Cathay General Bancorp (CATY) 2017 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp Second Quarter 2017 Earnings Conference Call.

My name is Cherie, 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 of Cathay General Bancorp.

Thank you, Cherie, and good afternoon.

Here to discuss the financial results today are Mr. Pin Tai, our Chief Executive Officer and President; 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, 2016, 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 statement or to publicly announce any revisions of any forward-looking statement to reflect future developments or events, except as required by law.

This afternoon, Cathay General Bancorp issued an earnings release outlining its second quarter 2017 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 would now turn the call over to Chief Executive Officer, Mr. Pin Tai.

Thank you, Monica, and good afternoon.

Welcome to our 2017 second quarter earnings conference call.

Before we discuss the results of the second quarter of 2017, I wish to discuss the acquisition of SinoPac Bancorp, the parent company of Far East National Bank, which we completed last Friday, July 14.

We are very excited to welcome the Far East National Bank customers and employees into the Cathay family.

This acquisition will strengthen our branch network and franchise in California and deploys a portion of our capital to generate strong returns.

In addition, we will also have a representative office in Beijing.

As previously announced, the total consideration was $351.6 million plus the additional post closing consideration based on the realization of certain assets of Far East National Bank.

We issued 926,192 shares of our common stock, with the remainder to be paid in cash.

Until all necessary regulatory approval is obtained for Far East National Bank to be merged into Cathay Bank, we will operating -- we'll be operating 2 banks under Cathay General Bancorp.

The transaction is expected to be over 1% accretive to Cathay Bank's GAAP earnings per share, excluding any onetime transaction costs and restructuring charges in 2017 and approximately 4% to 5% accretive in 2018.

Turning to the second quarter results, we reported net income of $51.4 million for the second quarter of 2017, a 47.6% increase when compared to a net income of $34.8 million for the second quarter of 2016.

Diluted earnings per share increased 45.5% to $0.64 per share for the second quarter of 2017 compared to $0.44 per share for the same quarter a year ago.

In the second quarter of 2017, our gross loans, excluding loans held for sale, grew by $206 million to $11.6 billion or an increase of 7.2% on an annualized basis when compared to the first quarter of 2017.

The increases in loans for the second quarter of 2017 resulted primarily from residential and commercial loans, which grew by $172 million or 26% annualized and $64 million or 12% annualized, respectively.

Commercial mortgage loans decreased by $22 million or 2% annualized as a result of highest payoff.

We anticipate organic loan growth in 2017 to be still 7% to 8%.

For the second quarter of 2017, our total deposits increased $124 million to $11.5 billion as we continue to reduce broker and wholesale deposits.

Our core deposits remained relatively flat at $9.3 billion when compared to the first quarter of 2017.

With that, I will turn the floor over to our Executive Vice President and Chief Financial Officer, Heng Chen, to discuss the second quarter 2017 financials in more detail.

Thank you, Pin, and good afternoon, everyone.

For the second quarter, we announced net income of $51.4 million or $0.64 per share.

Our net interest margin was 3.63% in the second quarter of 2017 as compared to 3.38% in the second quarter of 2016 and 3.49% for the first quarter of 2017.

The increase in net interest margin in the second quarter was partially due to rising interest rates, in addition to interest recoveries and prepayment penalties, which added 6 basis points to the net interest margin compared to 3 basis points for the first quarter of 2017 and 4 basis points for the second quarter of 2016.

Noninterest income during the second quarter of 2017 was $6.2 million.

Noninterest expense decreased by $12.2 million or 17.7% to $56.7 million in the second quarter of 2017 when compared to $68.9 million in the same quarter a year ago.

For the second quarter of 2017, compared to the same quarter a year ago, amortization of investments in affordable housing and alternative energy investments decreased $21.2 million, offset by a $4.6 million increase in salary and employee benefits expenses and a $2.8 million increase in other operating expenses, which include a $1.1 million increase in the reserve for off-balance sheet commitments during the second quarter of this year.

The effective tax rate for the second quarter of 2017 was 23.1%.

We completed our investment in the solar tax credit fund during the second quarter.

We anticipate that our expected tax rate for the second half of 2017 would be about 29%.

We expect solar tax credit amortization expense of about $7 million per quarter for the third and fourth quarters of 2017.

At June 30, 2017, our Tier 1 leverage capital ratio increased to 12.08% as compared to 11.57% at December 31, 2016.

Our Tier 1 risk-based capital ratio increased to 14.7% from 13.85% at December 31, 2016, and our total risk-based capital ratio increased to 15.35% from 14.97% at December 31, 2016.

All ratios significantly exceeded well-capitalized minimum ratios under all the regulatory guidelines.

At June 30, 2017, our common equity Tier 1 capital ratio was 13.26%.

