Cathay General Bancorp (CATY) 2014 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's third-quarter 2014 earnings conference call. My name is Sarah, 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 Georgia Lo for Cathay General Bancorp.

Thank you, Sarah, and good afternoon. Here to discuss the financial results today are Mr. Dunson Cheng, Chairman of the Board, President and Chief Executive Officer; and Mr. Heng Chen, 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, 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 earnings release outlining its third-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, Georgia, and good afternoon. Welcome to our 2014 third-quarter earnings conference call. This afternoon, Cathay General Bancorp reported net income of $35.9 million for the third quarter of 2014, a 19.5% increase when compared to a net income available to common stockholders of $30 million for the third quarter of 2013. Diluted earnings per share increased 18.4% to $0.45 per share for the third quarter of 2014, compared to $0.30 (sic - see press release, "$0.38")per share for the same quarter a year ago.

In the third quarter, we continued to experience strong loan growth. Gross loans increased $293 million in the quarter, representing an increase of 13.6% on an annualized basis. Both C&I and CRE loans grew over $100 million each, while residential mortgages increased by $48 million.

For the nine months ended September 30, 2014, our loans increased $774 million, or 12.8% annualized, compared to an increase of $403 million, or 7.2% annualized for the nine months ended September 30, 2013. The driver of the increase came from CRE loans, which increased $391 million, while residential mortgages grew by $162 million, C&I loans by $151 million, and the construction loans by $80 million. At this time, our expectation for loan growth for 2014 will come in about 12%.

For the third quarter of 2014, our total deposits increased $114 million to $8.69 billion. For the nine months ended September 30, 2013 (sic - see press release, "September 30, 2014"), the increase in deposits was $713 million, while representing a [12%] annualized increase from December 31, 2013. I think I -- there may -- there is a typo. For the first nine months of -- ended September 2014, the increase was $713 million. Our core deposits increase 20.9% on an annualized basis, or $225 million from June 30, 2014.

In early July, we took over an existing branch in the Richmond district in San Francisco. We now have two branches in the city. Total deposits at the branch on the date of acquisition were about $33 million. Cathay Banc remains committed to open or acquire new branches to better serve our customers.

Since our core conversion in July 2013, we have taken steps to make further use of the new system's capabilities to streamline our workflows. We are applying part of the third-quarter cost saves to develop more business, and in part, to lower our efficiency ratio. In the third quarter, our efficiency ratio was 44.51%, a slight improvement over the second-quarter ratio of 44.92%, and an improvement over the third-quarter 2013 ratio of 51.01%.

With that, I will turn the floor over to our Executive Vice President and CFO, Heng Chen, to discuss the third-quarter 2014 financials in more detail.

Thank you, Dunson, and good afternoon, everyone. For the third quarter, we announced net income of $35.9 million or $0.45 per share. Our net interest margin was 3.31% in the third quarter of 2014, compared to 3.37% in the second quarter of 2014, and compared to 3.35% for the third quarter of 2013. In both the second and third quarters of 2014, interest recoveries and pre-payment penalties added 9 basis points to the net interest margin.

In June 2014, we entered into $267 million of pay fixed received LIBOR interest rate swaps to reduce our exposure to higher interest rates. The net payments on these interest rate swaps decreased the net interest margin by 5 basis points during the third quarter of 2014.

Higher levels of short-term interest-bearing cash deposits, resulting from a surge in money market deposits during the third quarter, also reduced the net interest margin by 4 basis points. Maturities at structural repos -- or future maturities at structural repos are $100 million at 3.5% in November, and $50 million at 3.5% in January 2015.

Non-interest income during the third quarter of 2014 was $8.6 million, which excluded net security gains of $0.4 million. Non-interest expense decreased by $8.1 million to $42.6 million in the third quarter of 2014, compared to $50.7 million in the same quarter a year ago. The decrease was mainly due to $6.9 million of costs associated with debt redemption in the third quarter of 2013, as compared to only $0.5 million in the third quarter of 2014.

