Cathay General Bancorp (CATY) 2015 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's fourth-quarter and full-year 2015 earnings conference call. My name is Latif 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 Monica Chen, Investor Relations for Cathay General Bancorp

Thank you, Latif, 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, 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 statements to reflect future developments or events except as required by law.

This afternoon, Cathay General Bancorp issued an earnings release outlining its fourth-quarter and full-year 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, everyone. Welcome to our 2015 fourth quarter earnings conference call. This afternoon, we reported net income of $41.4 million for the fourth quarter of 2015, a 16.5% increase when compared to a net income of $35.6 million for the fourth quarter of 2014. Diluted earnings per share increased 15.9% to $0.51 per share for the fourth quarter 2015 compared to $0.44 per share for the same quarter a year ago.

In the fourth quarter of 2015, our total loans grew $124 million to $10.2 billion, excluding $419 million of loans from acquisition of Asia Bank. The loan growth of 2015 was $830 million, representing an increase of 9.3% on an annualized basis. The increases in loans for 2015 resulted primarily from commercial and residential mortgage loans which, excluding the loans acquired from Asia Bank, grew by $850 million or 18% and $362 million or 23%, respectively. In construction loans, by $143 million or 48%. Commercial loans decreased by $66 million or 3%. We anticipate our loan growth of 2016 to be slightly below the loan growth of 2015.

For the fourth quarter of 2015, our total deposits increased $231 million to $10.5 billion. For 2015, deposits grew organically by $1.3 billion or 15%. With the acquisition of Asia Bank, total deposit grew $1.7 billion or 20% in 2015. We increased the dividend a second time during 2015 to $0.18 per share, paid in December 2015. During the fourth quarter, we continue to repurchase our shares and we purchased 282,000 shares at an average price of [$30.35] --$30.85. During the 2015, we repurchased 2 million shares at an average price of $29.83 for a total cost of $59.4 million as part of our overall capital management efforts. We have 622,500 shares remaining under our August 2015 buyback authorization. We expect to buy back our stock from time to time in the public markets, based on our capital levels and our stock price.

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

Thank you, Dunson, and good afternoon, everyone. For the fourth quarter we announced net income of $41.1 million or $0.51 per share. Our net interest margin was 3.3% in the fourth quarter of 2015 as compared to 3.36% in the third quarter of 2015 and 3.36% for the fourth quarter of 2014.

In the fourth quarter of 2015, interest recoveries and prepayment penalties added 5 basis points to the net interest margin compared to 5 basis points for the third quarter of 2015 and 4 basis points for the fourth quarter of 2014. The net interest margin for the fourth quarter of 2015 was reduced by 5 basis points because interest-bearing deposits at the Federal Reserve Bank increased as a result of an influx in checking and money market accounts during the fourth quarter of 2015.

Non-interest income during the fourth quarter of 2015 was $9.4 million. Non-interest expense increased by $12.4 million or 30.2% to $53.5 million in the fourth quarter of 2015 as compared to $41.1 million in the same quarter a year ago. The increase was mainly due to an $8.2 million increase in amortization of investments in affordable housing and alternative energy partnerships, a $1.7 million increase in salary and employee benefits expense, a $928,000 increase in OREO expenses and a $923,000 increase in other offering expense in the fourth quarter of 2015. We expect that the amortization of alternative energy partnership will be about $1 million in the first quarter of 2016 compared to $7.9 million in the fourth quarter of 2015.

The effective tax rate for the fourth quarter of 2015 was 28.8%, due to a delay in the installation of some solar energy systems, which we expect to be installed in the first quarter of 2016. We expect that the full-year effective tax rate for 2016, assuming a similar amount of alternative energy tax credits, would be approximately 28%. In addition to the estimated effective tax rate of 28% for the full year of 2016, during the first quarter of 2016, we will record a non-cash charge to income tax expense of $3.4 million to reflect the Black-Scholes value related to stock options granted in 2006 that are expected to expire unexercised during the first quarter of 2016.