Net recoveries for the second quarter of 2017 were $266,000.

Net charge-offs were $6.5 million in the second quarter of 2016 and $923,000 in the first quarter of 2017.

We did not have any loan loss reversals for the first -- for the second quarter of 2017 compared to $5.2 million for the second quarter of 2016 and $2.5 million for the first quarter of 2017.

Our nonaccruals increased by 20.5% or $10.9 million to $64 million or 0.55% of period-end loans as compared to the second quarter of 2016.

Thank you, Heng.

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

(Operator Instructions) Our first question comes from Aaron Deer with Sandler O'Neill.

My first question is with respect to the increase in the NPLs.

Can you talk about what drove the increase in the construction and real estate loans on nonaccrual and maybe give some specifics, if you can, behind those credits?

Yes.

Aaron, this is Heng Chen.

There were a couple of loans -- construction loans in New York that became delinquent but they are very well secured.

So we put them on nonaccrual and we're working them out.

But -- so that's all there is to that.

Okay.

Are they -- is it residential housing?

Is it commercial?

What type of properties are they?

Oh I'm sorry.

It's construction...

Residential.

Condo...

Condo.

Oh yes.

Okay.

Condo and (inaudible)

Okay.

And then just a question on the deposits.

Looked like you'd let some of that run off in the quarter despite the strong loan growth.

As you look forward to funding the growth for the back half of the year, what -- do you anticipate having to pay up for deposits at this point?

Are you still seeing some -- do you still expect to get some good inflows without having to necessarily pay up?

Well, we -- yes, this is Heng Chen, Aaron.

We're not going to increase our core deposit rates because, in our marketplace, nobody else is doing that.

But we will -- 2 things.

One, Far East, they have -- their loan-to-deposit ratio is only about 85%, so they will generate about $150 million or so of excess deposits.

And then we will -- we've been letting broker CDs run off during the first half of this year and we'll be going back into that market for broker CDs.

So we -- once again, you can see our cost of deposits or core deposits was flat.

And I think one of them, it dropped a basis point on a linked quarter basis.

Our next question comes from Chris McGratty with KBW.

Heng, a quick question on the impact of the yield curve.

We've heard a lot of banks offer a little bit more cautious outlooks given what's happening to the shape of the curve and the impacts on both sides of the balance sheet.

I'm interested, maybe if you put that together and offer kind of a near-term outlook for the margin, understanding that obviously this quarter was a bit elevated with the prepayments and the interest reversals.

Yes.

Well, I think, first, on the margin.

We think in the third quarter it'll be above 3.6%.

We have $50 million of structured repos that matured yesterday, actually, so that reduces our total interest earning assets.

And then, the Far East, we think, they will help our margin by maybe a basis point.

So -- and then in terms of the yield curve, we -- our residential mortgage is primarily priced off of the 3-year portion of the yield curve.

And so that's actually gone up a little bit.

So -- and then lastly, our commercial real estate, it's priced off of the 5-year treasuries.

But we generally have been swapping them in the floating.

So Pin, I think the demand for -- well, you can tell in the second quarter our CRE loans fell, but maybe you can talk a little bit about the level of interest for fixed-rate CRE loans.

Well, certainly.

I think that the demand for fixed rate is still there.

However, there's severe competition from the major banks.

And to some point, we don't feel that we want to offer very, very low fixed rate in order to hold on to a commercial real estate loan.

That's why we're going to have some large payoffs.

Right, right.

And then -- so I think to just circle back, we're very cognizant that the -- there's possibly a rate hike in December and then there's possibly 3 more rate hikes in 2018 and so we do pretty well when the -- because a lot -- we have a lot of assets tied to prime.

So we think our margin will drift up over -- in the fourth quarter and then slightly in 2018.

Okay.

If I could on the outlook.

From a liquidity perspective, obviously, Far East adds a little bit to the balance sheet.

But you've been moving the security to earning asset ratio down considerably over the past couple years.

Are we at a level where the dollars of the investment portfolio begin to grow?

Or are you comfortable kind of keeping it perhaps in the high single digits to the proportion of the balance sheet?

Yes, I think we're going to keep it there.

Far East, they have $100 million of securities which will -- we're targeting about $1.2 billion.

And with that, it would go to $1.3 billion.

We're waiting for the interest rates -- in our securities portfolio we have about $400 million of very short-term treasuries.

So it's not giving us much yield.

We're just waiting for interest rates to go up a little bit more before we go from treasuries into MBS.

Great.

And then if you mind repeating the amortization outlook for the back half of the year?

I think you said $7 million.

But the other piece would be around $5 million.

Is that about right?

Oh, the solar amortization, we think it's $7 million each quarter and the low income housing is about $5 million.

