Cathay General Bancorp (CATY) 2015 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp's first-quarter 2015 earnings conference call. My name is Karen and I will be your coordinator for today.

(Operator Instructions)

Today's call will be recorded and 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, Karen, and good afternoon. Here to discuss the financial results today are Mr. Dunson Cheng, our Chairman of the Board 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, 2014, and Item 1-A 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 to reflect future developments or events, except as required by law.

I would also like to inform you that Cathay has filed a Form S-4 registration statement that includes a prospect of Cathay, and a proxy statement of Asia Bancshares, regarding the merger that we announced in January 2015. You are urged to read this document, because it contains important information about the merger.

In addition, Cathay and Asia Bancshares and their directors and officers, may be deemed to be participating in the solicitation of proxies in favor of the proposed merger. You can find information about the Cathay directors and executive officers in our proxy statements, filed with the SEC. You may obtain a copy of these documents through the SEC website, Cathay's website, or by request from our investor relations department.

This afternoon, Cathay General Bancorp issued an earnings release, outlining its first-quarter 2015 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 and CEO, Mr. Dunson Cheng.

Thank you, Monica, and good afternoon. Welcome to our 2015 first-quarter earnings conference call. This afternoon, we reported net income of $36 million for the first quarter of 2015, and 15.1% increase when compared to a net income of $31.3 million for the first quarter 2014.

Diluted earnings per share increased 15.4% to $0.45 per share for the first quarter of 2015, compared to $0.39 per share for the same quarter, a year ago. In the first quarter 2015, we had a solid loan growth of $310 million or 3.5% quarter-over-quarter. This brings our March 31, 2015, total loan balance to $9.2 billion.

Loans increased in every category, with CRE loans increase at $177 million, commercial loans at $52 million, construction loans at $47 million, and residential mortgages by $30 million. We continue to see our loan growth in 2015, in the range of 10%.

For the first quarter of 2015, our total deposits increases by $330 million to $9.1 billion. This represents an increase of 3.8% quarter-over-quarter, or 15% on an annualized basis. Our core deposits increased by $79 million or 6.95% on an annual basis from December 31, 2014.

During the last quarter's conference call, we announced a signing of the merger agreement with Asia Bancshares. We are looking forward to the completion of the merger with Asia Bancshares, which we now expect to occur in the third quarter of 2015.

With that, I will turn the floor over to our Executive Vice President and CFO, Heng Chen, to discuss the first quarter of 2015 financials in more detail.

Thank you, Dunson, and good afternoon, everyone. For the first quarter, we announced net income of $36 million, or $0.45 per share. Our net interest margin was 3.41% in the first quarter of 2015, compared to 3.36% in the fourth quarter of 2014, and compared to 3.38% for the first quarter of 2014.

In both the first quarter of 2015 and the fourth quarter of 2014, interest recoveries and prepayment penalties added 4 basis points to the net interest margin. An additional $50 million of structural repurchase agreements at 3.5% matured on January 8, 2015, adding an additional 4 basis points to the net interest margin for the first quarter of 2015.

Non-interest income during the first quarter of 2015 was $8.5 million. Non-interest expense decreased by $4 million or 8.2%, to $44.1 million in the first quarter of 2015, compared to $48.1 million in the same quarter a year ago. The decrease was mainly due to costs associated with debt -- debt redemptions incurred in the first quarter of 2014 of $3.4 million, as well as an $835,000 decrease in the amount of employee salaries and benefits expense in the first quarter of 2015.

The effective tax rate for the first quarter of 2015 was 37.3%. As the result of an investment in a renewable energy tax credit fund made on April 14, 2015, we expect that our effective tax rate for the full year of 2015 will be between 30% and 28%.

The additional pretax amortization expense for these investments would be between $15 million and $18 million for the last three quarters of 2015. The second-quarter income tax provision will reflect a catch-up adjustment to reflect the lower effective tax rate for the full year 2015, resulting from the investment in the renewable energy tax credit fund.

At March 31, 2015, our Tier 1 leverage capital ratio increased to 13.16%, our Tier 1 risk-based capital ratio decreased to 14.33%, and our total risk-based capital ratio decreased to 15.6%, as compared to December 31, 2014. Our ratios significantly exceeded well-capitalized minimum ratios under all the regulatory guidelines.

At March 31, 2015, our common equity Tier 1 capital ratio was 13.18%. The new Basel III capital ratio regulations reduced our risk-based capital ratios by almost 30 basis points compared to December 31.

Net charge-offs for the first quarter of 2015 were $332,000 or 0.004% of average loans, compared to net charge-offs of $5.8 million in the fourth quarter of 2014, and net charge-offs of $4.4 million in the same quarter a year ago. Our gross loan loss recovery stream in the first quarter of 2015 was $4.1 million, and our gross charge-offs were $4.5 million, all of which were from specific reserves set up in prior quarters.

