Cathay General Bancorp (CATY) 2002 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the GBC Bancorp's first quarter conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question & answer session and instructions will follow at that time. If any one should require assistance during the conference, please press '*', then '0' on your touchtone telephone. If anyone wants to disconnect and needs to rejoin, please dial 1-800-297-9150, again the number is 1-800-297-9150. I would now like to introduce your host for today's conference Miss. Rose Anunciacion of FRB Weber Shandwick. Miss. Anunciacion, you may begin your conference.

Thank you, operator. Good morning everyone and thank you for joining us to discuss GBC Bancorp's first quarter financial results. I would like to caution at this time that during the course of the conference call, management may make projections or other forward-looking statements regarding the events or future financial performance of the company within the meaning of the Safe-Harbor provision of the Private Securities Litigation Reform Act of 1995. We wish to caution you that these forward-looking statements may differ materially form actual results due to a number or risks and uncertainties. For more detailed description of the factors that affect the company's operating results, we refer you to our filings with the Securities & Exchange Commission. Now, I would like to turn the call over to Peter Wu, President and Chief Executive Officer of GBC Bancorp.

Thank you Rose. Good morning ladies and gentlemen. Thank you for joining us today. With me here today are our Chairman, Mr. Li-Pei Wu and our Chief Financial Officer, Mr. Peter Lowe. Since our recent press release, we understand that there is lot of concern on the office [audit/policy] of GBC Bancorp. Therefore, I want to take a few minutes to highlight our progress in the first quarter and we have more time for question and answers. First, I would like to direct your attention to the following positive developments of our bank. First, our core deposit growth. During the first quarter of 2002, our deposits have increased from $1.83 billion to $1.96 billion.

The $127 million increase all from core deposits. We are proud that our hardworking employees and our past 21 branch [history] enabled us to achieve strong growth in the first quarter. We remain confident about continuing depositor growth throughout the year. Second, regarding our geographic expansion, the acquisition of Liberty Bank in Boston has been successfully completed in the first quarter. These have [_____] two branches in the East Coast. We have 32 million depositors and 22 million loan. We agree that there are already [_____] in our niche market of real estate, [contracting] and traditional commercial lending in the Greater Boston area. Third, our net interest income. Our net interest income of $24 million is 14.3% higher than the $21 million of the same quarter last year. This is accomplished due to further increase of earning assets. And the front [up track] activity by borrowing from Federal Home Loan bank. Fourth, regarding our forecast for 2002, we now expect to earn $2.27 diluted EPS in 2002, with the first quarter loss of $0.25 per share that means we have to earn $2.52 for the next three quarters. Based on what see today on the trend of growth in the loans and deposits, we believe it is achievable with the assumption of $4.5 million of loan loss reserve every quarter. Our efficiency ratio in the first quarter is 32.9%. Again, we are able to control our expense while we are investing in some infrastructure for future growth. With the above being said, we are confident that once we overcome the pressure problems, the bank [_____]. With that, I will now open the call for questions.

I think the format that we would like to use, Rose, is rather than having any comments on the credit situation rather than to react to specific questions on the press release.

This is Li-Pei Wu. I am here mainly to respond to any questions concerning the creditor portfolio. _____] questions I might as well get right to the point to explain that two credit issue, $27 million issue, the hindsight that we should not have done it. But let me explain why we did it.

Ladies and gentlemen, if you have a question at this time, please press the '1' key on your touchtone telephone. If your question has been answered or if you wish to remove yourself from the queue, please press the pound key.

Our first question comes from [Brad Robertson] of Midwest Research.

BRAD ROBERTSON]: Good morning. Question regarding how you are going to go forward from here, obviously, you may make a larger loans so your business is somewhat more [_____] pressure on the credit side. Do you change anything from here, do you make smaller loans at more loan over side, or can you give us any guidance on what you might do differently in the future?

