Cathay General Bancorp (CATY) Q1 2016 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's First Quarter 2016 Earnings Conference Call. My name is Letif [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.

Thank you, Letif [ph], 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, 2015, 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 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 first 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 Chairman of the Board and CEO, Mr. Dunson Cheng.

Thank you, Monica, and good afternoon. Welcome to our 2016 first quarter earnings conference call. This afternoon we reported net income of $46.2 million for the first quarter of 2016, a 28.3% increase when compared to a net income of $36 million for the first quarter of 2015. Diluted earnings per share increased 26.7% to $0.57 per share for the first quarter of 2016, compared to $0.45 per share for the same quarter a year ago. In the first quarter 2016, our total loans grew $200 million to $10.4 billion, for an increase of 8% on an annualized basis. The increases in loans for the first quarter of 2016 resulted primarily from commercial and residential mortgage loans, which grew by $144 million or 12% annualized, and $111 million or 24% annualized, respectively. Construction loans grew by $12 million or 12% annualized. Commercial loans decreased by $66 million or 12% annualized, due in part to the payoff of a $30 million loan to a Chinese bank. The decline was also due to the reduction of three finance loans as customer collections were used to pay down outstanding. We expect loan growth to be in the 7% to 8% range for the full year of 2016. For the first quarter 2016, our total deposits decreased $185 million or 1.8% to $10.3 billion, due to the runoff of $188 million of brokered deposits. On the other hand, our core deposits grew $140 million or 5.7% annualized. In the first quarter we continued to repurchase our shares and repurchase 2 million shares at an average price of $27.03. In February 2016, we completed the repurchase of the remaining 633,250 shares under our August 2015 buyback authorization. In February 2016, we adopted a new stock repurchase program to repurchase up to 45 million of common stock. We have 7.5 million remaining under our February 2016 buyback authorization. We expect to buy back some stock from time to time in the public market based on our capital level 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 first quarter 2016 financials in much more detail.

Thank you, Dunson, and good afternoon everyone. For the first quarter, we announced net income of $46.2 million or $0.57 per share. Our net interest margin was 3.42% in the first quarter of 2016 as compared to 3.41% in the first quarter 2015 and 3.30% for the fourth quarter of 2015. In the first quarter of 2016, interest recoveries and prepayment penalties added 9 basis points to the net interest margin, compared to 5 basis points for the fourth quarter of 2015 and 4 basis points for the first quarter of 2015. The net interest margin for the first quarter of 2016 also increased by 4 basis points, because of lower interest-bearing deposits at the Federal Reserve Bank and is -- and as a result of the decrease in broker deposits as mentioned before. Non-interest income during the first quarter of 2016 was $7.5 million. Non-interest expense increased by $7.5 million or 16.9% to $51.6 million in the first quarter of 2016 as compared to $44.1 million in the same quarter a year ago. The increase was mainly due to a $2.4 million adjustment for the actual awards for 2015 performance, 310,000 in signing bonuses and 500,000 in additional bonus accruals for 2016, reflecting the stronger-than-plan results for the first quarter, a $1 million increase in professional service expenses, and a $1.2 million addition for the reserve for off-balance-sheet commitments which resulted from a refinement of the reserving methodology. A gain of $1.6 million was recorded in the first quarter of 2016 as a result of the sale of a low income housing property. The amortization of alternative energy investments was only $1.2 million during the first quarter of 2016. In March 2016, we made a new investment of $35 million in another -- in an alternative energy fund. For the full year of 2016, we expect amortization of alternative energy funds of approximately $25 million, of which approximately $15 million will be recorded in the second quarter of 2016, approximately $6 million in the third quarter, and approximately $3 million in the fourth quarter. We also expect amortization of low income housing investments of approximately $3 million a quarter during the remainder of 2016. The effective tax rate for the first quarter of 2016 was 33%, which included a $3.3 million tax charge for the write-off of deferred tax assets related to stock option awards which expired and exercised during the first quarter of 2016. We expect that the effective tax rate for the remaining three quarters of 2016 will be approximately 28%. At March 31, 2016, our tier 1 leverage capital ratio decreased 11.73%, our tier 1 risk-based capital ratio decreased to 13.67%, and our total risk-based capital ratio decreased to 14.93% as compared to December 31, 2015. All ratios significantly exceeded well-capitalized minimum ratios under all the regulatory guidelines. At March 31, 2016, our common equity tier 1 capital ratio was 12.6%. Net recoveries for the first quarter of 2016 were $6.1 million or 0.6% of average loans, due mainly to the recovery that resulted from a sale of a property in Northern California that secured a construction loan. Net charge-offs were $333,000 in the first quarter of 2015 and $8.1 million in the fourth quarter of 2015. Our gross loan loss recoveries during the first quarter of 2016 was $8.4 million and our gross charge-offs were $2.3 million. Our loan loss reversal was $10.5 million for the first quarter of 2016, compared to $5 million for the first quarter of 2015 and $3 million for the fourth quarter of 2015. Our non-accrual loans decreased by 14.4% or $7.5 million during the first quarter to $44.6 million or 0.43% of period-end loans, as compared to the fourth quarter of 2015.