At December 31, 2015, our tier 1 leveraged capital ratio increased to 11.95%; our tier 1 risk-based capital ratio decreased to 14.01%, and our total risk-based capital ratio decreased to 15.28% as compared to December 31, 2014. All ratios significantly exceeded well-capitalized minimum ratios under all regulatory guidelines. At December 31, 2015, our common equity tier 1 capital ratio was 12.93%.

Net charge-offs for the fourth quarter of 2015 were $8.1 million or 0.08% of average loans due mainly to a loan that was substantially reserved as of September 30, 2015. Net charge-offs were $2.1 million in the third quarter of 2015 and $5.8 million in the fourth quarter of 2014.

Our gross loan loss recoveries during the fourth quarter of 2015 were $1.8 million and our gross charge-offs were $9.9 million. Our loan loss reversal was $3 million for the fourth quarter of 2015, compared to $2.25 million for the third quarter of 2015 and $2 million for the fourth quarter of 2014. Our nonaccrual loans decreased by 26.8% or $19.1 million during the fourth quarter to $52.1 million or 0.52% of period end loans as compared to the third quarter of 2015.

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

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

(Operator Instructions)

Our first question comes from the line of Matthew Clark of Piper Jaffray. Your line is open.

Good afternoon.

Hi, Matt.

Maybe first on the loan growth in the quarter, just curious if we can get an update in the CNI line. Those bounces are down again. I know last quarter I think there were some deliberate payoffs that you may have pushed out the door. Just curious, though, what else you might be seeing on that front.

Yes. As you know, some of our CNI loans, many of them, to exporters and importers from China, And also we also made loans to customers that are backed by letters of credit from Bank of China. And in the fourth quarter alone, we saw some $40 million of loans being paid off, mostly because of the borrowers can or could obtain loans in China at a more favorable interest rate than what they had to pay in US dollars.

And the second reason is that -- that, of course, is because that China People's Bank has lowered interest rates several times. And the other reason is the depreciation of R&B and at such US dollar-denominated loans would be more expensive if the yen continues to appreciate. So that's the reason for the decrease in the fourth quarter of our CNI loans.

Okay. Great. In terms of loan pricing, spreads have come in quite a bit since the fourth quarter. Just curious if you've seen it among your customer base, as well.

Yes, to a lesser extent than the previous quarter, we are still seeing competition coming in with a lower pricing than what we would have wanted to do. And that is especially -- more especially more in the CRE loans. And as a result of that, in the fourth quarter, towards the end of the quarter, we saw a lot of -- a few large payoffs of CRE loans as a result of much lower pricing for them than other banks. On the C&I front, we are not seen as much, so mainly in the CRE area.

Okay. And then, just on the charge-offs in the quarter, it looked like it was in commercial, as well. Just curious if -- how much of that related to one relationship. And then, your expectations in terms of coverage ratios going forward.

Yes. This is Heng Chen.

Most of it was to one borrower, for which it was mainly reserved for as of September 30. While we don't want to comment as to specific borrowers, we can say it was not due to business conditions that we suffered the loss -- that economic conditions. It was borrower specific.

Got it. Okay. I will step back. Thanks.

Thank you. Our next question comes from Lana Chen of BMO Capital Markets. Your question, please.

Thank you. Just to also another follow-up on loan expectations for this year. Any signs of the China slowdown potentially impacting the residential mortgage growth? And also on the CRE side, given recent regulatory -- the regulators looking more heavily on that part of the business, in terms of growth in exposure for the banks, any concern that that could potentially slow for you, as well?

This is Dunson Cheng. With respect to residential mortgages, we have been paying more attention to see how many loans are in application and how many loans are being bulk and compare that to previous quarters. As far as we can tell, our pipeline for mortgages is still strong and we don't see any drop-off in applications. So now we have suspected that the -- with what's happening in China, many -- some of our mortgage business would be reduced, but that -- we have not seen any sign of that.

And on CRE, many of our loans come with or, we give the borrowers the chance to rate-lock the rate. It's a non-refundable fee of 1%, so in almost all cases, loans that are rate locked wind up funding -- or wind up closing. And so, for much of the last -- in December with the Fed increase, we had many borrowers that rate locked. So right now, we have $150 million of commercial real estate loans that are rate locked that should close in the first quarter.