Our loan loss reversal was $5 million for the first quarter of 2015, compared to $2 million for the fourth quarter of 2015, and $0 for the first quarter of 2014. Our non-accrual loans increased by 14.5% or $10.2 million during the first quarter to $80.3 million, or 0.87% of period-end loans, as compared to the fourth quarter of 2014.

Thank you, Heng. We will now proceed to the Q&A portion of the call.

(Operator Instructions)

Our first question comes from the line of Aaron Deer from Sandler O'Neill & Partners.

Gentlemen, I guess congratulations are in order, since I know that you've been aiming for a 340 margin for some time, and you finally punched through that level this quarter. Glad to see that.

Thank you.

Sticking with the theme of the margin, I was wondering if you could give us some color behind your expectations for that going forward. I know that it seems like you're sitting on a fair bit of cash at this point, which could maybe get deployed, but it seems like you're also becoming a little bit more reliant on CDs, or at least that was the case this past quarter. As you look at the funding mix going forward, and some additional run-off and maybe some higher cost items, as well as the new loans that are coming on, what are your expectations for the margin going forward?

Yes, Aaron, this is Heng Chen. We think the margin would probably decline slightly. The first quarter is a short quarter, and so for the mortgage-backed securities and loans in February, we earn a full month of interest, compared to when there's only 28 actual days.

In terms of the cash levels, that is just -- it's just temporary near the end of the quarter, so the average cash levels were quite a bit lower. So that should have a fairly low impact on the margin, and then we did have more reliance on CDs in the first quarter. We borrowed $50 million from the State of California. That was at 22 basis points, and we hope to be borrowing $50 million a quarter for the rest of the year.

And then we also had about $120 million of broker CDs. It was due in part to our very strong loan growth in the first quarter, and then seasonally, particularly in the month of February, we have many of our -- some of our depositors wiring funds back to mainland China or to Taiwan during the Chinese New Year holidays.

So we think in the second quarter that we'll get better core deposit growth. That is something that we saw last year. And then on the loan pricing, Dunson, maybe you want to talk about what rates we're getting on new loans in the first and second quarter?

I think for the pricing, as far as pricing is concerned, we don't see any more deterioration of pricing. And typically we are, for C&I loans, we are getting Wall Street anywhere from Wall Street plus zero to Wall Street plus 0.5. And for construction loans, the pricing is much more favorable, and for that, the pricing will vary from anywhere from Wall Street plus 1 to 1.5, with floors at a higher level. And CRE loans, there has been a little bit more requests for fixed rate loans, but however, the pricing of that is -- for five years, is around about over 0.25 in that area, and for floating rate, we are getting roughly Wall Street plus 0.5, somewhere near that level.

And then residential mortgage we're seeing just a slight drift each quarter, as -- mainly because we stopped making 30 year fixed rate residential mortgage, starting in March of last year.

And then as my follow-up, you mentioned the CRE pricing, it seemed like that was the book that really saw some impressive growth this quarter. Are there any particular categories of real estate where that's getting the most traction, or is there anything particularly that drove that strength this quarter?

This is Dunson Cheng. As I look through the new loan book, new CRE loan book in the quarter, it's really all over the place. For example, we have loans to finance a warehouse for our import customers. We also have loans to office building, and of course, we have some for hotel. And it's really very varied in terms of category, and there's no one particular category that stand out.

I think geographically, New York, the East Coast region still continues to be the fastest growing region for us in the first quarter.

That is by percentage, not in dollar terms?

Right, percentage, right.

Okay. Great. Thanks for taking my questions.

Thank you, Aaron.

Our next question comes from the line of Joe Morford from RBC Capital Markets.

Thanks, good afternoon, and Heng, also congratulations on the margin.

Yes, we will not give any more guidance.

Not going to throw out a 350 number, I take it? (laughter) Just following up one question on the loan side. I was curious just how your -- if you come in on the trade finance portfolio, and maybe how that performed this quarter, and if there is any impact from the stronger dollar on your customers, and or the port delays?

Joe, this is Dunson, and I really don't see it as yet, and you may recall that our first quarter usually sees a lot of pay-down. We do see that pay-down. On the other hand, we also are booking more new loans. And as a result of that is the increase of these loans was $52 million.

All right. And then, the other question is just on the Asia Bank merger, just curious what might be causing some of the delays then, and when exactly might you be looking to close that? And is there any discussion still about possibly repurchasing some of the shares being issued in that transaction?