Amortization of core deposit premiums decreased $1.1 million, as the result of the full amortization of the core deposit premium from the General Bank acquisition. Also, OREO expense for the third quarter of 2014 was income of $1 million, mainly as a result of gains from sales of OREO.

We have implemented other enhancements in our data processing capabilities since the completion of the core conversion on July 15, 2013, and have begun to realize operating efficiencies provided by our new core system in both our branch network, as well as our backroom operations.

The effective tax rate for the third-quarter 2014 was 38.3%, due in part to the higher expected pre-tax income for the full-year 2014. And we expect the fourth-quarter effective tax rate to be approximately 37.3%.

At September 30, 2014, our Tier 1 leverage capital ratio increased to 12.66%. Our Tier 1 risk-based capital ratio decreased to 14.77%. And our total risk-based capital ratio decreased to 16.05%, as compared to June 30, 2014. All ratios significantly exceeded well-capitalized minimum ratios under all the regulatory guidelines. At September 30, 2014, our Tier 1 common risk-based capital ratio was 13.53%.

Net recoveries for the third quarter of 2014 were $5.2 million, or 0.06% of average loans, compared to net recoveries of $3.6 million in both the second quarter of 2014 and the same quarter a year ago. Our loan loss reversal was $5.1 million for the third quarter, compared to $3.7 million in the second quarter of 2014, and $3.0 million for the third quarter of 2013. Our non-accrual loans decreased 15.9% or $12.3 million during the third quarter to $65.3 million, or 0.74% of period-end loans, as compared to the second quarter of 2014.

Thank you, Heng. We will now proceed to the question-and-answer portion of the call.

(Operator Instructions)

Joe Morford, RBC Capital Markets.

Thanks. Good afternoon, guys.

Hello, Joe.

Hello, Joe.

I was just curious to learn a little bit more about the commercial loan growth in the quarter, and what was driving that? Was it -- much of it trade finance related, or was it other kind of niches? And how does the pipeline look going into the fourth quarter and next year?

Joe, this is Dunson Cheng. I think you are correct, in the third quarter quite a bit of our (inaudible) C&I loan came from trade finance, as our trade customers draw down the line to finance their inventory, and then later on accounts receivable. And so, that contributed a good part of the increase, although there is quite a few new loans that we have booked for the quarter -- of the last quarter.

And so, as far as pipeline is concerned, I think the C&I pipeline is still good, but however, it's not as robust as in 2013. And at this point in time, I still feel pretty good that our loan growth is maintaining at a pretty good pace.

Okay. And then, I guess, the other question was just on the deposits. The core deposit growth was particularly strong. I am curious to learn more about driving that, and what was driving that? And then just -- the loan to deposit ratio, now up over 100%. Is that much of a concern, or a focus point for you at this point?

The growth of the deposits come in to be pretty good. And as you will recall, in the first and the second quarter, we had a promotion, but that has long gone. But we are finding that the promotion And the growth of deposits continues -- pretty evenly through the branch system that we have, and we also had a pretty good growth in our Texas region, as well.

And Joe, this is Heng Chen. We -- as for the loan to deposit ratio, we manage to the -- [net] loan to total deposits. So we were about 99.6% at the end of the quarter, but for much of the quarter, we had a -- that ratio was lower.

And to help try to improve our margin, we let about $40 million of internet CDs run off in the third quarter. And we expect to have -- to continue that run-off in the fourth quarter. We will -- we think we have pretty good core deposit growth from our customers. So we think our position at the end of the year still will be within our limit, which is 100% net loans to deposits.

That's great, Heng. Thanks so much for the color.

Okay.

Thank you, Joe.

Aaron Deer, Sandler O'Neill.

Thanks. Good afternoon, guys.

Hello, Aaron.

Hello, Aaron.

Just a couple of quick follow-ups on Joe's questions. One, is there a way for you to delineate the amount of loan growth that came in the quarter, between what was commercial and what was retail customers?

It's mostly commercial. I mean, we --

And I am sorry. I was talking about the deposit growth in the quarter.

Oh. I mean, the money market, that's tradition -- that is the bulk of the growth. And that is traditionally a commercial product for businesses. We have a lot of business customers that are involved in import/export, or they are affiliates of Taiwanese companies and so forth. They are Chinese by background, so it is mainly commercial. That is why it is so lumpy, when there is big growth.

