Cathay General Bancorp (CATY) Q4 2013 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp's Fourth Quarter 2013 Earnings Conference Call. My name is Suquenna [ph] and I'll 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. Please proceed.

Thank you, Suquenna [ph], and good afternoon. Here to discuss the financial results today are Mr. Dunson Cheng, our Chairman of the Board, 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 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, 2012, 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 2013 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, President and CEO, Mr. Dunson Cheng.

Thank you, Monica, and good afternoon. Welcome to our 2013 fourth quarter earnings conference call. This afternoon, Cathay General Bancorp reported net income of $31.9 million for the fourth quarter 2013 or $0.40 per common share. This compare to net income of $28.3 million or $0.31 per common share in the fourth quarter of 2012 and $32.5 million or $0.38 per common share for third quarter of 2013. In the fourth quarter we continued to experience solid loan growth. Gross loans increased $253 million in the quarter or a 12.8% annualized increase from the third quarter of 2013. For the full year of 2014, loans increased by $625 million or 8.8%. During the fourth quarter we saw loan growth in all categories. Commercial loans increased by $65 million, construction loans increased by $32 million, commercial mortgages increased by $102 million, and residential mortgages increased by $61 million. The net growth in fourth quarter exceeded that of the third quarter of $138 million. Our current expectation is that loan growth in 2014 will be about 7%. For the fourth quarter of 2013, our total deposits increased $63 million or 0.8% from $7.9 billion at September 30, 2013. For the full year of 2013, our core deposits increased by 10.3 or $386 million. In the beginning of this year we signed an agreement to purchase a branch in the Richmond District of San Francisco. This will give us a second branch in the city. Total deposit at branch are about $36 million. We expect the purchase of this branch to be completed early in the second quarter. Back in December 2013, we opened our new branch in Westminster, Southern California. The open -- West Covina, sorry, in Southern California. The opening of our second Brooklyn [ph] branch was delayed and now expected to be March 2014. We are also relocating our Sacramento branch to a more centrally located area. On July 15, 2013, we successfully completed a 24-month effort to upgrade our computer system to a new core system. Since the conversion date, we spent time in learning and fine-tuning the new system. We are happy to report that the new system is running smoothly. In the coming months we shall focus on streamlining our internal processes in all of our operating areas to improve our efficiency. In the fourth quarter, our efficiency ratio was 44.65%. With that, I will turn the floor over to our Executive Vice President and CFO, Heng Chen, to discuss the fourth quarter results in more detail.

Thank you, Dunson, and good afternoon everyone. For the fourth quarter we announced net income of $31.9 million or $0.40 per share. For the full year 2013, our net income was $123.1 million or $1.43 per share. Our net interest margin was 3.3% in the fourth quarter of 2013 compared to 3.35% in the third quarter of 2013 and compared to 3.28% for the fourth quarter of 2012. During the fourth quarter, interest recoveries added 5 basis points to the net interest margin, whereas during the third quarter, interest recoveries added 6 basis points to the margin. Our fourth quarter 2013 net interest margin was impacted by lower security yields as a result of sales without reinvestment, over $300 million of 30-year fixed-rate MBS securities during the second half of 2013, to reduce our exposure to higher interest rates. We estimate that the lower security yields impacted the margin by about 5 basis points. During 2014 we repaid $100 million of structured repos with an average rate of 3.5% and a prepayment cost of $3.4 million, which we expect will be offset by security gains during the first quarter. Excluding the $100 million that was paid off in January 2014, from July 2014 to January 2015, $300 million of structured repos with an average rate of 3.97% are scheduled to mature, which should help improve our future net interest margin. The maturities are $100 million in July, $50 million in September, $100 million in November, and $50 million in January 2015. Non-interest income during the fourth quarter of 2013 was $8.3 million. Non-interest expense, excluding costs associated with the redemption of debt, decreased $3.3 million to $40.3 million in the fourth quarter of 2013 compared to $43.6 million in the same quarter a year ago. The decrease was due to a $2.7 million decrease in OREO expenses which was partially offset by $1.1 million increase in salary and bonus expense. At December 31, 2013, our Tier 1 leverage capital ratio increased to 12.48% and our Tier 1 risk-based capital increased to 15.03%, and our total risk-based capital ratio decreased to 16.34%. During the fourth quarter we prepaid $50 million of Cathay Bank's sub-debt as part of our capital management process. All capital ratios significantly exceeded well-capitalized minimum ratios under all the regulatory guidelines. At December 31, 2013, our Tier 1 common risk-based capital ratio was 13.66%. Turning to credit, net charge-offs for the fourth quarter of 2013 was $8.2 million or 10 basis points of average loans, compared to net charge-offs of $1.4 million the same quarter a year ago. Included in the fourth quarter of 2013 net charge-offs was one charge-off of $5.7 million which was fully reserved for as of the end of the third quarter. Our loan loss provision was zero for both the fourth quarter of 2013 and the fourth quarter of 2012. Our non-accrual loans decreased 16.7% -- or $16.7 million during the fourth quarter to $83.2 million or 1.03% of period-end loans. Loans rated substandard or worse decreased from $402 million at September 30, 2013 to $368 million at December 31, 2013.

