CATY
#Thank you, <UNK>, and good afternoon, everyone.
Welcome to our 2015 second-quarter earnings conference call.
This afternoon, we reported net income of $45.2 million for the second quarter of 2015, a 28.8% increase when compared to a net income of $35.1 million for the second quarter of 2014.
Diluted earnings per share increased 27.3% to $0.56 for second quarter of 2015, compared to $0.44 per share for the same quarter a year ago.
In the second quarter 2015, we had [started] loan growth of $277 million, representing a 12% on an annualized basis.
This brings our June 30, 2015 total loan balance to $9.5 billion.
The driver of the increase came from CRE loans, which increased by $186 million, while residential mortgages grew by $113 million, and construction loans by $25 million.
For the six months ended June 30, 2015, our loans increased $588 million, or 13.2% annualized, compared to an increase of $481 million, or 11.9% annualized, for the six months ended June 30, 2014.
We continue to see our loan growth in 2015 in the range of at least 10%.
For the second quarter of 2015, our total deposits increased $226 million to $9.3 billion.
This represents an increase of 2.5% quarter-over-quarter, or 10% of an annualized basis.
Our core deposits increased by $220 million, or 8.6% on an annual basis from December 31, 2014.
In January, we announced a signing of the merger agreement with Asia Bancshares.
We have received all required bank regulatory approvals, and on July 17, Asia Bancshares' shareholders approved the merger with Cathay.
The closing is scheduled for July 31, 2015.
We are looking forward to a completion of the merger.
We expect a smooth integration of the two banks, with the retention of key officers and business to be high.
The merger will further strengthen our Hong Kong presence ---+ New York presence, having a total of 12 branches in the city.
It will also open a new market for us near Washington DC.
On June 26, we released summary results of our 2015 Dodd-Frank Act stress testing.
Under this hypothetical severely adverse economic scenario, the minimum common equity Tier 1 ratio is projected to be 11.5%.
The minimum Tier 1 risk-based ratio is projected to be 12.6%.
The minimum total risk-based capital ratio is projected to be 13.9%.
The minimum Tier 1 leverage ratio is projected to be 10.7%.
The complete summary is available on our Company website.
We are pleased to note that under the hypothetical severely adverse economic scenario, all our projected capital ratios significantly exceed the regulatory minimums for adequately capitalized financial institutions.
They will serve to support our Company's crucial growth and our strong dividend policy.
With that, I will turn the floor over to our Executive Vice President and CFO <UNK> <UNK> to discuss the second-quarter results in more detail.
Thank you, <UNK>, and good afternoon, everyone.
For the second quarter, we announced net income of $45.2 million, or $0.56 per share.
Our net interest margin was 3.51% in the second quarter of 2015, compared to 3.41% in the first quarter of 2015, and 3.37% for the second quarter of 2014.
In the second quarter 2015, interest recoveries and prepayment penalties added 9 basis points to the net interest margin versus 4 basis points in the first quarter of 2015.
We also received a special dividend from the Federal Home Loan Bank, which increased the net interest margin by 4 basis points in the second quarter.
Non-interest income during the second quarter 2015 was $9 million, excluding $3.3 million of net security losses.
Non-interest expense increased by $5.1 million, or 11.9%, to $47.6 million in the second quarter of 2015, compared to $42.5 million in the same quarter a year ago.
The increase was mainly due to a $4.5 million increase in amortization of investments in affordable housing and alternative energy partnerships, a $1.1 million in the amount of employee salaries and benefits expense, and a $1 million increase in professional services expense, partially offset by a $1.4 million decrease in OREO expense in the second quarter of 2015.
We expect amortization of alternative energy partnerships to increase from $3 million in the second quarter to between $11 million and $12 million a quarter in the second half of 2015.
The conversion of Asia Bank to Cathay's data processing system is scheduled for August 24.
We expect to incur approximately $2.5 million in merger and integration charges during the third quarter.
Asia Bank's loans at March 31, 2015 were $423 million, with an average yield of 5.26%, and deposits were $442 million.
We expect to issue approximately 2.6 million shares for the acquisition of Asia Bancshares based on the expected final stock/cash mix of 55% stock and 45% cash.