Yes, Joe, this is Heng Chen. What, in terms of the timing, we moved it to the third quarter, just because we're not sure. You may have seen that we filed our S-4 back in -- when was it, in early April? And then we have been notified that it's being reviewed, so that process can take -- it could take certainly at least one round of comments, and we don't know how long it takes for the SEC to actually review the response.

And so that's -- if all goes well, it should close -- and then lastly, I'm sorry, we have the -- once the S-4 is cleared, under New York law, there needs to be a 20 business day period between when the S-4 is declared effective and proxy is mailed, to when the shareholder vote can occur. And then we would close -- it looks like the shareholder vote is the one that is going to take the longest time. So we hope to close shortly after that.

And then in terms of buying back the stock, we have, in the S-4, there is a copy of the merger agreement. We have collars. The collars were struck back in January when the bank stocks were much lower. So the top of the collar is that $27 per share price, at the close, so we're not sure.

And then the floating exchange ratio, where at least 45% of the deal would be in stock, but up to 55% will be -- but no more than 55% -- will be in stock. So, our guess is that there will be over 2 million shares issued, and we would think to buy those back, depending on the -- depending on where our stock is trading. So that's -- and we would probably do that later this year or early next year.

Okay. That's really helpful. Thanks so much for the color, Heng.

Thank you, Joe.

Thank you. Our next question comes from the line of Julianna Balicka from KBW.

Good afternoon. I wanted to follow up on the margin once again. In terms of the forward, the pipeline of potential future interest recoveries, you've had a good one this quarter in your provision or negative provisions. So are you looking at any more larger outsize resolutions for the rest of the year? And how would that have an impact on your provisions, and/or interest income, and therefore margin?

Yes, we have a pipeline. I mean, just this week we had one of the B notes pay off as we viewed a series of A/B notes placed during the recession. And there is a good sized one that paid off this week.

And so we have several more that are -- that may pay off in the next couple years. Most of them -- all of them are tied to commercial real estate. And we see commercial real estate being very strong, so the prospects are good.

And then interest recoveries, it was 4 basis points this quarter. We see a steady stream of that. We have loans that were charged off or partially charged off a couple of years ago, or they were on non-accrual, where we applied interested collected to the principal, and so you can have a fairly small charge-off bring in almost an equal-sized interest recovery.

So it's still a fairly large pipeline, but we can't predict when it happens. But given where our reserve is, any gross recovery we have will be in a negative provision, which is, that's what happened in the first quarter.

Right, right. So it looks like that we may have several more quarters then of negative or zero provisions ongoing?

It's possible.

Great. And on the tax adjustments that you referenced that we will see in the second quarter, have you sized up what the tax adjustments would be for the tax investment you just made?

Yes, I tried to cover it in my comments, you know, the--

Just the catch-up in the second quarter.

Oh, the catch-up.

Yes.

Well, in ballpark, the full quarter impact would be around roughly about $0.10, and so, in EPS. And so we can see maybe $0.04 or $0.05 in Q2. The catch-up would probably be $0.02 to $0.03. That would just be the catch-up in the EPS.

Right. Okay. Very good. And then, previously you had discussed redeploying securities, treasuries into15-year MBSs. So I want to check in and see where that is in progress?

Yes, actually we're pleasantly surprised. At the end of 2014, we had a $1.3 billion securities portfolio. Of that, $664 million was in treasuries, which yielded 30 basis points, and we have reduced that to $350 million at the end of March, and our plan is to do more of it. And we had, at the end of December, we had $425 million of 30-year MBS, and at the end of March, we had brought that down to $17 million. And April, we sold the remaining $17 million, so we have no 30-year MBS.

And you'll see in the P&L there was basically no hit -- no security losses on a net basis from reducing our interest rate exposure. And so we are, in terms of the 15-year MBS, it was $119 million in December. It's now up to, at the end of March, it's up to $743 million, and we see that going up to about $900 million in Q2.

Great. And how kind of yields are you putting on that?

We're buying the 15-year at 3 now. We were buying the 2.5, so the 15-year 3s would be -- they would be about, maybe, maybe it's about 210 in yield, or something like that.

Got it. And then final question and I'll step back, any more color on the increase to your non-accruals, please?

It was mainly one land loan that had been -- that was reserved for, and so we took a small charge-off in the first quarter, and we, as a result, we had -- it was a TDR in December, and now it is non-accrual. But it's just one land loan that's well reserved.

Got it. Where is it?

It's on the East Coast.

Okay. Thank you very much. I'll step back now.

(Operator Instructions)

Our next question comes from the line of Lana Chan from BMO Capital Markets.

My question has been answered, thank you.

(Operator Instructions)

And I have no further questions. I would like to turn the conference back to Cathay General Bancorp's management for closing comments.

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

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