Let me address this question. My name is Li-Pei Wu; I am Chairman of the Board. Perhaps, I should address the concerns already expressed by many people with regard to the two credits, which over time becomes a bad credit, a proven credit. In hindsight, all we have to do, we should not have done that, but let me first explain what is behind these two credits. These are two credits to Metal companies Importer-Exporter [or mixed] companies combined at least $27 million. One was organized in 1989 and another was organized in 1990, so they are very seasoned. We started to finance the larger one, i.e., $20 million in total four years ago. And then during first four years, that company's net worth increased three times from $27 million to $67 million and their earning had been growing very rapidly. They did have major international accounting firm as their auditor. Infact, the latest certified audited statement was certified on February 28th for the last year and that shows very good profit. Our financing of [_____].

So based on that we shared joint force with a few major banks did it and the problem occurs so sudden, that only during last one month or so, we started to hear that they are not paying. You will find these two credits as of now, they are still current, but we put into normal accrual anyway. So, these are such a sudden so I don't have the best explanation as to why this is happening and whether the recovery is, how much is the recovery or so forth. We are joining force with all other banks having an auditor getting into the company. So, that is as much I can explain about these two companies. The other [familiar] companies are having the same pattern; very good profitability, have good auditing results, and so forth. And those are attribution two creditors issue. You asked about how we are going to do with our loan portfolio and I assume you are concern about we having other credit which are similar in nature, which are joining force with other major banks and I would like to direct your attention to the portion which headed core financial condition and in that section we have described a number of larger credits which we have shared the credit with other institutions and I would try to address those. If you look at [headed] from the third paragraph, we think commercial loans and in that paragraph we consider that remaining credits, which are almost similar to the tool, we had problems. Our tool as a credit $5 million each because though the two credits are all very large and we share with major banks and so a total of $10 million. They are all performing as agreed at this point in time. However, because of pricing, we are getting out from one of them. Perhaps some time next week or next month, we would get out from one of those two.

Then you have [_____] of credit of $20 million, which is to the most profitable, most prestigious [________] public company; they have a U.S. subsidiary [_____] in U.S. So we share with major banks $420 million of [combined amount] of credit. This credit is standby [very higher] on June 28th this year and we understand that a major bank in Taiwan and a major US bank branch in Taiwan is putting a new proposal together which we don't intend to participate. As a result, by June 28th, this $20 million standby credit would have been out from our portfolio. Then you have the third category; those are our traditional niche market. We finance that is $50 million to three credits which are all in our niche market, are all seasoned for longtime, but because these companies grow to the point, we feel it's better to participate with other banks. So, we are the leading banks and we share some of the credit with others. So, these are very seasoned and performing well at this point in time. So, these are three credits of such nature, all with our niche market, I am in the international trading business and [_____] in the traditional markets of [immigrant county Chinese immigrants] market. That's what I meant. Then there is another credit, which has $22 million exposure and we share it with a major financial institution we participate with them for 30% of that and so we have $22 million. Then there is another category, which is in California. In recent years, there are many Indian casinos become very profitable and during past two years or so, we have gradually participated in their expansion programs. They constructed their permanent facility and we participated or we committed $43 million and right now they are $32 million outstanding. This is kind of construction [_____] and they are performing as agreed and these Indian casinos, their profitability has not, in general has not declined because of the [community] driven. So they are very profitable and they are able to pay us off from their cash generation during these several years is very short-term loan, none of them over five months. So these are our credits, which we joint force with each others and we are certain that it will continue to lead and if our customers become so weak we cannot completely finance them, then we will continue to seek some other financial institution to joint force with us. So this portion we would continue. As far as joint force with major banks rely on major banks' credit analysis and then we will be very hesitating in the future and if any the amount would be substantially reduced. So, we would put more force and more lending force into our own niche market try to expand our credit; so that is what we intend to do. Thank you.

Again, ladies and gentlemen if you have a question at this time, please press the '1' key on your touchtone telephone.

Good morning. Sorry, that I have joined this call late so please in [advance] some questions have already been answered. I got several e-mails last night regarding your earnings release and I may have, in fact, read the wrong one. Did I read this thing right that in the same quarter that you funded $5 million worth of loan you charged it off. I was wondering what happened there that, if that's true, the loan you just said the underwriting could have been so?

