Cathay General Bancorp (CATY) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp's fourth quarter and year end 2009 financial results conference call.

My name is Melanie, and I'll be your coordinator for today.

At this time, all participants are in listen-only mode.

Following the prepared remarks there will be a question-and-answer session.

(Operator Instructions) Today's call is being recorded, and will be available shortly after 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, Ms.

Chen.

Good afternoon, everyone, and thank you for joining on our first earnings conference call.

Here to discuss Cathay General Bancorp's fourth quarter and year-end 2009 financial results today is Mr.

Dunson Cheng, our Chairman, President, and Chief Executive Officer.

Mr.

Hang Chen, our Executive Vice President, and Chief Financial Officer; and Mr.

Kim Bingham, our Executive Vice President and Chief Credit 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 detailed in the company's current report on Form 8-K filed on November 23rd, 2009, and the other reports and filings with the Securities & Exchange Commission from time to time.

We caution you not to place undue reliance on such forward-looking statements, which speaks only of the date of the 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 fourth quarter and year-end 2009 results.

To obtain a copy, please visit our website at www.CathayGeneralBancorps.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.

Good afternoon, everyone.

I wish to welcome all of you to our first-ever conference call and earnings.

With an increased number of institution investor that now own our stock, we felt that a conference call would allow us to communicate more effectively with our shareholder base.

This afternoon, Cathay General Bancorp announced that the net loss for the fourth quarter 2009 was $35.3 million, and net loss available to common shareholders was a $0.64 per share.

For the full year 2009, the net loss was $67.4 million, and the net loss available to common shareholders was a loss of $1.59.

Except for the first year of operation of the bank, 2009 was the first loss in the company's history since it was founded 48 years ago, but we are looking for an improved 2010.

Now a few highlights for the fourth quarter and the year.

Our non-accrual loans hit a peak in the selling quarter of 2009 at $383 million.

In the third quarter, they were reduced to $362 million.

In the fourth quarter, they were further reduced to $281 million as we took more aggressive action to resolve the problem loans.

We transferred about $100 million of problem loans to held for sale, and at the same while we booked an additional charge-off of $19 million to write down this loan to its fair value.

At year end, $55 million of these loans were left as held for sale, of which two loans, totaling $42 million, will be sold and recognized in February or March.

As we mentioned in the news release, included in the non-accruals of $281 million, there is one loan with an outstanding balance of $47 million that is currently in bankruptcy.

We believe that the value and the cash flow of the underlying real estate collateral is sufficient for a full collection of principal and interest over time.

Respect or resolution of this loan with a return to scheduled payments will be forthcoming in the next few months.

In addition to resolutions, the decline in non-accruals is also due to the drop of inflow.

In the second quarter, the inflow was over $200 million, and it dropped by more than 50% in the fourth quarter to about $100 million level.

Because of the loan sales and the associated write-down of $19 million, our charge-off in the fourth quarter was higher, at $69 million.

For the entire year, we charged off $222 million or 3% of our average outstanding loans.

We have also determined to increase the loan-loss ratio by providing a higher amount at $91 million into our reserve at year end.

Our loan loss reserve was $212 million or 3.07% of provision and portfolio loans.

Our provision to non-accrual loans was 75%.

However, if we exclude the $47 million loans we mentioned previously, the coverage improved to 91%.

In the fourth quarter, we also sold 10 bank-owned properties, for a total of $29.2 million.

As a result, OREO dropped 19% to $71 million.

With regard to construction loans, the total has dropped substantially.

The outstanding at year end was $626 million, a drop of 31% from $930 million at the beginning of the year.

Land loans also declined.

The outstanding at year end was $185 million, a decrease of 14% from $250 million at the beginning of the year.

The rest of our CRE portfolio is distributed among different types of products with no one segment exceeding 25%.

We have a sizable owner-user CRE loan portfolio, the outstanding at year end was $621 million.

The reason is that the bank has a large number of end customers, and they typically own their own warehouses.

In general, our CRE portfolio has held up pretty well.

The CRE non-accruals of the year were $151 million.

That is less than 3% of our CRE portfolio, or 1.67% of those loans.

The CRE charge-off for the year was $53 million, equivalent to 1.35% of CRE loans.

Despite these losses we experienced in 2009, our Tier 1 risk base capital stood at 13.6%, and total capital at 15.4%.

Both exceeded the well-capitalized minimum capital ratios by a good margin.

In October 2009, we raised $76 million of new capital of public offering.

In November we began an after market stock offering, and raised another $12 million of new capital.

We expect to continue our capital-raising efforts during February to further improve our capital ratios.

In 2009, we experienced historic growth in deposits.