Thank you, Heng. We will now proceed to the Q&A 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 Aaron Deer of Sandler O'Neill. Your question please. Aaron Deer - Sandler O'Neill & Partners: Good afternoon guys.

Hi, Aaron.

Hi, Aaron. Aaron Deer - Sandler O'Neill & Partners: The -- a question on the -- I guess, credit, obviously the recoveries that you had this past quarter were terrific. If you kind of look at the pipeline of potential additional recoveries, do you see much out there still that might come back to us here? And what would you expect at this point in the cycle? What would be -- what would you kind of expect the normal credit loss is in a quarter?

Well, I think we have better visibility on gross recoveries, Aaron. Over the years I mentioned we had two large potential recoveries, so this is one of a two. We have another which is like to happen, hopefully next year, in 2017. And then meanwhile, we probably, this was just a guess, we probably would see gross recoveries of a couple of million a quarter for the next couple of quarters. And then our normalized credit losses, I mean we're trying to be cautious and limit our exposure to certain categories so that if the economy slows we would not have large, you know, excessive charge-offs. So we don't -- other than that, we really don't have a crystal ball as to what the right number is. But I mean, right now this is as good as it gets. Aaron Deer - Sandler O'Neill & Partners: Sure. And then of course you gave some good guidance with respect to what you guys have been doing on the energy tax credits and such. I'm curious, do you expect the alternative energy credits to be available again in 2017 at this point or is there anything that would cause that to disappear?

Yeah, we, you know, the Federal tax code was changed so that 30% credit doesn't start to step down until, I believe, 2020. Then it steps down over two or three years. So we are -- we want to avoid excessive concentration in any particular developer, so we are searching for other developers for next year. But we think it's going to be constant. And then as to the pattern of the amortization, there's thousands of individual consumer systems and we don't control the rollout and this is a forecast that we got from the developer from last week as to the second quarter installations. Aaron Deer - Sandler O'Neill & Partners: Sure. Okay, that's great. Thanks for taking my questions.

Okay. Thank you.

Thank you. Your next question comes from Joe Morford of RBC Capital Markets. Your question please.

Good afternoon guys.

Hi, Joe.

I was curious how much did the Fed rate hike in December benefit your margin if at all, kind of what your current thoughts, Heng, would be on the outlook for the margin, particularly given the loan-to-deposit ratio now, you know, upwards of around 100%?

Yeah. Joe, you know, we think that 25 basis points probably added only a million dollars to our net interest income in the first quarter, that's according to our models. The good news is that, I mean, there's a lot of moving parts. We have not increased our deposit rates at all since the Fed increase, but we continue to see some pricing pressure as our higher rate CRE loans and residential mortgage loans mature. The new loans are maybe 25 basis points less than the ones that are maturing. So in the second quarter, we would expect the margin to drop by 4 or 5 basis points if the interest -- because the interest recoveries were outsized, and the interest recovery in the first quarter, related to that same recovery that I was both the charged -- the B note that was charged off as well as interest applied to principal. So anyway, the second quarter, the margin should be lower. There is the day count issue because the February was still a short month. So it's going to be less than 3.40 but hopefully not by much. And then we're trying to run a more efficient, more compact balance sheet. So we would try to keep the loan-to-deposit ratio, net loan-to-deposit ratio, right at 100%, which would help the margin a little bit.

