Cathay General Bancorp (CATY) 2016 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's second-quarter 2016 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. 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, 2015, 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 second-quarter 2016 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 to our Chairman of the Board and CEO, Mr. Dunson Cheng.

Thank you, Monica. Welcome to our 2016 second-quarter earnings conference call. This afternoon we reported net income of $34.8 million for the second quarter of 2016, a 23% decrease when compared to a net income of $45.2 million for the second quarter of 2015. Diluted earnings per share decreased 21% to $0.44 per share for the second quarter of 2016 compared to $0.56 per share for the same quarter a year ago.

The decrease in net income compared to the same quarter a year ago is primarily due to an increase of $20.8 million in amortization of investments in alternative energy partnerships, as a result of the rapid installation of solar system from our investment made in March 2016. The actual alternative energy partnership amortization was $8.8 million higher than the $15 million estimate in the first-quarter conference call. Our estimate for this amortization for the second half of 2016 is lowered by around the same amount. This change in timing of amortization expense reduced second-quarter earnings per share by $0.06.

On July 8, 2016, we signed a [stock] purchase agreement to acquire SinoPac Bancorp, the US holding Company of Far East National Bank for $340 million, subject to certain adjustments. We are very excited about this transaction to acquire Far East National Bank and the additional scale strengthens our branch network and franchise in California and the opportunity to deploy a portion of our capital to generate strong returns.

Cathay Bank and Far East National Bank share similar attributes and business values. We look forward to servicing the customers of Far East National Bank and hope they will enjoy the additional products and services that Cathay Bank has to offer. The transaction is priced at the $1.26 of stated book value at March 31, 2016 and is expected to be approximately 4% to 5% accretive to Cathay's GAAP earnings per share for 2018, excluding any one-time transaction costs and restructuring charges.

Also in the second quarter of 2016, our total loans grew $162 million to $10.[4] billion, or an increase of 6% on annualized basis. The net increases in loans resulted primarily from commercial real estate and residential mortgage loans, which grew by $103 million, or 20% annualized and $68 million, or 6.3% annualized, respectively. Construction loans grew by $28 billion, or 25% annualized. Commercial loans decreased by $63 million, or 11.2% annualized, as new loans or originations were lower than continue pay downs and payoffs.

We still expect total loan growth to be in the range of 7% to 8% for the full year of 2016. For the second quarter 2016, our total deposits increased by $147 million, or 1.4%, to $10.5 billion due to an increase in non-interest-bearing demand deposits of $129 million and an increase in our money market deposits of $143 million compared to the first quarter 2016. Our core deposit also grew by $230 million, or 8.6% annualized.

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

Thank you, Dunson, and good afternoon, everyone. For the second quarter, we announced net income of $34.8 million or $0.44 per share. Our net increase margin was 3.38% in the second quarter 2016 as compared to 3.51% in the second quarter 2015 and 3.42% for the first quarter 2016. In the second quarter of 2016, interest recoveries and pre-payment penalties added four basis points to the net interest margin compared to nine basis points for the first quarter of 2016 and nine basis points for the second quarter of 2015.

The net interest margin also decreased due to the impact of a special Federal Home Loan Bank dividend received in the second quarter of 2015 and decreased 5 basis points due to higher cash balances at the Federal Reserve Bank in the second quarter of 2016. In late August 2016, we will have $50 million of structured repos at a rate of 2.69% that will mature. Also in January 2017, we will have $200 million of structured repos at 5% which will mature and would improve the net interest margin by 13 basis points on a run rate basis.

Noninterest income in the second quarter of 2016 was $9.1 million. Non-interest expense increased by $21.3 million, or 44.7%, to $68.9 million in the second quarter of 2016 as compared to $47.6 million in the same quarter a year ago. The increase was mainly due to an increase in amortization of alternative energy investments of $20.8 million during the second quarter of 2016. For the full year 2016, we expect amortization of alternative energy funds of approximately $27 million, of which $1.2 million was recorded in the first quarter, $23.8 million was recorded in the second quarter and approximately $2 million will be recorded in the third quarter.