Sure. Okay.

And Aaron, also our demand deposit also have a pretty good growth, and $68 million for the quarter. And that was (inaudible) has a pretty good growth. So (inaudible).

Yes. No, that's great. And then, on the trade finance loans, how should we think about the seasonality in that product? What kind of run-off would you expect in the fourth quarter, as some of those lines get paid down?

Well, it -- if we -- I think our previous experience has been that the fourth quarter growth in trade related customers will flat as it's -- once they sell their inventory, it takes maybe 60 days to 90 days to collect their ARs, and then pay down. I think the first quarter of 2015 traditionally should have a lower balance.

Should have a decline then?

A decline, yes, for the -- (Multiple Speakers).

Customers.

Okay. And then, one last one, if I may. Heng, you had mentioned that the -- you are getting some cost saves from the conversion. I am wondering how much more of that might be left, versus how much is being reinvested into new lenders?

So what might we see in terms of professional -- or in terms of a run rate for compensation expense? And similarly, are there any lingering cost saves in the professional services line that we might see?

Yes. I had mentioned, it was probably going to be $1 million a quarter in total. So probably, we have half of that realized through the end of the third quarter. And then, what we will -- try to get the other $0.5 million per quarter in the fourth and first quarter of next year.

And then, the professional, we are -- that -- there is room to grow there. But particularly in 2015, as we look at those sort of discretionary type expenses or control book expenses. Our goal is to have continued [offering] leverage where we try to have noninterest expense essentially almost flat quarter-to-quarter. And so, that is the case right now from the second to the third quarter.

Okay. Great. Thanks for taking my questions.

Okay.

Lana Chan, BMO Capital Markets.

Hello, good afternoon.

Hello, Lana.

Hello, Lana.

I wanted to ask about loan pricing and what you are seeing in sort of the different loan buckets, the C&I, commercial real estate, resi, mortgage? Any significant change quarter over quarter?

Lana, as far as C&I loan pricing is concerned is, we don't see a lot of deterioration in the C&I loan pricing. However, on CRE loans, we are experiencing quite a bit of competition on the CRE loans. And as a matter of fact, in the third quarter we saw a higher payoff on CRE loans, as some of the existing loans are being let go because of pricing.

On the other hand, we are still able to increase our CRE portfolio quite substantially. So on one hand, we are experiencing keen competition in CRE loan pricing. On the other hand, we are fortunate to be able to replenish that with newer loans.

Yes, and Lana, on residential mortgage, we since April, we have not been taking 30-year fixed-rate residential mortgage applications. But so, our emphasis has been on 15-year fixed-rate, as well as 5/1 ARMs or 3/1 ARMs. And that pricing, because most of it is -- a lot of is for investment property, that is holding up, compared to the residential mortgage pricing for conforming product.

Okay. And just in terms of -- as you look at the sort of overall balance sheet growth, you gave the loan growth guidance. But could you talk about what you would expect with the moving parts on the cash, and the securities portfolio, and the paydowns overall, just balance sheet growth for the year and going forward?

Yes, Lana, this is Heng Chen. Our goal is to try to get that cash at the Fed down to -- down to like $100 million. At the end of the -- well, the average for the third quarter -- and this includes some cash -- some small amount of cash in our Hong Kong branch that is with other banks. It was -- anyway, in the third quarter, it was $360 million. And our long-term goal is to try to get that down to $100 million.

And that by itself, will increase the margin by the -- you can do the math. It is, I think, probably 8 basis points by that, just by not investing the cash. And in terms of securities, we sold $75 million of 30-year MBS in the third quarter, and we bought a like amount of 15-year MBS. So we don't like the rates that were available.

And then, last Wednesday when -- with interest rates -- when the 10-year plummeted to 1.87%, we sold $100 million of 30-year MBS at our cost so. And we are going to reinvest that in 15-year MBS when interest rates are higher. But once -- we are going to try to keep that cash at the Fed down to a lower level. And that, in the third quarter, that was a cause of a 4 basis point drag to the margin.