Right. Okay, that's super helpful. Thanks, Heng. I guess the other question was, you cited the -- in your discussion several kind of unusual one-time or factors in the expenses in the first quarter. Kind of pulling that all together, any kind of run rate we should be expecting kind of going forward in the second quarter?

Yeah. Joe, this is kind of rough, but in terms of, you know, there's a $3.4 million tax hit that was one-time, and then we had -- we took -- we had $200,000 of security losses. And the interest recoveries were abnormally high, that's about $1.2 million. And then there's a lot of moving parts on the non-interest expense, but I see them as netting to $2.8 million. So that's, you know, it's a $2.4 million -- anyway, it -- so, by rough math, if you take out all those items, the Q1 adjusted EPS is still close to $0.57. And then the second quarter then will be lower because of the additional solar tax fund amortization. But for the full year we think we're going to be better than where we were before we closed the first quarter.

Right. Okay. Thanks so much, Heng.

Okay. Thank you, Joe.

Thank you. Our next question comes from Matthew Clark of Piper Jaffray. Your line is open.

Hey, good afternoon. I guess just drilling down on the comp expense a little more given all the seasonal factors in there, some signing bonuses and true-ups. Is it fair to assume we'll see some relief there in the second quarter and beyond?

Yeah. I mean, the second quarter, we think the FICO [ph] hit, because we paid our bonuses in April, would be around $900,000. But -- so that's not in the first quarter, but the normal bonus accruals would be quite a bit lower than what, you know, they will be lower by at least $2.9 million compared to Q1. So -- and then we have our annual merit increases which are roughly 4% of officer salary, that was effective on April 1. And then lastly, we did put out -- we did hire a new executive VP, Mr. Kelly Wu, from Union Bank, to try to bolster our commercial lending. So there is going to be some incremental impact from new hires in the last three quarters of 2016. But we view that as investing, so we're happy to spend that money, yeah.

Okay. And then just on the overall securities portfolio and thinking about the growth there, is it fair to assume that's largely stabilized in terms of size and maybe growth somewhat in line with the balance sheet?

No. Actually we think at these very low interest rates, we plan on thinking that by about $200 million in Q2, and then in the third quarter, towards late August, we have $50 million of structured repos, that is at a rate of 2.69%, that is going to mature. And we would just pay that off by reducing our securities portfolio. And then I know [ph] 2017 is aways off, but I mean it's eight months, but we do have $200 million of borrowings at 5%, which mature in the middle of January. And those structured repos, we would use securities to pay that off. And now that we're a little bit closer by -- for 2016, that $200 million running off will improve our margin by 13 basis points. So that's 2017.

Okay, that's it for me. Everything else has been asked. Thanks.

Yeah, thank you.

Thank you. Our next question comes from Lana Chan of BMO Capital Markets. Your line is open.

Hi, good afternoon.

HI.

Hi, Lana.

I had trouble hearing in the beginning with the loan growth guidance now at 7% to 8%. What -- if you're seeing a slowdown in originations in a particular area? I think I missed those comments.

Well, as in previous quarters and for the last couple of years, we've seen quite good growth in our single-family mortgages. That part of the business may experience some slowdown. And as far as C&I loans are concerned, and it's been stably flat to us. But -- and that's one of the reasons why we went out and seek help and hire Mr. Kelly Wu to come in, to expand that area of lending. And on CRE and construction loans, we have been doing quite well and we see a steady request in those two areas. But we are getting a little bit more selective because to us the economy, looking down to the coming six months, it's a little bit blurry to us, so we want to be more selective and a little bit more prudent in growing that piece of business. But all in all, overall, we feel good that we can achieve 7% to 8% loan growth for the rest of the year and maybe a little bit better. And our pipeline is still solid. But because of the more defensive outlook that we have, we just want to make sure that, if economy is not doing quite well in the next few months, the Bank will not be hurt in any large extent. So I think that's our outlook, 8% is something that is achievable. /

Okay, got it. Thank you. Just one follow-up for -- in terms of the capital and capital return. You've obviously been very aggressive with returning capital to shareholders. Heng, how much capital do you -- excess capital do you feel like you've got left now?