The effective tax rate for the second quarter of 2016 was 26.1% and we expect that the effective tax rate for the remaining two quarters of 2016 will be approximately 26.5%. At June 30, 2016, our Tier 1 leverage capital ratio decreased 11.8%, our Tier 1 risk-based capital ratio decreased 13.84% and our total risk-based capital ratio decreased to 15.02% as compared to December 31, 2015. All ratios significantly exceeded well capitalized minimum ratios under all the regulatory guidelines. At June 30, 2016, our common equity Tier 1 capital ratio was 12.77%.

Net charge-offs for the second quarter of 2016 were $6.5 million, or 25 basis points of average loans. Net charge-offs were $501,000 in the second quarter of 2015 and $8.1 million in the fourth quarter of 2015. Our gross loan loss recoveries during the second quarter of 2016 were $1.2 million and our gross charge-offs were $7.6 million.

Our loan loss reversal was $5.2 million for the second quarter of 2016 compared to $2.2 million for the second quarter of 2015 and $3.0 million for the fourth quarter of 2015. Our nonaccrual loans decreased -- increased by 10.3%, or $5.3 million, during the second quarter to $57.5 million, or 0.55% of period end loans, as compared to the fourth quarter 2015.

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

Thank you, sir.

(Operator Instructions)

Aaron Deer, Sandler O'Neill and Partners.

Dunson, you gave your expectations with the guidance the same for full-year loan growth. I'm wondering what the -- how you're thinking about what the mix is likely to be. It seems like recently it's been mostly on the commercial real estate and single-family side. As you look at the pipeline and what's coming in, should we expect any improvements in terms the C&I growth going forward?

Aaron, my expectation of loan growth for the year remains about the same. The mix, as you observe, is that much of the growth would center around CLE and also singles and [mergers] is being quite challenging to go to C&I portfolio for several reasons. Of course, the economy growing so slowly does not induce a quicker loan growth in C&I.

We also noticed the retail sector of the economy has been quite slow. We do have a number of customers that are in the trade business and connected with apparel industry and some of the consumer electronics. We are seeing them -- the usage of their lines being -- they have been slower.

On the other hand, we mentioned last year that we have formed a new C&I team under the leadership of Kelly Wu, who we moved from a different bank. Mr. Wu is in the [remov] space of his team and we expect that he and his team will contribute in the second half of this year, and so we are hopeful that the C&I portfolio will be stabilized and will grow slowly from there on.

That's great. Thank you, Dunson.

For my second question, Heng, I know last quarter there was -- in the first quarter there was some kind of outsized numbers -- outsized operating expenses in the comp line. Even adjusting for it, I thought those were -- the compensation was much lower than I expected this quarter. Is there anything unusual there? What should we expect for a run rate going forward?

I think the run rate for comp expense should be a couple million higher in Q3 and Q4. We accrue -- I mentioned the first quarter that because the pretax income was very strong, we accrued more than normal for the 2016 bonuses. We also had about $2.5 million adjustment for the 2015 bonuses that were not fully accrued. The first quarter was higher for those reasons. The second quarter, because it was once again, this large charge for the amortization, we accrued less in the way of 2016 bonuses. In the third and fourth quarter we will go to a more normal run rate, which will be a couple million per quarter higher.

Got you. Thank you very much.

Chris McGratty, KBW.

Good afternoon. Thanks for taking the question.

Maybe we start with credit quality. Obviously, the reserve ratio will be impacted when the deal closes, but interested in your commentary about near-term provisioning requirements, whether the pipeline for recoveries is still there at all and where you're comfortable in this environment taking the reserve.

We see -- we are on a five-year migration system. As the losses from 2011 drop off, we would get some pressure to reverse -- to lower the allowance. We see that continuing in the third-quarter. Our charge-offs both in the third and fourth quarter last year as well as so far this year have mainly been in commercial loans. We think those, for the most part, are unique situations.

We don't -- particular here in the second quarter we had a large charge-off that came out of our Hong Kong branch, so it was unique to what happened there. We think our domestic portfolio is holding up -- domestic C&I portfolio is holding up well. Before I have said that any gross recoveries will result in a negative provision. We still generally see it around $1 million a quarter of gross recoveries. To the extent that migration in our loss factors would force us to book a negative provision, we see some trend continuing for the rest of this year. In 2017, that's not going to happen again.