The number says that we funded $5 million in the charge on the same quarter. We did have a $5.4 million that as charge off, which was disclosed in both preliminary and yesterday's press release. That one we charged off during the first quarter, but this loan was made a few years back and became problem credit about two years ago and we provided around half of that and finally last month, we attended a meeting with other major bank's trustee and after the meeting, we decided that the timing and amount of the recovery is uncertain at this point. So, we decided to charge off all that's during the first quarter of this year.

I believed what Charlotte is referring to is, as we described in the last quarter's press release, there was a letter of credit that was granted at the time the loan was made and we had honored that letter of credit, withdrawn that letter of credit in the first quarter, but the granting of letter of credit was done at the time that the loan was made. The letter of credit was issued in the first quarter and then Mr. Wu has already commented on the review of the whole facility, but we were legally obliged to honor that letter of credit.

The letter of credit was granted several years ago. Somebody] of credit to a manufacturing facility and when this company got into trouble then last quarter they pushed that is upgraded back to us. So, we had to pay for what we have committed many years ago and also we paid, we charged off.

Well, within a week, that if all this gone on, I mean [just] had to be material address change, I mean legal or not legal you got material address change why would you ever fund something when you got such a clear and irrefutable and significant address change?

Well, obviously, the bank uses the advice of counsel in this bankruptcy situation and the advice of counsel was that we were legally obliged to fund the letter of credit, we would not have it as we have a legal right to do otherwise.

The details of some of the loans especially the $43 million casino loans, [should] for Indian casinos, and I guess you have extended $32 million on that. Are these casinos actually on reservations or they?

They are all in the reservation and all owned by Indian tribes. In one case, they have major company run for them, but they are all owned by Indian tribes.

And the reason that you are detailing these now is?

We thought that many of the investors might be concerned that how much of the credit we are doing outside of our traditional niche market. So, we took upon ourselves to show all those involving as institutions and appears to be outside of our niche market.

I certainly agree with that essentially since especially after the misadventure with the Sunrise Casino in Vegas. I guess my major concern is, how you perfected the lean on this, and Indian reservations are almost like foreign countries in terms of the ability of U.S. companies to do kind of normal things there. How is the lean perfected?

As far as the legal right is concerned, this credit, as I explained earlier, we are participants to major financial institutions. So, we are not the ones who did this. We joint force with other major top U.S. banks, so I assume, they know what they are doing and we have our attorney who reviewed the documentation and feel comfortable with it. So, that's all I can say. There's no lean to the property, but the Indians, as I understand they did waive their rights as a nation. And so this is a sort of how we can deal an issue. We realized legal advice from the leading banks and also from our own attorney.

So, as I understand Mr. Wu, there is no lean on the properties, these are unsecured loans?

These are not totally unsecured loan, but there is not lean on the property itself, they are reserved, it's where a company gets it's [_____] from their earnings they have to reserve money for disowning accounts for payments and unless they exceeded certain amount they cannot distribute and so there are many lease towards their machines and towards their earning power, but not real estate loans. If you consider this real estate loan, I am sorry, no.

Okay. Final question, what's the trend in your classified assets in the sense of the trends of.............portion of your loans that have gone from [half] to special mention and then special mention to lower categories? Can you just kind of give us some color on what's happened with that over the last quarter or so?

Okay. This is Peter Wu. Based on our first quarter 2002 compared with the fourth quarter of 2001, in fact, we increased about $6 million in the [subtended] categories and [_____] is $20 million and $7 million and all the other about the same and our special mention stays about the same and for the $6 million increase in [subtended] one is [contracting] real estate loan secured by the properties that's about $4 million and all the other small loans and we believe all these especially for real estate loans is only 65% [_____] ratio. So, in turn, we don't see the deterioration of our credit except all in a sudden we have $27 million [non-capital].

Okay.