Total deposit increased by 10% or $668 million.

Of these 79%, or $573 million, were in core deposits.

The growth in deposit also help us to improve our net loan to deposit ratio to 90% at year end.

With that, I'll turn the floor over to our Executive Vice President and CFO Hang Chen to discuss further the fourth quarter and year-end results.

Yes, thank you, Dunson, and good afternoon, everyone.

I just had a few short comments for the first quarter as Dunson mentioned.

We announced a net loss of $35.3 million or a loss of $0.64 per share available to common shareholders.

In terms of the net interest margin for the fourth quarter it was 2.65%, so it was the same as the third quarter of 2009.

One item I want to note is that we kept very high levels of cash on hand in the fourth quarter.

At times over $500 million or $600 million, and if we exclude the temporary liquidity that we kept on our balance sheet, that would have improved our net interest margin by 12 basis points.

And as interest rates increased during December, we invested most of this excess funds in mortgage-backed securities.

The cost of deposits improved to 1.63% in the fourth quarter, down 17 basis points from the third quarter of 2009, and the cost of funds improved to 2.35% in the fourth quarter, down 13 basis points from the third quarter 2009.

We expect that the margin in 2010 will improve over time as our time deposits continue to reprice downward.

Non-interest expenses were $52.7 million, compared to $38.8 million in the third quarter.

That was quite a jump due to higher OREO expense, primarily writedowns as a result of updated appraisals, as well as higher professional expenses during the fourth quarter.

With that, I would like to turn the call back over to Dunson.

Thank you, Hang.

We'll now proceed to the question and answer portion of the call.

Thank you.

Ladies and gentlemen, during today's question-and-answer session we ask that you limit yourself to one question and one follow-up.

If you have further questions, you may re-enter the queue.

(Operator Instructions).

And our first question comes from the line of Aaron Deer with Sandler O'Neill & Partners.

Go ahead.

Hi, good afternoon, everyone.

Oh, hi, Aaron.

I guess to begin, Dunson, it sounds like you are still going to continue with your efforts to raise capital presumably with the ATM offering.

Given the improved trends that you showed this quarter, at least with respect to your capital ratios coming up, following your efforts in the fourth quarter, and your non-performers coming down, I would expect that the market might even be more receptive to that.

Is your intent to get more aggressive with the issuance of shares, and would you consider doing just an outright capital raise as you did following your third quarter results?

Hang, please go ahead.

Aaron, I'll ask Hang to answer the question for you.

And we're going to look at our alternatives and certainly with the stock price being higher, we have more alternatives, and one of the disadvantages of the ATM program is that it takes a while to complete, so we found that out in November and December, where over 23 trading days, we only raised about $12.5 million worth of common.

So once again, we're going to look at alternatives, and there'll be more news to come.

Okay.

And then as a lot of banks have been pursuing FDIC-assisted deals.

I'm wondering what your interest or appetite would be in doing such deals, and whether you would be invited to participate given the outstanding MOU since that was issued, certainly, again, your capital metrics, and NPA levels have improved quite a bit?

Well, first, we generally don't comment on acquisition potential, and we can't comment on whether we're an approved bidder or whether we think we could be an approved bidder for an FDIC transaction.

So it's -- that's as much as we can say, Aaron.

Our next question comes from the line of Joe Morford with RBC Capital Markets.

Go ahead.

Thanks.

Good afternoon, Dunson and Hang.

Good afternoon.

I guess I'm curious about your plans for additional problem asset sales, be it on a book basis, or one off, and just talk a little bit more about kind of the values realized that you saw?

Yes, Hang.

Yes, I think first let's talk about what we did.

One, we sold two loans in the fourth quarter.

They were residential construction loans.

We sold them for $10 million, and we took the charge-offs in the third quarter, and then we sold a group of seven loans.

That closed on December 31st, to a fund.

And the charge there was about 30% discount, and then in terms of pending sales, on December 30th, we sold a $30 million non-accrual loan.

That's in New York City.

We sold that to a private individual, and given the timing of the year, the cash portion of the sale will come in in the first quarter, so for accounting purposes, even though legally a very strong individual is now the owner of that loan, we're required under GAAP to keep that loan still on our books.

And that loan the discount was fair -- relatively low, the discount on sale.

And then the last one is we have a condo loan in Northern California, which we've listed through an auction firm, and we're hopeful that we have gotten firm bids, and we're in the process of closing that transaction in February.

There we took a charge in the fourth quarter down to the bulk sale value, and the so that we didn't that we did not count in the $19.3 million of discounts.

But that one we're able to sell for just slightly under the bulk sale value.

