Cathay General Bancorp (CATY) 2015 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's third-quarter 2015 earnings conference call. My name is Andrew, 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, Investor Relations for Cathay General Bancorp.

Thank you, Andrew.

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 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 10K for the year ended December 31, 2014, 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 revisions 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 third-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 to the call over to our Chairman of the Board and CEO, Mr. Dunson Cheng.

Thank you, Georgia.

Good afternoon and welcome to our 2015 third-quarter earnings conference call.

This afternoon we reported net income of $38.5 million for the third quarter of 2015, a 7.2% increase when compared to a net income of $35.9 million for the third quarter of 2014. Diluted earnings per share increased 4.4%, to $0.47 per share, for the third quarter of 2015 compared to $0.45 per share for the same quarter a year ago. In the third quarter 2015 and with the completion of the Asia Bank acquisition, our total loans grew $538 million to $10.04 billion. Excluding the $418 million of loans from Asia Bank, the loan growth was $116 million, representing an increase of 5% on an annualized basis.

For the first nine months of 2015, and again excluding the loans from Asia Bank, we had loan growth of $708 million or 11% annualized. The increase in the third quarter came from residential mortgages, which grew by $101 million, construction loans by $34 million, and CRE loans by $26 million. Commercial loan's decreased by $41 million as a result of several large loan payoffs. We continue to see our loan growth in 2015 to be about 10%.

For the quarter of 2015, our total deposits, excluding the $429 million of deposits from Asia Bank, increased $479 million to $10.2 billion. This represents an increase of 5.1% over quarter over quarter or 20% on an annualized basis. The increase in deposits, which is related to our CD promotion, can be (inaudible) during the third quarter.

On July 31, 2015, we closed acquisition of Asia Bancshares with the issuance of 2.6 million shares of common stock and a cash payment of $57 million. A system's conversion occurred over the weekend of August 21, 2015. We expect that our higher lending limit and broader range of lending products will result in stronger loan growth for our new colleagues from Asia Bank.

During the third quarter of 2015, we completed the repurchase of the remaining 622,500 shares, at a total cost of $18.1 million, or $29.80 per share, under our November 2007 1 million share stock repurchase program. On August 31, 2015, we announced a new 2 million share stock repurchase program. During the month of September 2015, we repurchased 1.08 million shares [sic, see Press Release, "1.07 million shares"] at a cost of $32.6 million or $30.05 per share. We expect to buy back our stock from time to time in the public market based on our capital levels and our stock price.

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

Thank you, Dunson.

Good afternoon everyone.

For the third quarter, we announced net income of $38.5 million or $0.47 per share. Our net interest margin was 3.36% in the third quarter of 2015, compared to 3.51% in the second quarter 2015, and 3.31% for the third quarter of 2014. In the third quarter of 2015, interest recoveries and prepayment penalties added 5 basis points to the net interest margin versus 9 basis points in the second quarter of 2015 and 9 basis points in the third quarter of 2014. We also received a special dividend from the Federal Home Loan Bank, which increased net interest margin by 4 basis points in the second quarter.

Non-interest income during the third quarter 2015 was $9.2 million. Non-interest expense increased by $14.9 million, or 35%, to $57.5 million in the third quarter 2015 compared to $42.6 million in the same quarter a year ago. The increase was mainly due to a $13.8 million increase in amortization of investments in affordable housing and alternative energy partnerships; a $1.1 million increase in professional service expenses; and a $1.3 million increase in OREO expenses in the third quarter of 2015.

The conversion of Asia Bank to Cathay's data processing system commenced on August 24, 2015. We incurred approximately $2 million in merger and integration charges during the third quarter. We expect amortization of alternative energy partnerships to decrease from $13.4 million in the third quarter to approximately $8 million in the fourth quarter of 2015.

The effective tax rate for the third quarter of 2015 was 23.9%, which includes a catch-up adjustment to reflect the lower effective tax rate for the full year 2015 resulting from a lower forecast for full-year pretax income. We expect that our effective tax rate for the fourth quarter of 2015 will be around 27%.