Also I wanted to add that if you look at our loan loss reserves, we provide $18.5 million loan loss reserves and for this $27 million of [_____] earlier we mentioned about schedule 5.4 this tool amounts to $17.7 million so for all the other loans we provide $800,000 loan loss reserve after careful review.

Okay. And that the regulators were supposed to be doing in Spring, have they arrived [yet] for the annual exams?

PETER WU]: No, they have not.

Have they kind of shown any indication of when they might arrive?

PETER WU]: No.

Okay. All right. Thanks.

Once again, ladies and gentlemen, if you have a question at this time, please press the '1' key on your touchtone telephone. Our next question comes from Steve Didion of Hoefer & Arnett.

Good morning. It sounds like most of the loans you were describing, most of what's found on current non-performing is relatively seasoned and I guess, number one, is that right? And number two, have you made changes very recently in the way you are underwriting and what your are underwriting that would give us a level of confidence in the reduction in future losses?

You are right, on the first question that it's already indicated that we are not feeling at this point in time [and] new problem created other than those we have disclosed. Then as far as strengthening of underwriting criteria is ongoing effort every time you learn something new and strengthened, then in addition that we intend to have some outside people come in and take a hard look as to whether we miss something and if we do miss something, we would use that their recommendation to further strengthen our underwriting criteria.

I know Mr. Wu you have had a long career there and you are very knowledgeable about the competitor banks. Of course, if you can talk a little bit about the lending culture at General Bank compared, may be shed some light on why the non-performing loan ratios are so much higher at General Bank than lets say at [Cathay], in particular because it's more matured, but also United Commercial Bank and East-West Bank?

Well, I can only comment based on our own and guessing what they are doing rather than having insider information from other banks. We all can see is the published material of other institutions. Basically,] are more business banks than those banks that you just mentioned. Such a bank is somewhat more in retail and we are more in business area, particularly that you mentioned another bank, [ECBH] am I right, yeah. They are [steer] very much a mortgage company, although these last two to three years, they are trying to do more of commercial loan. But up till now their average size of loan is very small, and our average size of loan is somewhat bigger. Most of their loans are mortgages [steer], if you look at the Form 10-K, I believe based on the Form 10-K, I learned this that they have been trying to do more commercial loans, but up to now their commercial loan portfolio is very small percentage. I forgot the exact 17% or 7% very low percentage of their total portfolio. So being a commercial banker and taking larger credit risk, we would be more subject to fluctuation of loan, problem loans, because of one credit sometimes account for a lot and if you go back a few years back, in fact, we didn't have any loan losses until year 2001. Very few loan losses niche [_____] between 1996 to 2000, the five-year period. And 2000 increased somewhat and 2001 increased and in 2002, now first quarter we had this big one. So we are from time-to-time a big one come up and unfortunately being a commercial bank since like that happens, as I have said earlier, these two credits even now I am still puzzled. I don't know exactly what happened; so we are looking into what happened and what we can do to mitigate the problem. So, being a commercial bank sometimes for many years you don't have loan losses and sometimes you pep up one or two big ones. Last year, there were two larger credits accounting for $10 million of the loss. And if you add that to the one we charged off recently that another credit we became doubtful last year so the three credits accounting for $14 million out of about $17 million of total loan loss in last year. These three provided for more than $14 million, about $15 million, out of $20 million. This happens.

Okay and there's one last question I think this would be more directed to Pete Lowe. I have been through this fact carefully, but the earning power charge that you put in the release, you added back a 100% of the provision for credit losses. Is that right?

Right. On the theory is to do [_____] total take out their provision as everyone has a different view on how to ProForma that and so the thought was that to take it entirely out and then show what the growth of the pre-provision resulted. I would have done it pre-tax, but last year because of 133, we have that accounting change that we have to put in and have to be on an aftertax basis by the accounting rule. So it makes for a more confusing presentation than we would have otherwise liked, but the concept is to show the growth of the pre-provision and pre-tax core of the company.