And just any thoughts about how long that would take, in terms of getting the cash down to $100 million? I know you are assuming that that goes into securities or loans?

It goes into loans. Right now, we are actually there. We have $100 million, and we think we will be able -- it will be a little easier. We -- the $100 million of 30-year MBS that we sold, we sold that for November settlement, and we have $100 million of structured repos that will mature in the middle of November as well.

So our goal is to have a more efficient balance sheet, and to have -- to keep the earnings assets flat, for lack of a better word.

Okay. Thank you.

(Operator Instructions)

Julianna Balicka, KBW.

Good afternoon.

Hello, Julianna.

Hello, Julianna.

So I have a couple of questions. One, just to quickly follow-up on the cash conversation that you were just having. So in this coming quarter, we should expect a positive NIM adjustment back up from the reduction in cash, yes?

Yes.

Yes.

So all things equal, you would have had a [3.4%] NIM if you hadn't had excess cash this quarter?

Well, not quite, because we also did the interest rate swaps, which were -- what was that? I think it was -- it was 5 basis points. So it's -- we were hoping that the 10-year would go back up to 3%, but it hasn't happened yet.

Right. Okay. And then, so this interest rate swap impact will be present this coming quarter, or is this a one-off?

No. It's going to be present until the Feds -- until LIBOR starts to move, it's -- there is going to be that same 5 basis point drag. It is just not going to get any worse.

Right. Got it. Okay. I understand. All right. And then, in terms of your pipeline of recoveries that you typically have in your interest income, and then also often in your charge-offs, can you give us an update on what we should be looking at for the next couple of quarters?

Well, so far in the fourth quarter, we think we will have several million. Maybe not quite as high as the third quarter, but there is a couple of real estate loans that are going to be paid off, that had been charged off, or partially charged-off. And then, our visibility into 2015 is less clear.

But we do -- we have one loan in the third quarter that is scheduled to mature, and we have $8 million of charge-offs. And roughly $5 million of interest applied to principal on that loan which we expect to recover, because we -- -- that property is in New York City, and it is residential. It is -- the use is for resident -- for condo construction. So we are optimistic that another bank will take us out.

Oh good. And then, so that is for next quarter, and for this quarter, you said several million. So of that several million recovery, is that going to be recovery in terms of positive -- I mean, in terms of the provision charge-off line? Or is that recovery, in terms of several million of interest income recovery?

It's provision. The interest recovery, it is generally 4 to 9 basis points depending on -- it's lumpy, but it jumps around.

Okay. And then, in terms of your deposit growth which has been very strong, can you talk a little bit more about the -- any verticals, or specialized deposit verticals, any concentrations or any particular industry expertises you have in your business deposit growth?

We are actually -- we just offer the traditional banking products to our type of customer. So we don't have a team that goes after title and escrow, or law firms or anything. It is just -- if the business owner is Chinese, and has some sort of trade relation or whatever, that is our target customer. As -- and then for individuals, that tends to be more on the CD side.

Got it. And then, a final question, and I will step back. You said earlier in the Q&A, you mentioned a lending run off of $40 million of internet CDs per quarter, and you will continue that run-off in 4Q So how much more of internet CDs, are you assuming another $40 million, or is that different in amount?

Yes, it is about that.

Okay. And then after that, is that all -- there is no more internet CDs left?

No. We have about $300 million. And our plan is, when we get to a -- if we need more deposits, we -- this quarter we got $50 million from the state of California, 10 basis points for six-month money, and that limit is $300 million. And so, we, over the course of 2015, we will try to use that as an alternative source of deposit, if our core deposit growth is not high enough.

Okay. That makes sense. And then, so the internet CDs that you are running off, sorry, what the cost on those?

Generally, 1%.

Okay. Got it. Thank you very much.

Okay.

All right. Great. And it looks like there are no further questions in queue, so I will turn the call back over to Cathay General Bancorp's management for closing remarks.

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

Ladies and gentlemen, thank you for your participation. This concludes today's presentation. You can disconnect, and have a great day.