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

Thank you. [Operator Instructions] And please be advised that you are limited to one question and one follow-up, and then you may reenter the queue. Your first question comes from the line of Julianna Balicka, representing KBW. Please proceed. David Gong – KBW: Good afternoon. This is actually David Gong for Julianna.

Hi, David. David Gong – KBW: Hi. Just had a question on your residential loan growth. What's your outlook for resis going into 2014 just given where rates are?

As you know that -- you may know that on January the 10th we had stopped doing Smart Mortgage Program and for the first quarter we're projecting the origination probably stay about the same as the last quarter of 2013, just because of the onrush of applications received before the January 10th deadline. And then for the rest of the year we are projecting that origination will drop by 40%.

Yes. David, for our budgeting purposes, we're assuming that residential mortgage loans will increase 7% December to December. David Gong – KBW: Okay. Thank you. And also on -- switching to commercial real estate growth for next year, so what's your outlook on that? And what kind of yields are you getting on the new originations in that space?

Well, on the C&I loan, I think you're talking commercial real estate, right? David Gong – KBW: The CRE, yeah.

CRE loan, our pipeline is fairly respectable and we view that in 2014 our origination should be a little bit higher than 2013. As far as yield is concerned, right now we are encouraging our customers to do floating rate loans instead of fixed-rate loans. And for cases that customer insist the fixed-rate loans, we usually hedge it. And at this point in time it just depends on the movement of treasury, but we are getting anywhere from 4.5% to 5% at float rate. David Gong – KBW: Okay. Thanks for the color.

Your next question comes from the line of Brett Rabatin, representing Sterne Agee. Please proceed. Brett Rabatin – Sterne Agee: Hi, good afternoon.

Hi, Brett. Brett Rabatin – Sterne Agee: Wanted to ask a few colors on capital and then just kind of managing the balance sheet around that. Can you guys give -- I know you gave loan growth guidance for the year, can you give us any thoughts on the excess capital and what you'll do. I know everyone is trying to steer away from doing longer duration loans at this point. Can you just talk about your thoughts on managing excess liquidity with the balance sheet this year and what you'll do with capital?

Yes, Brett. Heng Chen. I think the first thing we want to do is increase our dividend which we're hopeful that in Q2 or Q3 will be back up to the 10.5% level. Then in terms of the capital management, we did a couple of things in the fourth quarter. As I mentioned in my remarks, we had $50 million of bank sub-debt and we prepaid that -- the prepayment penalty was only breakage, was the LIBOR breakage, that was only $2,000. And then we also had $8 million of preferred stock and we called that [ph]. So those are -- and then I think our capital will not build up too much in 2014 from our current levels because we're expecting 7% or so loan growth. Our preference would be to use some of it for acquisitions, and then with the run-up in bank stock prices, I think the stock buyback would be the least favorite use of capital. Brett Rabatin – Sterne Agee: Okay. And then just the other question was around the expense initiatives. I know you guys have done a conversion and been doing some efficiency projects. Any thoughts on further efficiency gains? You're already a very efficient bank, but any thoughts on operating leverage into 2014?

Yes, Brett. This is Heng Chen again. We're pretty optimistic that our operating expenses for 2014 are going to grow slower than our revenues. You know, there's a few things. One, we think the other real estate expense will be -- will continue to be low if not to be a net credit. And then we have the core deposit intangible that was -- that will be much lower next -- in 2014. So we're budgeting about $700,000 for that versus $4.5 million in 2013. But we spent about $2.5 million per quarter on the conversion, so that we had in each of the first three quarters of 2013, and that has pretty much gone away in the fourth quarter. And then lastly, we expect our legal and collection expense to be lower in 2014. And then I'll let Dunson sort of talk about the rationalization we hope to see in the second half.