This is similar concept as we have presented between 1994-1995. Our bank had very heavy loan loss in 1994 and 1995, mainly at that point in time, real estate and loan losses associated with recession in Southern California. Also we had used these four months to show our investor just assuming that if we did have this kind of heavy loan loss, then what kind of earning power and what kind of earning loss we are having. Obviously, we are not trying to tell you that no we don't have a loan loss that's not what we trying to tell you.

Right. Let me just ask one follow-up and I will leave you alone. The $2.5 million in provision for credit loss that you have guided to for the next three quarters. Is that what you think will occur or is that what you think your run rate should be?

That was based on past record and a look at present [forty] of asset but, obviously we cannot predict anything, which we don't. For example, this $27 million, which obviously is totally not expected, and this $27 million, we already provided $13.5 million and yet we might have recovery and we might have to charge on more. So, those are not [the] consideration. We based our loan loss and the current portfolio; we believe it should be sufficient. For example the first quarter it ended only $800,000 with a normal loas loss situation. So, if you say it's feasible, it is feasible. I have to admit that, but outside strong [anything] totally unexpected and unfortunately, you have this is kind of unexpected and I have to admit that the assumption. I am personally very surprised, bu from what can see, outside from situation like this it should be sufficient and more than sufficient.

Okay. Thanks for your time.

Thank you.

Thank you.

Our next question comes from [Peter Corlene] of Berstein Investment Research & Management.

PETER CORLENE]: Hi guys. Can you just talk about the strategy of borrowings to buy securities, also what securities you are buying and I notice you only bought back about 2000 share in the quarter, talk about the decision between levering up that way versus buying back stock?

Okay, this is Peter Lowe. What we have been buying agency issues securities and we basically are, obviously, using the spread between the yield on the security and what we have to take for the incremental borrowings and we basically were trying to optimize our return on equity. That's what we are trying to do as you suggest, there really we can use that and buyback shares, that's one alternative. We viewed in the first quarter that the opportunity that the yield-curve presented us and the securities that were available which were obviously credit risk-free that seemed to us was the best decision to implement in the first quarter and with the continuation of the strategy that we were doing really heavily since the third quarter, we started increasing significantly that strategy.

PETER CORLENE]: How do that impact your interest rate's sensitivity going forward assuming the yield-curve flattens and how do you do that - do you do a financial analysis versus buying back your stock in terms of accretion?

They are not mutually exclusive in the context that the capital ratios still well above the well-capitalized requirements so we never looked at it that way. We look at doing the arbitrage program and then we make a decision with respect to the stock repurchased, really it's separate decision. We have not used them as this being in conflict with each other.

PETER CORLENE]: Okay and how do that impact your interest rate sensitivity?

There certainly is some increase in the interest sensitivity and that securities that we are buying are not bullous and therefore, there is not an exact matching of what their final principal repayment schedule is going to be, vis-à-vis, the underlying borrowing on the other hand, we modeled that carefully on Bloomberg and we look at that in the context that the whole simulation of the balance sheet and basically management has concluded that the incremental risk we are taking with the arbitrage program is very acceptable in the context that the overall sensitivity of the balance sheet.

PETER CORLENE]: Why did you only buyback 3000 shares in the quarter and what are your plans for the future?

You know that's a decision that management makes really on an ad-hoc. We take a look at the market and make decisions with respect to how active we are going to be in the stock repurchase.

PETER CORLENE]: Can you talk about why your Q1 declined dramatically? Q1 average].

That's not risk [weighted], so the balance sheet will grows from the end of the year to March 31st was fairly significant, and of course, we reported a loss, so the equity went down.

PETER CORLENE]: So that's the only reason, right?

Yeah.

PETER CORLENE]: Okay. Thanks.

Again, ladies and gentlemen, if you have a question at this time, please press the '1' key on your touchtone telephone. One moment for our next question.

At this time, it appears that we have no further question.

Thank you very much for all the participants and obviously we are welcome to answer any further questions, if they arise.

Thank you very much for joining us today. Thank you.

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