Cathay General Bancorp (CATY) 2016 Q3 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to Cathay General Bancorp's third-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. Participating in this call today are Mr. Dunson Cheng, our Executive Chairman; Mr. Pin Tai, our President 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 at 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, 2016, as 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 or to publicly announce any revision of any forward-looking statements to reflect future developments or events, except as may be required by law.

This afternoon Cathay General Bancorp issued an earnings release outlining its third-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 over to our Executive Chairman, Mr. Dunson Cheng.

Thank you, Monica, and good afternoon, everyone. Welcome to our 2016 third-quarter earnings conference call.

On August 19, the Company announced my retirement as President and CEO of the Company and as CEO of Cathay Bank effective September 30, 2016. Mr. Pin Tai has been appointed by the Board of Directors to succeed me in these positions, while I continue to serve as Executive Chairman of both Company and Cathay Bank Board of Directors.

Mr. Pin Tai has served as President of Cathay Bank since April 2015, prior to which he served as General Manager of the New York region, Executive Vice President and General Manager of the Eastern regions, Deputy Chief Lending Officer and Chief Lending Officer. With over 34 years of banking experience, of which 17 years were with Cathay Bank, he is well-qualified to take on this new responsibility which has made the transition easier to implement. Before discussing our third-quarter performance, I would like to introduce Mr. Pin Tai to say a few words.

Thank you, Dunson, and good afternoon, everyone. It has been a great pleasure to have been able to work with Dunson and the other members of management during my tenure with Cathay Bank. I am honored to have been given the opportunity to serve and to lead the Company going forward.

So much has been accomplished during Dunson's leadership. And I look forward to building on this strong foundation. I welcome the opportunity to discuss our financial results with you in the future earnings conference call. I will now turn the call back to Dunson to discuss our third-quarter 2016 performance.

Thank you, Pin. This afternoon we reported net income of $46.1 million for the third quarter 2016, a 19.8% increase when compared to net income of $38.5 million for the third quarter of 2015. Diluted earnings per share increased 23.4% to $0.58 per share for the third quarter of 2016 compared to $0.47 per share for the same quarter a year ago. The increase in net income compared to the same quarter a year ago is primarily due to a decrease of $11.7 million in amortization of investments in alternative energy partnerships.

Also in the third quarter 2016 our total loans increased $487 million to $11 billion compared to second quarter 2016, or an increase of 18.5% on an annualized basis. That compared to 6% growth in the second quarter.

The reason for the unusually high loan growth are several-folds. One is that some of the new loans to invoke in the second quarter were delayed to the third quarter. Another is that we took over a group of loans totaling $51 million made to one of our existing customers from another company. Thirdly, we purchased a pool of residential mortgages, including $40 million of qualified TRA single-family mortgages.

Our year-to-date loan growth was $847 million, or 11.1% annualized. When compared to the second quarter, the net increase in loans resulted primarily from commercial real estate and residential loans that grew by [$213] million, or 15.4% annualized, and $183 million, or 30% annualized, respectively.

In construction loans, it grew by $33 million, or 27.7% annualized. Commercial loans increased by $61 million, or 11% annualized, reversing the declining trend that we witnessed in the first half of the year. We expect the total of loans to be about 6% in the fourth quarter and for the entire year of 2016 to be about 9% to 10%.

For the third quarter of 2016 our total deposits increased $468 million (sic - see press release, ?$430 million"), or 4.5% (sic - see press release, "4.1%") to $10.9 billion due to primarily an increase in our time deposits of $276 million and money market deposits of $64 million compared to second quarter 2016. Our core deposit also grew $226 million, or 10.7% annualized in the third quarter.

Our transaction to acquire Far East National Bank is moving forward as expected. We filed our application with the Federal Reserve Board at the end of September. While the merger remains subject to regulatory approvals and customary closing and conditions, as of today we still anticipate closing in the first half of 2017.

With that, I will turn the floor over to our Executive Vice President and CFO, Heng Chen, to discuss the third-quarter 2016 financials in more details.

Thank you, Dunson, and good afternoon, everyone. For the third quarter we announced net income of $46.1 million, or $0.58 per share. Our net interest margin was 3.36% in the third quarter 2016 as compared to 3.37% for the third quarter of 2015 and 3.38% for the second quarter of 2016.

In the third quarter of 2016, interest recovery and prepayment penalties added 3 basis points to the net interest margin compared to 4 basis points for the second quarter of 2016 and 5 basis points for the third quarter of 2015. In January 2017, $200 million of structural repos at 5% will mature and would improve the [net] interest margin by [13] basis points on a run rate basis.

Non-interest income during the third quarter of 2016 was $8.8 million. Non-interest expenses decreased by $6.8 million, or 12%, to $50.7 million in the third quarter of 2016 as compared to $57.5 million in the same quarter a year ago. The decrease was mainly due to a decrease of $11.7 million in amortization of investments in alternative energy partnerships. We do not expect to record any amortization expense during the fourth quarter of 2016 related to alternative energy partnerships.