So lower negative provisioning for the back half of the year and then at some point in 2017 we turn positive again? Is that the right way to think about it, Heng?

Yes. Hopefully not too much.

Understood. Maybe we switch to the margin, if you don't mind. I'm interested -- can you repeat the -- I got the $200 million of structure borrowings at 5% that roll off in January. There was another that you mentioned. Could you repeat that for me?

It was $50 million that rolls off in late August. That's at 2.69%.

If I think about those and then also what's happened in the yield curve getting flatter and bets on futures market really not indicating much movement, how should we as analysts and investors be thinking about the trajectory of your NIM looking out over the next few quarters?

I try not to give guidance too much on the NIM because it's been tough to get to close to 3.40%. We are optimistic that it will hold there until January and then we will get this 13 basis points pop. We were holding a higher excess cash balances at the Fed for a couple months in Q2, so we're gradually investing that and also hopefully having a stronger loan growth.

Great. Takes for taking the questions.

Matthew Clark, Piper Jaffray.

Good afternoon. Maybe just as we look out into next year and thinking about those tax credit investments that you probably re-up and -- how should we think about that related amortization in the tax rate next year?

We were surprised at how fast our investments got put to work. Next year, we will split that in two. Hopefully it will be in Q1 and Q3. The amortization will be closer to maybe $6 million each quarter. Then we have been ramping up our low-income housing investments. That's going to help our tax rate. We think the tax rate would be probably about 27.5% next year for the full year.

Okay, great. On the buyback, I think on the call you had mentioned you'll suspend it until the deal closes. Fair to assume that you re-up second half of next year?

Yes. It's dependent on the stock price but we are -- the Far East National Bank transaction uses up about 110 basis points of our capital ratio. We want to target a higher cap or some portion of our total return to shareholders will come in the form of buybacks. It should come in the second half of next year.

Okay. The source of the increase in non-performers this quarter, just curious?

It was CRE, from what I recall. Nothing really unique that I could think of.

Okay. Thank you.

Joe Morford, RBC Capital Markets.

Thanks. Good afternoon. My questions have been asked already.

The one follow-up would be on the C&I loan growth. You talked about some softness in the -- I think you said manufacturing apparel business. I just wondered if that's something you see continuing for a while and as back half as you see growth, is that just from the new team or do you see some of this activity picking up as well?

Joe, from my perspective, I'm seeing the C&I portfolio as currently instituted should be stabilizing over the quarter and then, hopefully, also the same time our new team will be contributing to the loan growth. I'm really hoping the third quarter would be stable -- in the third quarter typically we see our trade customer reduce their lines to pay for their inventory AR, so I believe the second half of this year the C&I loans should be stabilized and perhaps growing a bit.

Okay. Thanks so much.

(Operator Instructions)

Lana Chan, BMO Capital Markets.

Good afternoon.

Just one quick question on the securities portfolio. Took that down a bit this quarter. I'm assuming given the rate environment here, what should we expect in terms of investments there as the structured repos matures that also paying down some of the securities further, or letting those run off?

We have been buying one-year treasuries here in the second quarter because you can tell from a security gains we sold about $150 million of MBS to book the gains. It wasn't so much -- it was part of keeping ourselves fairly asset sensitive.

We have between the August maturity and the January maturity, we would have $250 million of borrowings that will mature. Most likely, unless rates increase, we will shrink our securities portfolio. To the extent that we need to maintain certain liquidity ratios, we will just leave it in cash at the Fed, because given how flat the yields curve is going out to five years.

Okay. Any change recently, again, with the flatter yield curve, any change recently in loan pricing, specifically on the CRE resi mortgage side?

No. We still target 315 basis points over Treasury's for our five-year fixed-rate loans. The good news is that demand is spread out. We don't -- interest rates were very low around the Brexit time. We didn't have hundreds of millions of dollars of loans rate-locked. They are generally spread out throughout the quarter. We are generally, in other portfolios, we are maintaining our past pricing.

Okay. Thanks, Heng.

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

Thank you and thank you again for joining us for this call and we look forward to talking to you again next quarter. Thank you.

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