Cathay General Bancorp (CATY) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp's first quarter 2010 earnings conference call.

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 earnings conference call.

Here to discuss Cathay General Bancorp's first quarter 2010 financial results today are Mr.

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

Heng 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 provision 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, 2009 and Item 1-A in particular, and in other reports and filings with the Securities and Exchange Commission from time to time.

We caution you not to place undue reliance on such forward-looking statements which speak only as of the date of this presentation.

We undertake no obligation to update any forward-looking statements or to publicly announce any revision of any forward-looking statement to reflect future developments or events, except as required by law.

This afternoon, Cathay General Bancorp issued an Earnings Release outlining its first quarter 2010 results.

To obtain a copy please visit our website at www.CathayGeneralBancorp.com .

After comments by management today, we will open up this call for questions.

I will now turn the call over to our Chairman of the Board, President and CEO, Mr.

Dunson

Thank you, Monica and good afternoon, everyone.

Welcome to our earnings conference call.

This afternoon, Cathay General Bancorp announced a net loss of $25.7 million for the first quarter of 2010 and a net loss attributable to common stockholders was $0.41 per share.

Now, just a few highlights of our first quarter.

On February 1, Cathay General Bancorp completed its second capital raise and received $125.2 million in additional capital through the sale of 15 million shares of common stock.

As a result, total risk-based capital ratio was 16.35% at March 31, 2010, compared to 15.43% at December 31, 2009.

This capital raise allows the bank to move more aggressively to resolve its non-performing assets and to increase its provision for loan losses.

Net loan charge-offs decreased by $5.2 million to $63.1 million in the first quarter of 2010 compared to $68.3 million at year-end 2009 but remains high as a result of the continuing weak economy.

Total non-accrual portfolio loans excluding $21 million held for sale increased by 5.2% or $14.7 million to $295.4 million at quarter end compared to $280.6 million at December 31, 2009.

As was mentioned in our earnings release, there is one loan of $47 million that is in non-accrual due to bankruptcy by the borrower.

We expect a settlement is forthcoming without any forgiveness of principal.

Since March 31, 2010, we also have sold or signed contract to sell an additional $30 million of OREs.

The provision for credit losses was $84 million for the first quarter 2010 compared to $91 million for the fourth quarter of 2009.

Our reserve to loans was 3.4% and the non-accrual loans was 77%.

However, if we exclude the $47 million loan we measured above the coverage ratio would be 94%.

Total assets were $11.9 billion at quarter end, an increase of $282.3 million or 2.4% from $11.6 billion at year-end 2009 primarily due to increases of $307 million in security available for sale.

Another event of note was the appointment of Mr.

Eddie Kim as Executive Vice President and Manager of the Victor LA Commercial Banking Group.

Mr.

Kim has 28 years of successful commercial lending experience previously at two major banks.

He will be responsible for expanding bank C & I lending to the greater communities of Los Angeles.

With that, I'll turn the floor to our Executive Vice President and CFO, Heng Chen to discuss the first quarter results further.

Heng?

Thank you, Dunson and good afternoon, everyone.

For the first quarter, we announced a net loss of $25.7 million or 41% per share net loss attributable to common shareholders.

Going through the income statement, the net interest margin for the first quarter was 2.72%, an increase of seven basis points from the 2.65% for the fourth quarter, an increase of three basis points from the 2.69% from the first quarter 2009.

There was 110 basis point decrease in the rate on interest bearing deposits from 2.54% at March 31, 2009 to 1.44% at March 31, 2010.

The cost of deposits including demand deposits decreased 17 basis points to 1.28% in the first quarter 2010 compared to 1.45% in the fourth quarter of 2009 and decreased 99 basis points from 2.27% in the first quarter of 2009 due primarily to the decrease in the rates paid on certificates of deposit upon renewal and for core deposits as a result of a decline in market interest rates.

In the non-interest income, there was one unusual item, we have a $3 million charge for the market value of $300 million of interest rate swaps.

If interest rates go up, that charge would be reversed in the remaining quarters of 2010, so I just want to point that out.

It's in the text of the press release.

Non-interest expense, that increased $6.6 million or 17.7% to $44.2 million in the first quarter 2010 compared to $37.5 million in the same quarter a year ago.