At September 30, 2015, our Tier 1 leveraged capital ratio decreased to 12.24%. Our Tier 1 risk-based capital ratio decreased to 13.98%. And our total risk-based capital ratios decreased to 15.25% as compared to December 31, 2014. All ratios significantly exceeded well-capitalized minimum ratios under the regulatory guidelines. At September 30, 2015, our common equity Tier 1 capital ratio was 12.89%.

Net charge-offs for the third quarter of 2015 were $2.1 million, or.09%, of average loans compared to net charge-offs of $0.5 million in the second quarter of 2015 and net recoveries of $5.2 million in the same quarter a year ago. Our gross loan loss recoveries during the third quarter of 2015 were $1.3 million, and our gross charge-offs were $3.4 million.

Our loan loss reversal was $1.25 million for the third quarter of 2015 compared to $2.15 million for the second quarter 2015 and $5.1 million for the third quarter of 2014. Our nonaccrual loans increased by 7.9%, or $5.2 million, during the third quarter to $71.2 million, or 0.71%, of period-end loans, as compared to the second quarter of 2015.

Thank you, Heng.

We will now proceed to the question-and-answer portion of the call.

(Operator Instructions)

Our first question comes from the line of Julianna Balicka with KBW. Your line is open.

Good afternoon.

Hi, Julianna.

I have a couple of questions and then I will step out. One maybe on the expenses.

Your salary and expense went down linked quarter and also -- I'm sorry the decline in your expenses in terms of salaries and also professional expenses. Actually, yes, so the decline in your salary expense -- can you talk about that? Was that stock-based compensation in the second quarter that does it not come through in the third quarter? Or can you talk more about what's going on there?

Yes, Julianna, this is Heng Chen. The biggest component is bonus accruals.

In the second quarter our net income was -- for our EPS was $0.56 and so because that was a much higher percentage -- it was such a strong quarter, we had much higher bonus accruals. And then we also had a more optimistic forecast of how the year was going to go in terms of net income. So that also -- so basically in the second quarter we were going to go above our internal budget, and we accrued extra bonus to reflect that.

And secondly there was about $700,000 more of FICA in the second quarter than in the third quarter. We paid our 2014 bonuses in the middle of April 2015, so that triggered a lot of FICA. Once the officers are over the limit the FICA is much less for the rest of the year.

And so in terms where this should go for next quarter expenses given the bonus accrual parts where you think that we should be pegging for the run rate or into 4Q or maybe for the full year 2016 whatever makes more sense.

Yes, I think the fourth quarter the bonuses will probably be $1 million higher bonus accrual than the third quarter. So and then that would be a pretty good run rate for 2016 because my goal is to fully accrue the bonuses for 2015 in 2015. In the first quarter we had about $1 million catch-up for 2014 bonuses.

Okay. So you don't want to have that happen again.

Right. Right. So a higher salary number this year should be -- reflects growth into next year if you use the same dollar amount.

Okay. And then in your answer and remarks you referenced a decreased expectation for net income for this year. Is it simply related to merger costs from Asia Bank, or is there something else change in your Outlook for linked quarter?

I think the loan growth was slower. At the end of the second quarter we were annualized -- we were at 11%, and we didn't raise -- we were cautious and didn't raise guidance at that time.

With the number of -- like the commercial loans dropped again in the third quarter. We are more cautious. We thought there might have been a prime increase in September, and so now we probably don't think anything will happen until Q1 next year.

Right. And then final question, and I will step back.

In terms of your repurchases the 1.7 million this quarter of shares you issued 2.6 million with the Asia bank deal what is your outlook for repurchases for next year other than keep going? Is there a target number you want to reach per quarter or anything?

Well we hope to finish our remaining million shares by the latest by February of next year. And then -- and so that would make Asia Bank -- it would go from 2.5% accretive to 5.5% accretive. Then as part of our long-term capital forecast, we think at these current levels we'd probably buy back 2 million to 3 million shares a year for the next couple of years.

On top of the Bank Asia repurchase?

That's right. And we have the capacity for that under the normal federal bank holding companies can -- there is a certain amount of buyback that they could complete without notice to the regulators.