The effective tax rate for the third quarter of 2016 was 25.5% due to additional low income housing tax credits. And we expect that the effective tax rate for the fourth quarter of 2016 would be approximately 27%.

At September 30, 2016 our Tier 1 leverage capital ratio decreased to 11.91%, our Tier 1 risk-based capital ratio decreased to 13.67%, and our total risk-based capital ratio decreased to 14.78% as compared to December 31, 2015. Our ratios significantly exceed these well-capitalized minimum ratios under all of the regulatory guidelines. At September 30, 2016, our common equity Tier 1 capital ratio was 12.64%.

Net charge-offs for the third quarter of 2016 were $5 million, or 0.19% of average loans. Net charge-offs were $2.1 million in the third quarter of 2015 and $6.5 million in the second quarter of 2016. Our gross loan loss recoveries during the third quarter of 2016 were $2.9 million, and our gross charge-offs were $7.9 million. Our loan-loss reversal was $0 million for the third quarter 2016 compared to $1.3 million for the third quarter of 2015 and $6.5 million for the second quarter of 2016. Our nonaccrual loans decreased by 14.9%, or $7.7 million during the third quarter to $44.4 million, or 0.4% of period-end loans as compared to the fourth quarter of 2015.

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

(Operator Instructions)

Aaron Deer, Sandler O'Neill and Partners.

Good afternoon, everyone.

Hi, Aaron.

My first question has to do with the loan for the customer that you took over from the other banks. Really, maybe four questions related to that. One would be, what prompted the move? The second would be, what type of credit was this? The third was, was there any premium or discounts on the loan taken? And then, what is your total exposure now to this customer?

This is Dunson Cheng. We acquired the loans from a company that is exiting that kind of business. Actually, this company is leaving the banking business in general itself. Secondly, the $51 million are all [strong] loans. The premium we paid par 0.25, so it's 100.25%. Then as to the total balance, this is one of our very best customers and we generally don't discuss individual customer totals. It's the only thing that they [didn't add against there] within our bank's lending limit.

Okay; very good. Along the lines of your internal limits, can you talk about where your commercial real estate concentration limit was at September 30 and where that corresponds relative to your capital ratios and what the internal target is, which I think is 400%, if I recall correctly?

Aaron, we don't have that information just yet. We are in the process of preparing the call report. At the end of June, my recollection was it was 302%, although I think with this growth it would probably be a few percentages higher than that.

Okay. Lastly, you guys had very nice trends in the nonaccruals and OREO coming down. I saw the TDRs ticked up a bit. I was wondering if there was anything behind that, that you can talk about?

Nothing really outstanding. I believe there were three loans in the range of a couple of million dollars that we felt appropriate to include in that category.

Okay. Very good. Thanks for taking my questions, guys.

Great. Thank you.

Lana Chan, BMO Capital Markets.

Hi, good afternoon. Could you give us any guidance on the tax amortization and tax rate for next year, Heng?

It would be about the same amount. It is the total amount for the year, I believe, was $27 million for 2016, and so we would expect to do that. And in terms of a pattern, we think it will probably be nothing in Q1. Then, maybe $15 million or $20 million in Q2. And then, the remainder in Q3.

Okay. It looks like the full-year tax rate for 2016 will be about 28%. So similar in 2017?

Yes. In 2016, we have, I believe, $4.2 million of deferred tax asset write-offs related to stock options in the first quarter. So that will not incur. I think -- what are we budgeting? Aren't we budgeting $27.5 million for next year?

Yes.

Okay. Anything unusual to call out in the expense line items? Like, I guess personnel was up but lower than expected, and then the other expense line was higher than expected? Was there anything unusual in those items?

Yes, Lana, in aggregate we had a legal settlement with a borrower from many years ago that we finalized. And we also have legal fees to a different borrower that has been fully charged off. In total, there is at least $2 million of unusual or higher than normal expenses.

Okay. Helpful; thank you. Last question was on gross charge-offs this quarter. Can you give us more color on what drove the gross charge-offs?

Yes. There's two. The largest one was almost $4 million, or thereabout. That was $3 million or $4 million, and that was fully reserved for. If you note that we have a loan, that is one loan for $4.7 million that was held for sale so that relates to that particular loan. That sale closed a few days ago.

Then, we had a credit of $2.5 million from a middle-market customer that was just a credit surprise. That was a full charge-off. It was not a nonaccrual at June 30. Once we identified the problem, it was a full charge-off. Hopefully, last one will be unusual. But for those reasons, we think that in the fourth quarter we are going to look at net charge-offs to see whether we need a provision or not, depending on the amount of net charge-offs and loan growth.

Okay. Thank you.

Sure.

Chris McGratty, KBW.

Good afternoon. Thanks for taking the question. I just wanted to follow up on the amortization question, just to make sure I have the full numbers. I think you said year to date it was around $27 million. But there are two pieces, that's the low income and the energy, right? Year-to-date was roughly $35 million, $36 million? I am thinking about next year, the $27 million, that should be grossed up by a couple million a quarter for the other amortization, right? Just making sure I -- .