The effective tax rate for the second quarter of 2015 was 17.7%, which includes a catch-up adjustment to reflect the lower effective tax rate for the full year 2015, resulting from the investment in the Renewable Energy Tax Credit Fund in early April.
As a result of the investment in the Renewable Energy Tax Fund, we expect our effective tax rate for the full year 2015 will be around 27.7%.
At June 30, 2015, our Tier 1 leverage capital ratio remained flat at 12.99%, our Tier 1 risk-based capital ratio decreased to 14.53% and our total risk-based capital ratio decreased to 15.81% as compared to December 31, 2014.
Our ratios significantly exceeded well-capitalized minimum ratios under all the regulatory guidelines.
At June 30, 2015, our common equity Tier 1 capital ratio was 13.39%.
Net charge-offs for the second quarter of 2015 were $0.5 million, compared to net charge-offs of $331,000 in the first quarter of 2015 and net recoveries of $3.7 million in the same quarter a year ago.
Our gross loan loss recoveries during the second quarter of 2015 were $2.2 million and our gross charge-offs were $2.7 million.
Our loan loss reversal was $2.2 million for the second quarter of 2015 compared to $5 million for the first quarter of 2015 and $3.7 million for the second quarter of 2014.
Our nonaccrual loans decreased by 17.8%, or $14.3 million, during the second quarter to $66.1 million, or 0.7% of period-end loans as compared to the first quarter of 2015.
Thank you, <UNK>.
We will now proceed to the question-and-answer portion of the call.
Aaron, this is <UNK> <UNK>.
We had a couple of promotions in the first half of the year, which had limited success.
They focused mainly on just business accounts and things like that, but we have ---+ starting in July, we will be running a two-month CD promotion, and so far in just 10 days, it's generating quite a bit of new funds.
So we are paying for two-year money 1.3%, and then one year, I believe, is about 1%.
So right now our loan-to-deposit ratio with that promotion is closer to 99%, whereas we historically have been at 100% loan-to-deposit ratio.
So once again, we have another eight weeks or six weeks to go on this special CD promotion, and we would expect to, if we get strong demand, we'll let the loan-to-deposit ratio drift down.
And then on the margin, Asia Bank should at about 2 basis points to our margin.
Their loan yield is 5.26% and then they only have about $4 million in securities, and then their deposit costs are similar to us.
They actually have a higher proportion of checking accounts than we do.
So once again Asia will add a couple basis points to the margin and then we were buying 15-year MBS, particularly in late May and June, so we'll get the full-quarter impact of that.
So I've stopped giving guidance on the NIM itself, but I'm optimistic.
C&I balance.
C&I, yes.
We had a couple large payoffs---+
C&I loans, I have to admit is a little bit difficult to increase and originate in the second quarter.
In the second quarter, we looked at our payoffs and it's a little more substantial than the first quarter, and as <UNK> mentioned, a couple of loans being paid off.
My expectation is that C&I loans continue to be sluggish and there are several reasons for that.
One is that new business formation is very hard to come by and roughly 60% of our portfolio is [25] related.
You might be aware or might have heard about this before, that China export has slowed down about 10% in the second quarter.
That has a little bit to do with that.
On the other hand, I have seen some projections that in the second half of the year, exports should pick up a little bit in China, [because] the holiday season is at the end of the year.
So hopefully the third and fourth quarters, we'll see more increases in C&I loans, but overall C&I loans are very sluggish
Yes.
It's between $11 million to $12 million per quarter.
We're still funding ---+ it takes five months to fund into this particular investment so we don't have the final numbers.
We don't know till September and then we'll update our amortization, but this is the ballpark.
Meanwhile, that higher amortization continues to be offset by the 27.7% effective tax rate so it's a very similar situation than one of our competitors announced last week, where they have a timing issue as well on the amortization
It was about [$1.1 million].
Probably.
We're thinking without giving ---+ well ---+
Let's say, that, as we mentioned, that our capital ratios are very strong and the earnings are coming in as expected, so there's room for improvement
Certainly over the 30%, and we know some of the banks in Southern California, they are paying 50%, say even 60% of current year's earnings.