Got it. Got it. Thank you very much.

Thank you.

Our next question or comment comes from the line of Lana Chan with BMO Capital Markets. Your line is now open.

Hi, good afternoon.

Hi, Lana.

Two questions. One on the C&I pay downs, can you talk about where they're coming from our what is driving that? Is it some of the slowdown in China or is it pricing competition? What do you think is driving that near-term?

Lana, this is Dunson Cheng. I think that -- a couple of things.

First of all the pay down I think there are three or four of those that we simply didn't feel comfortable in continuing our relationship, and those accounts were asked to exit our bank and find another lender. I think that is one component and that is those are sort of one-off events. And the other phenomenon that we observed in the third quarter is that our importers are less active in placing orders, and they are more cautious in such that Asia was less than the previous years.

With regard to slowdown of China, it may have some affect on it, but because for us we deal with mostly importers and if the demand is there we imagine that they would certainly go ahead and place their orders. So it's really difficult to know. So I think those are some of the factors that contribute to the slowdown in C&I loans.

In general for the last couple of years it's been very difficult to grow C&I loans. And one reason is that we just don't see that many new business formations, and so at this point with the volatility and uncertainty in the marketplace and we see our customer are being more cautious.

Thank you. Just to follow up on that, the growth on the real estate side which has been a good growth driver both on commercial and residential mortgage. Do you think that is -- the trend is sustainable into 2016 to at least help you maintain that 10% annual growth rate?

At the present time we're still seeing pretty strong pipeline in single home family mortgages. And my expectation is that it should continue well into 2016, and so we feel that there is still some momentum behind the growth.

How about the CREs?

On the CRE side we are seeing quite a bit of requests from construction loans and for the regular C&Is there are a lot of competition in the marketplace and we still see our pipeline is pretty good. And one thing that I say will slow us down is that when construction loans get specialty housing when the project is done they can pay down pretty quickly. So in the sense that we are booking loans and on the other hand we are being paid off.

Thank you. And if I could just do one more question for Heng on terms of the margin.

I know partly this quarter was -- the decline was driven by the excess liquidity with the deposit growth. Would you expect some of that excess liquidity to be reinvested pretty shortly and put some -- bring some relief to the margin going into the fourth quarter?

Probably not. We sold $75 million of MBS -- it settled in late September so that was to position for higher interest rate. It's 15-year MBS so the yield is in the low 2%. And we are kind of reluctant to buy more MBS at this time.

Then in terms of the CDs, we were successful in getting our loan to deposit ratio down to 98%, but it increased our average cost of CDs by three basis points from the second to third quarter. So the full quarter impact of that will have a little bit more impact on the NIM in Q4.

Okay. Thank you.

Our next question or comment comes from the line of Aaron Deer with Sandler O'Neill. Your line is now open.

Hi, good afternoon, everyone.

Hi, Aaron.

I wanted to follow up on your comments regarding the slowdown in China. I'm curious to get your perspective on the exposure that you have either in Hong Kong or mainland China or to that extent your US based export customers and if there is any risk that you see in any of these portfolios?

Aaron, as you know we really don't have a large extent of exposure in China, and most of the loans that we make that are related to China tie to CREs in terms of financing their real estate development in the [uvula] state. So I would say that exposure to China is very minimal. We don't have any investments at all in China.

The loans that we made to China are almost all to Chinese specs in helping them to finance their LCs and things like that. So we don't feel at this point in time the Bank in China is in danger of having problems. So I don't really see much exposure in China itself. Also, have only a few exporters in China, and that would not be a problem for us.

Okay. That's helpful.

And then Heng on your guidance with respect to the tax credits and the tax rates -- that is the amortization of the tax credits, is the guidance that you give for the fourth quarter, is it reasonable to assume those are decent numbers for 2016 as well? Or are there other investments you are making that could affect that going forward?

Yes. So in terms of our existing investment the 2016 amortization would be only $1 million throughout 2016. And so -- and we expect to make a similar sized one here in -- early in the first quarter. And so the expense hopefully -- it should be smoother throughout 2016 rather than having to jump up so much here in Q3.