Well, I used to say it was $200 million, and over last six months we bought back 4 million shares. So it's -- we're going to -- it's less than that. I mean we're in the midst of our DFAST efforts for 2016 and we'll have a better idea once we see the DFAST results as to how aggressive we'll deploy capital.

Lana, too, remember that we always say that the first of our capital is for growth. And so we feel that if there's opportunity out there to grow the business, we're using our capital for that purpose.

Okay. Thank you.

Thank you. Our next question comes from Juliana Balicka of KBW. Your line is open.

Good afternoon.

Hi, Juliana.

Hi. I have a couple of follow-ups to some topics that have already been raised. One, you started just talking about the corporate banking group that you're adding with Mr. Wu. One, in terms of Kelly and his team, have all those folks already come onboard? And therefore, will that be in your 2Q expense run rate? Or is that going to be a longer-term hiring process?

I think it's going to be a, I would say, I don't want to say longer, but I would say in a steady and planned basis. And what Mr. Wu is looking for, obviously, is to help with the commercial lending area and then there are several lines of business that we are contemplating. But we just make sure that we want to do the proper due diligence before we engage to it. But at this point in time, we are pretty optimistic that Mr. Wu would be able to help us in many areas.

Okay. And then in terms of the plans for the commercial group, have you identified specialized expertise verticals that you want to focus on? Have you set up targets for dollars of loans that you think, you know, once he and his group are ramped up, or I mean, how should we think about the impact to your loan portfolio from this incremental direction?

We have identified two areas that we want to participate and we are in the process of planning and it takes a little bit time. Nowadays what you want to do in new areas is that you want to prepare the policy statement and then will go through the risk committee, I guess, filtering, and then go to the boss. So it's going to take a little bit of time. I would say that we'll probably see the impact in the late second and third quarter.

Okay. That makes sense. And in the interim, as that gets -- as organic originations kind of get worked through in that process that you just described, should we be expecting you to participate in participations in syndications in the meantime so we might see a quicker impact to loan balances, or you're not going to be participating in syndications?

Again, depending on how soon we get everybody onboard, but there are areas in syndications that we will take a closely look at. But Kelly is a commercial and ABL [ph] lender and we have existing groups in commercial lending and in ABL [ph] lending that he will be able to make an immediate impact.

Got it. And a final question on that topic. Is Kelly's participation going to also impact deposit gathering and moving into more middle-market business deposit gathering or anything like that?

Yes. Yes, that's part of our plan.

Okay. And one more housekeeping question and I'll step back. In terms of, to follow up on Lana's question on the excess capital, you still have, said something like 7 million left in your exiting authorization. Once you run out of that, do you plan to renew that or are you going to have to wait until after DFAST before you renew any new buyback authorization?

Yeah. I think DFAST -- this is Heng Chen -- we probably would do something again in August, which is when we started our -- which is when we resume our buyback. I think based on the work so far on DFAST, we don't think that DFAST results are going to be much different than the prior year than our public disclosures. So -- but, you know, we also look at our stock price too. So we rather be patient than to get ahead of ourselves.

Got it. Okay, thank you very much.

Well, congratulations -- or good luck in your retirement.

Same here, Juliana. We'll miss you.

We will miss your questions.

You always have the last say.

Well, thank you very much. I am looking forward to sailing off into the sunset. It's been a pleasure.

Please keep -- please stay in touch.

Most certainly.

At this time there are no questions in the 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 for joining us for this call and we look forward to talking with you again at our next quarterly earnings release date.

Thank you.

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