualized basis of $301 million from December 31, 2013.

Last Friday we took over a existing branch in Richmond District. We now have two branches in the city of San Francisco. Federal deposit on the branch on the date of acquisition were about $45 million.

Cathay Bank remains committed to open or acquire new branches to better serve our customers. Since our core conversion in July 2013, we have taken additional steps to make fuller use of the new system capabilities to streamline our work flows. Starting with the second half of 2014, we expect to begin to realize additional operating efficiencies.

We show a [pry part] of the cost saves to develop more business in part to lower our efficiency ratio. In the second quarter our efficiency ratio was 44.92%, an improvement over the first quarter of 49.44%. With that I'll turn the floor over to our Executive Vice President and CFO, Heng Chen, to discuss the second quarter of 2014 financials in more detail.

Thank you, Dunson and good afternoon, everyone.

For the second quarter we announced net income of $35.1 million or $0.44 per share. Our net interest margin was 3.37% in the second quarter of 2014, compared to 3.38% in the first quarter of 2014, and compared to 3.30% for the second quarter of 2013. During the second quarter, interest recoveries and prepayment penalties added 9 basis points to the net interest margin compared to 5 basis points during the first quarter.

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. Maturities are $100 million at the 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. During the second quarter we sold $164 million of 30-year MBS securities as part of our plan to reduce our exposure to higher interest rates.

To reduce the level of short-term cash on hand, during the first three weeks of July, we prepaid $171.2 million of our Federal Home Loan Bank term borrowings, which had a weighted average interest rate of 1.07%, and incurred prepayment penalties of about $500,000, which we expect to be covered by security gains. Non-interest income during the second quarter of 2014 was $8.5 million, excluding net security gains of $0.5 million.

Non-interest expense decreased by $11.2 million to $42.5 million in the second quarter of 2014, compared to $53.7 million in the same quarter a year ago. A decrease was due to $10.1 million of costs associated with debt redemptions in the second quarter of 2013.

During the second quarter of 2014, FICA taxes of $525,000 were incurred when the cash bonuses for 2013 performance were paid. Also during the second quarter of 2014, a reduction of $950,000 for loss from low income housing operations was recorded to reflect over amortization of 2013 low income housing offering losses. We have implemented other enhancements in our data processing capabilities since the conversion -- since the completion of the core conversion on July 15, 2013.

Starting with a 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 back room operations. At June 30, 2014, our Tier 1 leverage capital ratio decreased to 12.65%, our Tier 1 risk-based capital ratio increased to 15.13%, and our total risk-based capital ratio increased to 16.43%.

Our ratios significantly exceeded well capitalized minimum ratios under all the regulatory guidelines. At June 30, 2014, our Tier 1 common risk-based capital ratio was 13.83%.

Net recoveries for the second quarter of 2014 were $3.7 million, or 0.05% of average loans, compared to net charge-offs of $4.4 million in the first quarter of 2014 and $0.9 million of net recoveries in the same quarter a year ago. Our loan loss reversal was $3.7 million for the second quarter, and $0 for the first quarter of 2014, and for the second quarter of 2013. Our non-accrual loans decreased -- I'm sorry -- our non-accrual loans increased 9.5% or $7.2 million during the second quarter to $77.6 million, or 0.91% of period end loans as compared to the first quarter of 2014.

Thank you Heng. We now continue to the Q&A portion of the call.

(Operator instructions)

Aaron Deer, Sandler O'Neill & Partners.

Heng, I had a question, when you were discussing the loan growth, I wasn't sure if I heard you correctly. Did you say that the 10% number you throw out, were you talking about the year-to-date growth, or is that what you see as being on target for the full year at this point?

It's what we expect for the full year, and it's -- now, we tend to be conservative, because in the last quarter call we were expecting 8% full-year growth. But right now we're thinking it is going to be a little over 10%, and it is mainly from a slow-down -- not a slow-down in CRE, but higher prepayments that we see in the third and possibly in the fourth quarter.

So in the first quarter our CRE loans increased by $170 million net, and in the second quarter it only increased by $115 million. So, and then once again we are losing some small amount of loans due to very intense price competition here in the third quarter. So, that's why we're guiding to slightly over 10%.

And then on the deposit side the average rates on your money market and CDs don't seem to have moved that much, yet you seem to be attracting a lot more of those balances. Are you finding that you're having to pay up for some of that funding at this point, and should we expect to see that start to show up in the deposit costs going forward?

No, we had a special promotion in the second quarter for two months. It's for one-, two-, and three-year CDs, where we gave a slight rate concession. So for example, for three-year CDs, the rate we offer was 1.3%, and we got quite a bit of deposit growth from there. And so we think our -- we're in good position there. Our loan to deposit ratio actually went down slightly at the end of the second quarter.

And then here in the we -- we were reinstated with the state of California public deposit program, so we're going to be adding deposits from that very inexpensive source. It's about 12 basis points or 15 basis points, and so we're going to start doing that in the third quarter.