And then lastly, we had a group of about $22 million of loans that we plan on selling, and we took about a 45% charge based on our estimate of the market.

And that last group may take a quarter or two to sell.

So generally, it's what we're finding is that if you have a unique buyer for the project or the property or the loan, you are going to get your best pricing, and in terms of how much more we'll do in the future, one of our goals is to get the loan-loss reserve to portfolio non-accruals, that coverage ratio up to 100%, so if that $47 million loan is converted to a TDR, which we hope will happen shortly, we're not that far away from that metric, and then we'll be slower to sell these loans.

I mean, we would rather do TDRs on other loans, because if you do the A-B splits, you are going to get about the same value as a sale to an outside investor, but the bank would keep the upside with the B note.

Okay.

And I guess the other follow-up question was just on the margin, Hang, can you quantify interest reversals this quarter?

No, we it was some.

It sort of offset the -- we had some interest recoveries.

The biggest one was we had a $10 million residential construction loan.

It is in the Valley, and half of the units sold in the fourth quarter, and the bar then became current as to principal and interest, so we had about $700,000 of interest recovery on that loan, but that is sort of offset by the new non-accrual.

So really nothing exceptional here in the fourth quarter.

Our next question comes from Joe Gladue with B.

Riley.

Go ahead.

Yes, I guess given the big reserve build you had in the fourth quarter.

Just wondering, what your thoughts are on how much you'll need to build that going forward?

Yes, this is Hang Chen again.

Hi, Joe.

We going back to my earlier question, I think once we get to that 100% coverage, I think we can then just go to match net charge-offs.

As part of this reserve building, when you have a lot of charge-offs, our historical migration factor forces us to build up reserves quickly, even on perfectly good loans.

So we're at 3.15%.

We see if we look at the charge-offs in the fourth quarter, and take out the $19.3 million, they are actually down a little bit from the third quarter, and we had a couple of large charge-offs that were driven by appraisals for loans that where we're working with the borrower to restructure, but the appraisals are coming in very low, and -- but we have to take -- we have to use the appraisal amount.

Okay.

All right.

Just wondering if you could give us what the 30 to 89-day delinquencies were and where that trended from the third quarter?

Yes, Joe, this is Hang Chen again.

It is up from the very low levels, at September 30th.

We are still finalizing that number and opening our call report, which we'll file shortly, but in terms of the non-accrual content, most of those are just overdue by 30 days.

Some of our borrowers were out of the country around the holidays, so the renewals couldn't be done, and so I would characterize, based on what we see is that even though the delinquencies are up, we don't see a big surge in non-accruals in the first quarter.

Our next question comes from the line of David Rochester with FBR.

Go ahead.

Hey, good evening, guys.

How are you?

Hi, Dave.

Hey, just a couple of quick questions, and I apologize if I missed this.

Did you talk about the classified asset and criticized asset trends during the quarter?

No, we don't disclose that to investors.

Okay.

Well, could you just as a follow-up, can you talk about the amount that your NPAs have been written down, either through charge-offs or reserves from the original balance.

So the $280 million portfolio, what is the mark on that?

That this is Hang Chen again.

We don't have that number for December.

I did a quick study for at September 30th, and I believe that mark was about 15%, and that's kind of distorted because about half of our loans don't have any charge-offs, like that $47 million loan that Dunston mentioned.

So if half of them don't have any charge-offs and the cumulative average charge-off is about 15%, then the half half charge-offs have been charged down by about 30%.

Our next question comes from the line of Chris Stulpin with D.A.

Davidson.

Go ahead.

Good afternoon, good evening.

Hi, Chris.

Of your TDRs, approximately how what percent or what dollar value are A-B note structures, Hang?

Yes, this is Kim Bingham.

We have not undertaken a tremendous number of them yet.

The main reason being that most of our problems up to this point have been more on construction loans and the opportunities for A-B splits are fewer.

Yes.

But we anticipate that going forward, that will be a viable strategy for us.

It's kind of hard to say where the split between the A and the B will be at this point.

It's going to depend entirely on the unique situation -- the circumstance of each situation.

Okay.

And I think Kim correct me if I'm wrong I think most of our TDRs right now are where we've given interest concession or we changed the amortization rather than try to split the --

Oh, yes.

Overwhelmingly.

A lot of them have been deferral of interest or deferral of principal rather into an interest only or a reduction in the rate and a continued amortization program.

Yes, we have one loan for about $10 million that is a restructure that I have talked about at the third quarter, where we forgave, I believe about $3 million of principal, and that loan is like an AB split, and after December 31st, if it remains current, it is not going to be recorded as a TDR in the future.