Well, offsetting those reduction in expenses, we are, on the other side of it, as you have seen, that we are going to open -- well, we have opened one and then open two more branches, and that of course will incur additional expense both in personnel and infrastructure. And the other area that we'll be putting more resources in, in this regulated side of things, we're all well aware that increase in regulatory burden would necessitate us to put in several more headcount into our bank office. And so those are some of the things that we are doing. We continue to look for opportunities to increase our branch network. And so there may be a few more branches that we might think about towards the second half of this year. Brett Rabatin – Sterne Agee: Okay. That's great, Heng and Dunson. Appreciate it.

Thank you.

Your next question comes from the line of Herman Chan, representing Wells Fargo U.S. Securities. Please proceed. Herman Chan – Wells Fargo Securities: Thanks a lot. It looks like, one, growth guidance represents a slowdown, but it does look like you also have levers on the cost of funds side. Pulling that all together, can you talk about the outlook for net interest income dollar growth for 2014? Thanks.

Yes. This is Heng Chen, Herman. We think it's going to go up between 3% to 5%. That's primarily because we paid off higher cost borrowing in 2013. Herman Chan – Wells Fargo Securities: Got it. And then on your construction loan balances, that seems to have hit an inflection point. Can you talk about what you're seeing within that particular loan type and the like? Thanks.

Yeah. We're observing. Our consumption portfolio has increased quite a bit in the fourth quarter. And our expectation is that it's going to continue to increase because the commitment that we are making on construction loans is much higher at this point in time than any time during 2013. And so our expectation is that this year our construction portfolio outstanding should increase somewhere in around the 12% area. Herman Chan – Wells Fargo Securities: Got it. Thank you very much.

Yes. Thank you.

[Operator Instructions] Your next question comes from the line of Lana Chan, representing BMO Capital Markets. Please proceed. Lana Chan – BMO Capital Markets: Hi, good afternoon.

Hi, Lana.

Hi, Lana. Lana Chan – BMO Capital Markets: Can you talk about, are there -- do you there's going to be opportunities to prepay the rest of the structured repos earlier in 2014 or is the plan to let those mature on schedule?

We like to -- we like to prepay them where the credit amount is at least 20 basis points so we're not losing too much yield. We canvassed [ph] -- we only have three counterparties that hold the structured repos, so we canvassed [ph] with all three of them in January and we're going to do that again in April. But we have $100 million that's maturing in early July, and that's at 4.78%. So even if we don't prepay it, certainly by Q3, that that benefit will show up. Lana Chan – BMO Capital Markets: Okay. And then, so outside of the structured repos benefit later on in the year, what is I guess the near-term outlook for the margin? Should we expect a little bit more pressure with the securities or earning asset yields?

Well, no. You know, I think typically the first quarter is a better quarter for the margin because of we have a lot of MBS and February is the 28th month [ph]. But one of the things is that we have a table in that press release that shows the earning assets with the Fed [ph], so that's deposits with banks [ph], and in Q4 that was $190 million. And we hope to Q1 with that being basically less than $25 million. So that by itself will add 4 or 5 basis points for margin. So that's a function of the prepayments. And so we think Q1 will be better than Q4. And then if we do something in terms of prepaying some additional structured repos early in Q2, we should finally hit 2.4% by Q2. But I've been trying to get there for two years, so I don't want to be too confident. Lana Chan – BMO Capital Markets: Okay. Thanks, Heng.

Okay.

Your next question comes -- is a follow-up from the line of Brett Rabatin, representing Sterne Agee. Brett Rabatin – Sterne Agee: Yes, hi. I just wanted to follow up on the loan growth this year, and you discontinued the mortgage product. I just want to make sure I wasn't missing anything around your think about mortgage and QM and the implications on that, and just it sounds like most of the growth this year is going to be commercial and CRE. I just want to make sure I had that -- I had it right.

Brett, you're correct. We just don't see that much growth in our single-family mortgages this year. And we feel -- we believe that the slack can be taken up by the resurgence of CRE and especially construction loans. So we are still projecting about 7%. Brett Rabatin – Sterne Agee: And remind me what you guys are in doing [ph] again on construction presently in terms of spec versus pre-sold and what kind of development you're mostly getting into.

It's a mixture of products. I think residential is one area that we're doing quite a bit of it, construction of -- currently hotel is pretty much in demand. And then the rest of it would be some shopping centers. Brett Rabatin – Sterne Agee: Okay. Great. Thank you.

Thank you.

Thank you.

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

Well, thank you again for joining us for this session of webcast and we'd come back and talk to you again after our first quarter earnings is released. Thank you.

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