Aaron, this is Dunson Cheng. I want to add to what Heng just said.

Even though our CD promotion was on -- well, our promotion was on CD but however, we did require our other new customer to open a checking account or other account with us to get the special rates, and the promotion, in addition of generating some CD money, we have also gotten a substantial amount deposits in checking accounts and also money market accounts. There is a -- it's synergistic with CD and the other checking accounts.

Heng, in your comments you mentioned the uptick in the non-accruals. Anything there that we should be watching for? Is that just normal bouncing around at this point?

Yes. Our substandard credits actually went down quite a bit. They went down from $351 million at the end of March to $313 million at the end of June.

But we just had a couple of real estate loans that are having cash flow problems. They're well-secured and we didn't take charge-offs on them, but they were placed on non-accrual status.

Aaron, this is Dunson Cheng again. The uptick in the non-accrual really due to, as I mentioned, one CRE loan and one C&I loan, and both loans are smaller in magnitude, around $3 million, or so. And the income of non-accruals is going to be at even. For example, in the first quarter you saw charge-off of $4 million and most of that charge-off has been recovered in the second quarter.

Yes, it seems like overall the credit trends continue to move in the right direction. Great. Thank you. I will step back.

Joe Morford, RBC Capital Markets.

A question on the margin. I recognize in the second quarter you had about 9 basis points of interest recoveries, but based on the prepayment of the FHLB term borrowings that you have done so far this quarter, Heng, do you see that margin finally crossing that 3.40% level here in the third quarter?

I'm hopeful, Joe. I think part -- there is two things that impact us. One, the cash -- the excess cash on hand continues to build, so it was on average $252 million in the second quarter, and it was higher at the end of June. The average for June was -- the month of June was about $380 million. But the -- so it's a matter of how fast we -- our loans get booked and grow versus that.

But under -- I knew many investors would ask that, so I actually did a pretty detailed forecast by component and it's off of the June run rate, and it brackets the 3.40%. So if things really break, we would get about 3.4%; if not, we'll get there, hopefully, in the fourth quarter. But one of the things is we're trying to be more efficient with our balance sheet, so we were under a matched funding strategy where we would borrow three years from the Federal Home Loan Bank, and now we're accomplishing the same thing by doing interest rate swaps on selected fixed-rate loans.

That's helpful. The other question, Heng, was just the -- or maybe Dunson, the uptick in the commercial loan growth this quarter, was that primarily on the trade finance side or more traditional C&I type business in the market?

Joe, mostly in the trade finance side and the same quarter in the third quarter and other quarters that our trade customers are building up inventory, and so we tend to use their lines a bit more than usual, so, yes, it is mostly in the trade finance side.

Brett Rabatin, Sterne, Agee.

I wanted to, first, ask about commercial real estate and just, you had growth in the quarter, and you kind of mentioned in your comments that you expected some commercial real estate to come off in 3Q with pricing. What did you do in terms of commercial real estate production in 3Q? What kind of pricing, what kind of properties? And then, maybe if you could talk about what you're seeing come off as, you might view it, too competitive in nature?

Joe, you're talking about commercial construction?

Commercial real estate.

In general, the commercial real estate side of the business actually is quite good and our pipeline, in my way of looking at it, it's good. On the other side of things is that what Heng just mentioned, that competition for commercial real estate is really very key, both in structure and in pricing.

So on one hand, we are booking quite a bit of loans. On the other hand, just like Joe asked about margin previously, on the other hand we want to make Heng's forecast to be correct at 3.4%. So it's a balance between the two, and that makes the job a little bit more difficult.

Maybe we can [talk] some more on that. The other thing I just wanted to ask, I know I've asked this before, capital management, you continue to creep up a little bit in terms of your capital ratios, and was just curious about your thoughts on capital management strategies going forward?

Brett, it has not changed. The priority of capital management, of course, the easy thing to do is to increase dividends. That is what we have done and we hope to be able to continue with increased dividends.

Now it is at $0.07 and prior to the recession we were paying $0.105 per share and we hope that we would be able to do that soon. And so that would be the first priority. And as you have seen that we are continuing to add more branches. And I think the one that we just recently took over in San Francisco, that was the fourth or fifth new branches that we have gotten for -- in the last 12 months and we shall continue to do that.

And, of course, we always hope that they -- a good partner would come on the scene and we can use some of the -- our excess capital to fund acquisition. And now let me let Heng talk about buy-back.

Oh, well, I think we would view that as another tool in the tool kit. So we haven't -- we haven't reactivated our authorization because we're in the -- we won't get through the DFAS process and get some improvements in our capital management.

But our long-term goal is to have a small buy-back capacity available approved by both our board and the regulators in case there is weakness in our stock. But we would not be active buyers of our stock except under those circumstances.

Lana Chan, BMO Capital Markets.

First question on expenses, I think, Heng, you named a couple of items on the expense side this quarter, I couldn't quite follow everything and there were a couple of other things like the OREO expense or OREO gain and a $550,000 gain on the debt redemption.