But that is about the only one out of that group of $50 million or so.

I thought you referred to the $47 million loan as a potential A-B split, so --

Well, it is a potential AB split, but we're still working through the bankruptcy court, and we're still trying to get to a final plan and the payout based on the plan will then dictate what we can do with the AB structure.

Because that particular property is stabilized and does throw off a significant amount of cash flow.

Our next question comes from the line of Brett Rabatin with Sterne Agee.

Go ahead.

Good afternoon.

Hi, Brett.

How are you, Hang?

Fine.

Fine.

Wanted to ask you were talking about the capital earlier potential raise and continuing in 2010, and just wanted to if you could any color on levels that you would like to get to from whatever ratio you want to use perspective.

And then as a follow-up just how much balance sheet shrinkage you see kind of occurring during 2010 as you, work through some old loans you would maybe like to exit?

Yes, let me, this is Hang Chen.

What we want to do is raise enough capital to cover our losses, since the third quarter, and then have a little bit of cushion to take care of opportunities.

So that sort of gives you a ballpark of how much capital we're seeking to raise.

And then in terms of loan demand, we continue to see, there continues to be, a fairly good paydown on some of the categories.

So, for example, residential construction was $414 million at the end of 2008.

At the end of the third quarter, it was $297 million, and at the end of the fourth quarter, it was down to $227 million.

So our residential construction exposure in absolute dollar amounts have been cut by half, but in terms of what is going to happen in 2010, there's very few new -- there's no new construction loans, and for regular CRE, we're seeing very little new applications, but we are seeing a lot of commercial loan applications.

Dunson can you maybe do you want cover the pipeline for commercial loans as to how strong of demand or is it --

Yes, we have been able to build quite a few C&I loans, and we also are able to open doors to new customers that we were not able to approach them before, and we found potential customer rather receptive to talk to us and give us financial statements for one reason or another, so we are pretty hopeful that the C&I loan can be stabilized and even increase in 2010.

And going back, of our different ratios, our leverage ratio is the one that is relatively the tightest, and we are looking at, as opportunity presents itself, to reduce some of our wholesale borrowings, to improve our leverage ratio.

Okay.

But you are not going to my assumption is given the prepayment penalties, you not going to prepay any of the longer dated borrowings?

That's correct yes.

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

Go ahead.

Hi, good afternoon.

Hi, Lana.

I was wondering if you could give us some color on where the new inflows into non-performers were coming from this quarter in terms of what loan category and sort of geographically, and if they were concentrated in a couple of larger credits or was it smaller ones?

Yes, Lana this is Kim Bingham.

There has been a clear shift in the source of non-performers, formerly, first half of the year it was really driven by residential construction.

All of our indicators suggest that while there's probably still some more problems in that portfolio, that is pretty much gone, it's pretty much done on the residential side.

We do have what is left in that book is primarily some bigger projects in New York, where we feel pretty good about it, and some of our stronger borrowers here in southern California, where credit worthiness is not particularly an issue.

Where we are seeing the new inflow, however, is in non-residential, both in commercial mortgages, and in non-residential construction, particularly in retail and office property types, and most of the problems are really concentrated in what are generally acknowledged to be the weaker markets.

Inland Empire in southern California for example.

Sacramento area in northern California.

So that really is kind of where the trend has gone.

At this point, the CRE, I believe is about 70% of the new inflow.

Whereas first quarter of the year, it was really about 70% was residential construction, so it's really kind of done a 180 there.

And just to follow up with that, could you give us an idea of on the new inflows, what kind of updated appraisal values you are getting in terms of loan to values and debt service coverage ratios?

Well, with regard to LTV, it obviously depends on property type, but if I had to ballpark it on the commercial mortgages, where you started out with a stabilized property, I don't think it's unusual to see 20, 25% reduction in value, relative to where we were on the day we made the loan.

Where we're seeing the more meaningful drops in value is obviously on the construction loans.

For example, either kind of a failed retail project in a secondary market, or office space because of the presumptions about lease-up times, and reductions in rentals relative to when we underwrote the loan.

The reductions in value can be far more significant, 30, 40%, in that ballpark.

With regards to DSC on established properties, by the time you are getting to non-performers, we're seeing that it's substantially less than one-to-one for the simple reason that our borrowers do everything they can to carry the property until resources are exhausted and they can't.

So it's probably in the area it ranges from probably maybe a 0.7 to 0.8, I would say on average, although there is some variability in those numbers.

This is Dunson Chang.

I want to add to what Kim just said that on the inflow of CRE loans, the significant portion of the inflow from that category comes from newly finished construction projects like retailers and mostly that lease up.