Is it your expectations than that given the investments that you be looking at something close to this I guess full year number of $30 million or so in amortization costs for 2016?

Yes. It's closer to $25 million, Aaron.

Okay.

And our tax rate because of the higher pretax income for next year will be closer to 28% from the 27% for the fourth quarter.

Okay. And then just one little point. On the nonperformance it looks like those ticked up just a little bit -- it looks like there's some C&I. Is that something you picked up from the acquisition or is that just some churn in your existing portfolio?

Aaron, it's Dunson Cheng. That particular loan is on our books for several years, and the customer encountered cash flow problems. And we just want to be safe and put it on non-accrual.

It's in liquidation to try to collect the balance.

Okay. Great. Thank you guys for taking my questions.

Thank you, Aaron.

Our next question or comment comes from the line of Joe Morford with RBC Capital Markets. Your line is now open.

Thanks, good afternoon, everyone.

Good afternoon.

Everything has pretty well been exhausted at this point. I just thought I'd follow-up on Lana's just to confirm. It sounds like the bias of the margins is still downward a little bit in the fourth quarter. And then from there, Heng, are you expecting relatively stable outlook in 2016 or what is the early thought here?

Yes, Joe, I think the margin would go down a little bit most likely a couple basis points. But we do have a large probably all told probably $150 million of brokers CDs and Internet CDs that will mature in the next six months. Plus we are going to have loan growth.

So in terms of -- also the first quarter is -- that's the 90 day quarter because we have so much in terms of residential mortgage and MBS that Q1 typically is -- the margin goes up by 8 basis points to 10 basis points from the 33/68 convention. And so then going into the rest -- I don't want to get -- give-absolute percentage guidance on the margin but you -- but it will improve in 2016.

Okay. That's helpful. Thank you so much.

Thank you.

(Operator Instructions).

Our next question or comment comes from the line of Julianna Balicka with KBW.

Hi, I have a couple of follow-ups please.

Sure.

What kind of rate are you now making new loan originations at by loan category? And also what kind of rate are you now offering for new CDs and do you plan another CS campaign in the first quarter of 2016? What kind of rates are you thinking ahead of that?

Well, Julianna, let me cover residential mortgage. Our new rates are very close to our average portfolio rates. Our new rates are probably 4.375% in our portfolio rates are I think 4.55% or thereabouts. CRE, we are about 4.6% and our new five-year fixed -- we're pretty much there.

And then for C&I loans I think we're -- I'm just doing this for memory, I think we're in the low 4's%. And that is our new loans are also pretty similar particularly for the ones with floors, and then construction that's a pretty healthy yield, and so we don't see any margin pressure coming from construction loans. So to summarize we might see a bleed of a couple basis points per quarter in terms of lower overall loan yields, but at some point it should flatten out.

Very good. And what rate are you are offering CDs at these days?

Well the promotion for the two years it was a 1.28%. A lot of that money was one year which was I believe 0.9% for the over $100,000. But our normal CD rate is about -- we're at 60 basis points before concessions for one year CDs.

Got it. And in terms of your charge-offs and recoveries, do you have a pipeline of recoveries still in progress and that the charge off this quarter the $2 million, could you talk about that and give more color?

Yes, well we have a couple of good-sized recoveries. It's hard to predict when they will come. Hopefully one will happen in the first half of next year. And one will happen in the next couple of years.

So the charge-offs from the third quarter -- they were mostly centered on one loan which is the loan Dunson was alluding to.

Okay.

The C&I customer that we are in the process of liquidating the outstanding loans.

And final question, and I'll step back. Do you have any foreign currency translation losses in your numbers this quarter and then you have the other income or other expenses?

No, we run a matchbook in that -- kind of under the -- [Boper] rule, we originate foreign currency transactions for customers, and we offset that the same day.

Okay. Got it. Thank you very much.

Thank you.

Thank you for your participation. I will now turn the call back over to Cathay General Bancorp's Management for closing remarks.

Well, thank you for joining us for 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.