So can you go over what the non-recurring things were in the expense line? And then you mentioned several times that there were efficiencies with the core systems conversion expected in the second half of the year; what kind of efficiencies are you looking for?

So on the -- just to recap, the unusual items, we had the FICA taxes on the bonuses, that was $525,000, and then on the low income housing prior period -- prior year adjustment, that was $950,000. So in terms of other items we are -- we have a charitable foundation that's affiliated with the bank and we historically paid -- made our contribution, our full-year contribution in the second quarter, so that was $850,000. So that was why marketing went up.

Then in terms of the third quarter, we expect, based on what we know right now, to have at least another $1 million of OREO gains for properties that are in escrow. So that expense should be a positive number.

And then in terms of the costs, the benefits from the core conversion, we're guessing it's about $1 million a quarter. And then some portion of it will be reinvested in new staff, new lenders. But the absolute number right now, based on our internal targets, is about $1 million a quarter.

Lana, this is Dunson Cheng. Heng's number is quite correct about cost saves. But however, as we mentioned several times before, we are going to use some part of the cost savings to build our business. Our loans and deposits in the first half of the year grew only like $0.5 billion, and so we need to have additional employees to support that growth.

The other thing, about efficiency level, we don't have a hard goal to drive our efficiency level to a certain point. And we just want to make sure that both our offers, our back room offers, regulatory requirement not being adhered to, and by just running the ship very efficiently like we have done over the years. We are hoping that the efficient level would go down to a point that we are comfortable with.

Let me just add, I think we're not concerned so much with just the expense part, because unlike many other banks we actually have top line growth. So on a year-over-year quarter our net interest income went up 7%, and our non-interest income, excluding security gains, went up 4%, whereas our core expenses, excluding debt prepayments, went down 4%. So we think we're in a pretty good position.

Secondly, we have been very cautious. In my remarks we said we sold $165 million of MBS in the second quarter, and then we sold another -- that's 30-year MBS. And we also sold another 100 million of 15-year MBS and we haven't bought any securities except short -- except US treasuries.

So at the end of June our securities portfolio is $1.3 billion, of which almost $600 million is in very short-term treasuries, because we are expecting interest rates to go up, and with security yields being so low, we would rather sacrifice some current income rather than be locked into a big capital -- big unrealized losses in the future.

Just to follow up on that, what were the average yields of the MBS sold?

They were about -- they were about 2.7%. They were at 3%, 30-years threes that we bought at 1.03%.

And just last question on that, is -- does that change your asset sensitivity position at all?

Yes, we are still working on June, but we think in our, always on net interest income we were generally up 10% in the 200-basis point rate shop for net interest income. And then for market value equity we think it will be in the -- up 200 basis point rate shock, it will be in the 3% to 5% range. So it will be a lot different than what we had in the -- in the first quarter Q.

Julianna Balicka, KBW.

Hi, I have a couple questions. One, in terms of ongoing pipeline of potential recoveries, both in the loan recoveries that would flow through your provision line and also in interest income recoveries in your loan yields, what are some of the pipelines we should think about in 2Q, 3Q, 4Q of that?

We have a fairly large recovery that we would expect to get in the third quarter. It's several million dollars, and we had gotten part of that recovery in the second quarter, and this is for a loan that was charged off in the fourth quarter.

So based on what we see right now, we're likely to have net recoveries again in the third quarter. And then in 2015, we have some -- a few larger recoveries toward the third quarter of 2015.

As we built those recoveries into our reserve expectations, at what level do you expect your reserve coverage of loans to stabilize at?

Well, right now we're at 2% and our loans are growing. But it's -- I think our peers are down to 1.6% or something like that, so we're working on our model. I mean, Kim is here, so he's been retired from these conference calls, but our Chief -- our Chief Risk Officer now, Kim, if you want to add something there?

No, I mean, I don't see large provisions being added, certainly, and our anticipated loan growth obviously is going to push down that ratio to some degree. But I think we'll be -- continue to be rather well-reserved.

And then on the recoveries impact onto loan yields, should we continue to think about a few basis points each quarter of loan yield in positive impact?

Yes, well this -- the first quarter was 5. This second quarter was 9. We think the third quarter will probably be 5 basis points, hopefully.

So that's both recoveries and prepayments. Most of our commercial real estate loans, if they're fixed-rate, carry prepayments, so the bulk of that in the second quarter was from prepayments rather than recoveries.

And then in terms of the -- you mentioned that you have been reinstated with the state of California public deposit program, which is excellent to hear, and when you go back to that in the third quarter, how much or how quickly do you expect to bring on that funding?

Well, the limit is $300 million. We were going to -- we've been approved for $50 million, and then we hope to -- we used to be at the limit of $300 million before the recession, so it's our plan to phase that in over six quarters.

Phase in the $50 million over six quarters or get to the $300 million over six quarters?

Get to the $300 million.

At this time there are no questions in 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.

Thank you again for joining us in this call and we look forward to talking with you at our next quarterly earnings release. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.