So that's -- in terms of the loan growth, we think the pipeline is pretty good. And so far for the first quarter, the growth should be probably stronger than the fourth quarter, if there's no surge of payoffs.

Lana, this is Dunson Cheng. And I am sure everybody agrees that in the current environment, it's very, very difficult to project with any certainty what the loan growth would be in 2016. But as Heng mentioned, at this point in time we are still seeing growth in almost all areas, all loan categories. And we feel that 2016 may be a little bit slower than 2015, but at this point in time we don't see it to drop dramatically.

Okay, thank you. And just one follow-up question on expenses. Given the guidance on the amortization of the energy credits dropping from $7.9 million fourth quarter to $1 million in 1Q, that would imply a pretty significant decline in expenses in 1Q, Heng?

Yes, it would be the solar energy amortization. It's very lumpy, so we see still $24.5 million in 2016, but it's $1 million in the first quarter, then the rest of it, $23.5 million, in Q2 through Q4. And then as far as expenses, the fourth quarter was a little bit high. We typically have some fourth quarter expenses in terms of consulting projects, legal fees and so forth that are incurred and paid. So, yes, the first quarter should be a little bit better.

Okay. Thank you.

Sure. Thank you.

Thank you. Our next question comes from Joe Morford of RBC Capital Markets. Your line is open.

Thanks. Good afternoon.

Hi, Joe.

I noticed there it looked like some slight upticks in deposit costs across multiple products this quarter. Are you offering any particular promotions of note, or are you feeling a need to be a little bit more competitive on pricing given your loan-to-deposit ratio?

Yes, Joe. Heng Chen. We have about $300 million of wholesale deposits that we expect to run off in the first quarter. And if, in terms of our deposit costs, based on the surveys that we see as well as our own deposits, we have not raised rates at all since the Fed increased prime.

And given, for us, relatively our loan-to-deposit ratios, we would -- we tend to want to wait longer before raising deposits because we do have access to wholesale funding that would help us meet loan growth. So I don't see any pressure for us to increase deposit rates for the next couple months.

Joe, this is Dunson Cheng. As far as promotion is concerned, what we have now is as Chinese New Year is approaching, and traditionally we have a small promotion for deposits. But this time, because our liquidity is quite good, we are not giving any concession increase in rates. All we are doing with this promotion is to give a monkey (laughter).

It looks very nice.

I will take your word on that one.

You can see it on our website, I think.

You should see the monkey.

Just following up on that, you talked about a little more price competition on the loan side. Any comments on the outlook for the margin at all, Heng?

Joe, I retired from giving guidance on the margins, but we -- if you can look at our net interest income growth year-to-year and link quarter, it is pretty good. I think that would bode well. And we're going to let our securities portfolio -- we're going to be cautious on reinvesting it.

We would rather pay down this $300 million of wholesale CDs, so -- and then lastly, as I mentioned on the last call, February is a good month, because we have so much in the way of mortgages. And I think this year it's a 29-day month, but it's still -- we get some extra margin increase from the short month in February, so that's where we are.

Okay. Sounds good. Thanks so much.

Sure.

Thank you. Our next question comes from Aaron Deer of Sandler O'Neill. Your line is open.

Hey, good afternoon. I'm just going to follow up on Joe's question a little bit with respect to this deposit cost. I was surprised too, because it did have a lot of excess liquidity come in in the quarter, and yet the deposit costs were up. Was some of that carryover in deposit cost from promotions earlier in 2015?

Yes. Let me look at that, because we -- the money market, we have a number of products. And we have, for the large corporate customers, we have a premium money market account, and I mentioned that there was an increase in money markets, so --

And then the CDs, so the money market went up 2 basis points link quarter. The CDs went up 2 basis points. That is just the impact from our summer CD promotion, which is now fully ramped in.

Okay. And then going back to the loan growth in the quarter. It sounds like paydowns were something of a headwind in the quarter. I'm curious, can you give any sort of number in terms of what the volume of paydowns were in the quarter, at least relative to what you had been seeing in prior quarters?

We just track it by the individual loans that change by more than $4 million. So it'd be -- any number we give you wouldn't be accurate, but it certainly was more than it was in the third quarter.