(Operator Instructions) Our next question comes from Matthew Clark from Piper Jaffray.

So first question on the interest income reversals in the quarter.

Just curious how much that contributed to the margin this quarter versus last as well.

Oh, it was 6 basis points this quarter and 3. Now we lumped that with prepayment penalties.

So generally, the prepayment penalties are a little bit more than the interest reversals or the interest collections.

Okay.

So that's all in, the 6 and the 3?

Yes.

Okay.

And then your margin outlook for the upcoming quarter, you obviously had a rate hike in June.

That 3.60% obviously incorporates the benefit there on prime.

Yes, yes.

And then this is kind of temporary for the third quarter.

We're actually running 2 banks.

So right now at Far East they have $0.25 billion of excess liquidity; whereas Cathay, we now don't have any excess liquidity.

So it's going to -- it's in our guidance.

That's one reason why we're guiding to only like 3.60% in the margin, because we have this $0.25 billion at Far East that's sitting at the Fed.

And once the bank merger is completed, hopefully sometime in the fourth quarter, then we can shrink our earning assets by that amount.

Got it.

Okay.

And then just thinking out with the -- your excess capital now the deal is closed, I guess, how should we think about share repurchase and other forms of capital management?

Yes.

So first, we issued roughly 921,000 shares for Bank SinoPac.

And we will, over time, buy that back.

And for those shares, we're relatively indifferent to the stock price because we issued them at close to $37.50 per share or something like that.

And then to the extent we see weakness in our stock price, well, in 2018 especially, we'll go back -- our goal is to try to buy back about 2 million shares a year to help reduce our excess capital and this acquisition has made things complicated because of the moving parts.

But going into 2018, well, depending on the stock price, we will -- we may resume the -- more stock repurchases.

Okay.

And then just the tax rate next year, how should we think about that as well?

Well, we think it's going to be 29%.

We were delayed in terms of putting in our solar tax credit investment.

And our hope is that we start another one early in the first quarter, so we'll get a full year's benefit of our solar tax credit investments.

So it should hold our tax rate at 29%, maybe a little less than that.

Our next question comes from David Chiaverini with Wedbush Securities.

I wanted to follow up on the question about credit quality.

You mentioned that these were condo construction loans in New York.

Are these high-end condos?

No, no.

We -- David, we -- we do not normally do high-end condo construction.

Most of the construction loan for condo is kind of medium or lower-medium price.

Okay, great.

And I think Heng mentioned that there's a decent amount of equity in these.

Do you know what the...

Yes, yes.

The loan-to-cost and loan-to-value is very low for these loans, so we don't think there will be any loss.

Okay, great.

And then following up on the deposits.

Is there any seasonality between the first and second quarter?

I was wondering what was behind the decline in deposits in the quarter.

I see time deposits came down.

But a little bit of the core deposits came down as well.

I think sometimes around Chinese New Year, some of our depositors remit their cash back to Taiwan or Hong Kong.

So typically, the second half of the year is a little stronger for core deposits.

Our next question comes from Lana Chan with BMO Capital Markets.

Could you talk about pricing on some of your loan portfolios?

Any change in resi pricing, CRE and C&I?

Well, for the new loan that we originate recently, I think the pricing is slightly higher for the residential mortgage.

Definitely the new loan that we are originating is -- have the highest interest rate than the existing portfolio.

And right now, it's about 4.42%.

And for the commercial real estate or fixed-rate loans, right now we are underwriting close to 5%.

Our existing portfolio is 4.74%.

And the C&I, we're basically doing a prime basis, which is slightly higher than the existing yield of 4.03%.

Okay.

And on the resi mortgage that continues to be one of your key growth drivers, can you talk about demand in the pipeline there?

Yes.

Our pipeline is still quite high compared to the previous year, which is quite a surprise to us because, originally, we were thinking that this year they'll be spreads for them.

We are seeing a lot of demand.

(Operator Instructions) Our next question comes from Gary Tenner with D.A. Davidson.

I came on a little late, so I apologize if I missed this in your comments, guys.

But with the loan growth being a little bit challenged this quarter, I think you commented on some payoffs on commercial real estate.

Could you talk about kind of what the full year loan growth expectations are relative to what you've said in the past?

Yes, we are still expecting 7% to 8% growth for the second half of the year.

And right now, if we look at our pipeline, actually our C&I pipeline is quite strong.

So we're anticipating that we thought we should have a very strong quarter for C&I loan growth.

I'm showing no further questions at this time.

Thank you for your participation.

I will now turn the call back over to Cathay General Bancorp's management for closing remarks.

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

Thank you.

Ladies and gentlemen, this now concludes today's conference.

Thank you for your participation.

You may all disconnect, and have a wonderful day.