Again, it's difficult, but for the majority of our CRE portfolio that's been seasoned and in place for quite some time, we are seeing not that much inflow from that category.

Our next question comes from the line of Jeannette Daroosh with JMP Securities.

Go ahead.

Hi, Dunson and Hang.

Thank you so much for taking my questions.

Hi, Jeannette.

Oops, I had you on speaker, didn't I?

Yes.

Sorry about that.

I was wondering if you could give us a little bit of detail on the OREO expense in the quarter, which was significantly higher than what we have seen in the past.

Really, what I was hoping for was some detail on how much of this is operating expense, versus how much is actual writedowns on properties that you have taken in through foreclosure?

We're on a six-month cycle for new appraisals, so it just happens that the second and the fourth quarters are where most of our OREO appraisals are being done.

We try to sell OREO quickly, but there's a group that -- it starts with land, and then the other group is, we have a couple of shopping centers that are not finished, so they are both in Texas.

So they have been on the books for a while.

So in the fourth quarter we took about a $5 million write-down on a shopping center in Texas, but the good news we took that in conjunction with a sale.

That sale closed on December 30th.

So that's about a third of the OREO expense.

And then the rest of it is just from new appraisals for land and the declines of very large, very high, maybe 30, 40% every six months, but we think these final set of appraisals hopefully are at the bottom, because we have taken some quite a bit of writedowns already on this.

Yes?

Dunson?

Yes, if I have to guess, I would imagine that 80% of the expense was related to writedowns, maybe 20% is operating expenses.

Yes.

Yes.

At this point in time, our largest OREO is about I would say it's about $10 million or so, and there are only a few of them at this point in time.

Right, and one is in escrow.

Right.

Yes.

And how large is the property that is in escrow?

How large?

It's a little over $7 million.

It's an office in the Inland Empire.

Our next question comes from the line of Julie Balicka with KBW.

Go ahead.

Good afternoon, thank you for taking my question.

Good afternoon.

I have two questions I would like to follow up on.

One to follow up on the conversation on asset quality.

On the land and residential construction portfolios that are still performing, could you give us a sense of the maturity schedule, when is approximately 175 of the residential construction coming due?

And also where they are at?

Although you mentioned most are in New York.

And also on the 145 land loan that is still performing, can you give us a sense of the maturities there?

Well, typically our land loans are written for about 24 months, I would say, on average given the size of the projects that we typically do.

So I don't have the specific maturity schedule in front of me that I can quote from, but to the extent that we haven't done a lot of new lending in that area for a number of quarters, and our and our renewals on projects that haven't performed up to expectations are typically short-term, so I would imagine that the majority of what we have is going to mature in the next year to 18 months in those books of business.

And what about on the residential construction?

Or is that the same thing?

The residential construction there yes, I would say the same in that the size of the projects that we do tend to be more or less the same.

Smaller office billings, smaller like neighborhood retail centers, and then, condo units, way less than 100 units or phased single-family development on the residential construction side.

(Operator instructions).

Our next question comes from the line of David Rochester with FBR.

Go ahead.

Hey, guys just a couple of quick follow-ups, could you update us on the percentage of the portfolio?

It's variable rate?

And the percentage that are priced at fours right now?

Yes, Dave this is Hang Chen.

I think the last time I looked, about 55% was variable rate, and of that 70 or 80% have floors, and the floors are generally 5.25 or higher.

Great.

All right.

Thanks, guys.

Okay.

Our next question comes from the line of Julie Balicka with KBW.

Go ahead.

Just a quick question.

Do you have any large of amounts of deposits that are coming up for repricing in the next couple of quarters?

Nothing really lumpy, but we are we -- no.

But the new pricing is better, as we continue to have a lower loan to deposit ratio.

Okay.

Thank you very much.

Okay.

Our next question comes from the line of Robert Matthew with Wells Fargo.

Go ahead.

Hi, Dunson.

Good afternoon.

Just a general question here about your present plans to get the dividend higher toward previous levels?

Well, at this point in time, it's hard to say, and I think we have to wait a little bit longer until the bank becomes profitable before we can resume at a higher dividend level.

Anything to add to that?

No, I think we want to become profitable and have our credit problems well covered before we even approach the regulators about increasing the dividend.

Okay.

(Operator Instructions).

And ladies and gentlemen, I'm showing no further questions at this time.

I would like to turn the call back over to Cathay General Bancorp's management team for closing remarks.

Please proceed.

Yes, thank you, I wish to thank everybody for joining us on this call.

And we look forward to talking with you again next quarter when we release earnings again.

Thank you very much.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference.

That does conclude the presentation.

You may disconnect.

Have a wonderful day.