Yes. Low income housing, we continue to invest in that, both for the CRA benefit as well as the financial return. Right now, the run rate is about $4 million a quarter for that expense. It will probably go up to $4.5 million a quarter next year.

Okay. So the fourth quarter will just have the $4 million from that? Is that the right --

Yes.

Okay. I wanted to go back on the balance sheet a little bit. You guys are obviously preparing for the closing of the acquisition, and you are getting very strong loan growth. How should we be thinking about the, call it, $1.3 billion or so of securities from here? Should we be assuming flat balances, growth, or remixing once the structured repos come off?

Yes. I think we are targeting a minimum of at least $1.2 billion of securities. On the structured repos, we have some cash at the Fed that we would use to pay most of that off. But we had been, in terms of remixing our securities portfolio from MBS to callable agencies and treasuries.

Okay. Okay; that is helpful. Maybe the next one is on the reserve. It has obviously come down quite a bit as you work through some of these credits. But approaching 1% with the growth you are having, is the expectation that the provision will flip positive in the next quarter or so?

It is possible. It depends on net charge-offs.

Okay. Great. I just wanted to make sure I heard you on the loan growth. You said 9% to 10%? Was that for next year or was that for --

That is for this year, Chris. That's for this year.

Okay. That is for the rest of this year. How should we be thinking about next year, similar rate of growth?

(Multiple speakers) We're in the process of doing our budget. I would say it is really -- well, (inaudible) about on the same (inaudible). It is (inaudible) high.

Okay. Thanks for taking the questions. Appreciate it.

Matthew Clark, Piper Jaffray.

Hey, guys. It's actually Nate Race on for (multiple speakers). Just a quick question on loan price in the quarter. Can you give us a sense of, excluding the loans that you purchased, kind of where you are putting loans on the books in 3Q on a weight average basis?

Let me cover residential mortgage. There has been a very slow drift in that. I think our linked quarter that we lost 12 basis points on residential mortgage. Our average rate on residential mortgage is 4.35% this quarter whereas in the second quarter it is 4.48%. The average for commercial mortgage is 4.56%. And Pin can give us some color on new loans. I think they're generally -- .

?The pricing is holding pretty stable. We don't see any potential increase or decrease.

Yes. And, then, commercial assets, 3.84%, and -- on average. And then, lastly, real estate construction is 5.76%. I think that our new loans are probably close to those average rates.

Okay. Got you. Are you guys seeing any increased opportunities in the commercial real estate space from a pricing and production standpoint, given some of the regulatory pressures that maybe smaller banks are feeling more recently?

We are seeing quite a few construction loans coming to the bank. However, we are being quite conservative at this point because we don't know what the market is heading. Either we will be declining those loan applications or we will increase our pricing to compensate for [this].

Okay. Thanks. Just the securities yield price in the quarter, can you give us a sense of how much of that may have been related to premium amortization versus just reinvesting at lower rates?

The premium amortization is not much. I don't have -- I think it is probably $1.8 million for the quarter. But it is in the rate already. We are buying 15-year MBS. And we don't pay more than 1.03[%] for it. The premium amortization, it's not -- it does not jump around for us.

Okay. Great. I appreciate all the color.

Great. Thank you.

(Operator Instructions)

Gary Tenner, D.A. Davidson.

Thanks. Good afternoon. I had a follow-up question regarding just the progression on the housing partnership and alternative energy partnerships. Heng, you said $4.5 million per quarter next year for the affordable housing on top of that $27 million for the energy partnerships between second and third quarter?

Yes, yes.

Okay. So would the tax rate -- the effective tax rate you're talking about at 27%, would that be higher in the first quarter until the alternative energy partnership pieces kick in in the second quarter or should it be pretty straight line?

It should be straight line. The only caveat is, there is a pretty strict convention that if we don't sign the investment agreement before March 31, then we can't reflect those tax credits in our full-year effective tax rate. And then, if we sign that agreement in the second quarter then you will see the tax rate drop on a catch-up basis. That happened to us in 2015. And to avoid noise like that, we are going to try hard to get our investments signed before March 31.

Okay; fair enough. I missed some of your introductory comments on loan growth. The C&I growth, sequentially, was that -- I assume that was, at least to some degree, trade finance oriented. Maybe you could comment on what the pipeline for trade finance is indicating for the season?

I think third quarter tends to be the quarter that most of our trade customers withdraw on the line to import inventory. Quite a bit of that is because of that. C&I's loan growth has been really very challenging for us for the last three quarters. And the expectation is that it will continue to be growing at a slower pace.

Do you have a sense of how, if you compared this year's trade finance utilization rates and pipeline versus last year, what then -- any sort of read from that in terms of demand and the economy?

The demand is still quite timid, but I don't expect next year C&I loan would -- well, I think the first two -- as I remember, the first two quarters of this year, our C&I loans dropped about $113 million or so. The drop was caused by really some unusual circumstances. I believe that the current C&I portfolio should be stable. And I look forward to it slowly growing back up again.

Very good. Thank you.

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 speaking with you again next quarter. I think in January in the new year.

In the new year. Thank you.

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