Okay. And then lastly, on the tax credits, you've given some good guidance in terms of what we should expect for 2016. As we look out to 2017, do you have any decent visibility with your partner on those energy tax credits in terms of the availability of those for next year that we might expect something similar?

Yes. When Congress passed the budget bill in December, it extended the solar tax credit until 2019. So we have several years. And given the amount of taxes we're paying, we have plenty of capacity. So we would try to keep the solar tax credit at the same dollar amount.

And then meanwhile, if you look at the balance sheet, in the low-income housing and affordable -- I'm sorry, and alternative energy balance sheet, that went up by about $90 million from a year over year. We are ramping up our investments in low-income housing, much as some of the other banks have been doing. So that should help lower our effective tax rate in future years as well.

Okay. Good stuff. Thank you for taking my questions.

Great. Thank you, Aaron.

Thank you. Our next question comes from Juliana Balicka of KBW. Your question, please.

Good afternoon.

Hi, Juliana.

Hello. I have a few follow-up questions, since some of the topics have already been raised. On the tax credit amortization for next year, you've talked about the energy credits, but how much amortization should we be thinking about from the low-income housing investments?

They would go up $4 million for the full year, so it's $1 million a quarter.

So $1 million a quarter. And how much was that in 2015, because your full amortization this quarter was $10 million versus you had talked about the $7.9 million related to the solar tax credit. So is there something unusual in this quarter?

No, let me just try to do math without a calculator. For the full year, that line was $33.3 million. $24.5 million was solo, so the rest was -- I think it was $9.8 million is low-income housing. So that could --

Go ahead. Sorry.

So that's going to go up by $4 million in 2016.

Got it. Okay; that makes sense. And then in terms of your deposit growth, was there any seasonality to the deposit growth in the fourth quarter that we should be thinking about and out-flows into the first quarter? And as you pay off the wholesale deposits, are you thinking about any particular section of deposits that will come in to fill that or will you just simply -- are you looking for a decrease in balances? And also what is the rate at which the wholesale deposits are costing you?

Yes. So in no particular order, we are going to pay down the balances and then the average rate in those CDs are running off. It's probably 85 basis points. It's like our average CD -- yes, it's 85 basis points. And then seasonality -- I'm doing this from memory, but in past years our money market balances have dropped during the Chinese New Year, Irwin, right? Yes, that is our Chief Operating Officer. So we and --

Well, last year was a little bit special because of our summer CD promotion. We brought in quite a bit of money.

Right.

And the other one, of course, is our merger with Asia Bank. But in the fourth quarter itself, our deposit growth was $270 million.

Right.

And that is net of those two lumpy deposit growth that I talked about.

Got it. And then could you give us an update on what your stock repurchases have been quarter to date and your appetite for repurchasing stock maybe in the first quarter, given where your stock price is right now versus keeping it even throughout the year?

Yes. So, Juliana, we repurchased 2 million shares in 2015 and we started in the middle of August. And we generally had a price target of just right around [30]. So we have 622,000 shares remaining. We would start buying back early next week when we are passed the blackout period. Then we will go to our Board to ask for a new authorization.

We have plenty of dividend capacity. So, yes, we've told investors we want to manage our capital levels, so if our stock price is reasonable or appropriate, we would try to buy it back 2 million to 3 million shares a year, and we will try to target like a 90% or 100% total capital return. So our capital ratios would diminish over time as our loans grew.

Juliana, this is Dunson Cheng. Just to repeat, our priority of excess capital usage is -- first and foremost, is to grow our Business. And secondly is on dividend and then I looked at opportunity to go to bank as well, so those are our priorities.

Excellent. And then final question and I'll step back. Quick housekeeping question on expenses. You had mentioned that your other expenses will tick down into the first quarter. And then could you remind us, how much is your seasonal uptick from payroll, et cetera, in the first quarter?

It's actually -- I'm guessing it's about $600,000 in Q1 for FICA, and then there's probably almost $1 million in the second quarter, because that's when we pay our bonuses. And so that's a seasonality of our payroll.

Got it. Thank you very much.

Thank you.

Thank you. 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 for this call, and we look forward to talking with you at the 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.