So if our stock ---+ depending on where our stock price is, we'll do a mix of both stock buyback as well as higher dividend increases.
It's something we'll look at in the third quarter, starting in the third quarter.
<UNK>, I get the rate lock report every Friday, and we're rate locking between $15 million and $20 million a week, and so it's a very strong pipeline.
We seem to have found a niche where our loans to non-US resident borrowers, as well as investments loans for investment property, that's proven to be very popular.
There's been a fair amount of payoffs, as well, but in terms of the rate of payoffs, it's less than conforming mortgage because almost our whole portfolio is made up of Chinese borrowers and so many of the loans are not conforming loans.
So we would ---+ our goal is we want to continue to increase the mix of our loans from residential mortgage.
Back in the second quarter last year, we stopped originating 30-year fixed-rate mortgages.
The bulk of our new mortgages are either 5-1 ARMs or 15-year mortgages, fixed-rate mortgages.
So we feel very comfortable with continuing to grow those, and now with the interest rates going up in the last six weeks, we're getting very low pressure on new originations in terms of lowering our overall portfolio yield for residential mortgage.
<UNK>, this is <UNK> <UNK>.
Our guidance is at least 10% growth for the rest of the year.
And that is because there is a lot of volatility in the market and it's really difficult to make a very blanket statement that it's going to be 13% or 12%.
At least 10% is something that we are comfortable with.
<UNK>, this is <UNK> <UNK>.
Our first preference is we want to buy back shares that were issued through stock option exercises.
So that's not that ---+ not that we can find those exact shares out in the market but in terms of dollar amount.
And then we would ---+ for Asia, originally it was targeted to be 55% cash, 45% stock deal, but because our stock prices traded above the collar, the Asia shareholders are mainly electing stock.
So we're going to issue more stock than we originally thought.
So we don't have an issue with later on buying back most of those shares.
They are just 15-year, [3%]s, so they're probably right at [2.1%] or something like that.
It's higher than what our average overall portfolio would yield.
<UNK>, the pricing has been pretty stable for the last, I would say, six months or so.
And for six-, five-year loans, we are looking at somewhere around [4.5] to [4.75] and for floating typically it's between prime plus prime and one-half in the range.
With a floor, right.
But the floor is not as meaningful as before (laughter).
Above the 3.4%.
Right.
I'd be happy if we came in at 3.4%.
Yes.
It's $0.08.
Our effective tax rate will go up 1%, so if we're 27.7%, it might go up to 28.7%.
We're thinking of doing a similar amount but now that we know the accounting, it's going to be much smoother.
Because if we sign a deal, let's say, in November, all of the amortization in 2016 will be spread out through the year rather than ---+ and the tax rate will be constant in 2016.
So it's a learning process for us, but we're working on a second deal.
Yes.
Yes.
We had ---+ we look at the overall trend in net income and so because we expect to be higher than our internal budget, and therefore we would have higher bonus expense, we accrued all of that, that extra bonus, for exceeding the budget, we accrued that in the second quarter.
So we're $[1.4] million higher than our normal bonus accrual in Q2.
Then we also accrued roughly $0.5 million of integration charges for Asia, mainly for legal fees in Q2.
No.
All of the amortization is, more or less, it's in this year.
No.
It's because our pre-tax income is going to go up by a certain percentage.
So these tax credits are a fixed dollar amount.
So they're going to make up a smaller percentage of the pre-tax income
No.
We think we're in a pretty good position.
We have about $115 million of treasuries that are maturing here at the end of July and we'll probably just pay off some short-term borrowings with that.
And then we have some more in March of next year, treasuries that, since we're trying to position for higher interest rates, so we're not going to be very active in terms of buying a lot of new securities.
On the OREO gains, we have one that will generate a few million, but we don't know the timing.
It's listed for sale but it's a few million.
And then on the reserves, our reserves are still higher than most banks in Southern California, so we're okay with just having the loan growth absorb any reserve releases.
Thank you again for joining us for this call and we will look forward to talking with you at our next quarterly earnings release date.
Thank you.