There's a couple of unusual items in the first quarter of this year.

One, we have almost $2 million in writedowns on loans held for sale.

That is in non-interest expense and then there's a $900,000 pre-payment from a federal home loan bank borrowing that was recorded in the first quarter.

The efficiency ratio was 54.6% in the first quarter 2010 compared to 38.3% for the same period a year ago due primarily to higher OREO expenses, higher FDIC assessments, higher loss for the interest rate swap, and lower security gains recorded in the first quarter 2010.

At March 31, 2010, Cathay General Bancorp significantly exceeded well capitalized minimum ratios under all of the regulatory guidelines.

Our Tier One leverage capital ratio increased at 10.11%.

Our Tier One risk-based capital increased to 14.48% and total risk-based capital increased to 16.35%.

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

Thank you, Heng.

We can now proceed with the Q & A.

(Operator Instructions).

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

Davidson.

Please proceed.

Good afternoon.

Hi, Chris.

Hi.

I have two questions quickly.

You addressed this earlier on the call but last quarter you mentioned the large 47.6 non-accrual CRE loan was possibly going to be broken into AB notes and dealt with that way was one option and now you're also saying currently that settlement is forthcoming.

What kind of settlement is this going to be and what's the timing do you think?

Yes, this is Kim Bingham speaking.

The structure of the settlement has changed and we're no longer looking to an AB structure but rather a restructuring of the existing note.

We believe we're very close within a month or so of getting this done and with the idea of hoping to get this seasoned and back on accrual near the latter part of the year in Q4.

Okay, thanks, and can you break out your delinquent loans for us, your buckets 30 and beyond days past due?

Chris, this is Heng Chen.

Preliminary but at the end of March, it looks to be around $90 million, that's in the 30-89 days delinquent.

That compares with $154 million at the end of December and then the over 90 days it's in the press release, I think it's $4.5 million, over 90 days and still accruing.

Yes.

That's all I have at this time, thank you.

Our following question comes from the line of Joe Gladue with B.

Riley.

Please proceed.

Hi.

Hi.

Wondered if you could first off talk about loans a little bit, number of your loans just wondering how much interest rates would have to rise before some of those loans sort of come off of the floors and you start to see yields rise on those.

Oh, yes I think the floors are generally at 5.25%.

Yes, they really range from 5%-6% in most cases with a floating spread over prime on the order of a 0.25% to 0.75% in most cases, so you're looking at 200-250 basis points before you get to the point where the floor is no longer effective.

Okay.

Do you have an idea to how much basis points are migration belongs to non-accrual effective to net interest margin?

It's comparable to the fourth quarter.

We had higher than normal in flows into non-accruals in the first quarter but we also had quite a bit of cures and transfers to REO.

It's at about the same pace as in the fourth quarter.

Okay, and in the press release you mentioned that the deposit promotion that you did for Chinese New Year, just wondering what kind of rates you're putting on those deposits, those CDs?

Yes, it was two separate terms and it was for jumbo and for non-jumbo, but my recollection is that for the 10 month term, we were at I think 1.5% for the jumbo and 1.3% for the non-jumbo, and for 18 months, I thought we were at the 1.8% for the non-jumbo and 2.1% for the jumbo.

And I guess lastly, I'll ask about migration to non-accrual and the net charge-offs.

Just wondering, how much is new appraisals driving those increases and I guess if you could remind us if you're doing appraisals particularly on the commercial real estate?

Yes, question updated appraisals are a big factor in driving charge-offs since a majority of our non-performing assets are secured by real property.

In the past quarter, we undertook a more rigorous effort to not only increase the frequency of reappraisals on non-performing loans but also obtaining frequent reappraisals on performing but troubled loans, generally loans rated substandard but still accruing and that did drive some down grades or classification to non-accrual status because we believe we are impaired as well as driving charge-offs on both those new non-accruals that were considered to be impaired for the first time this quarter as well as existing non-performing loans from prior quarters.

So in terms of charge-offs from the appraisals of loans that are not 90 days past due, it's a little over $10 million and the non-accruals are probably $20 million from those two or three loans.

Oh, from those few loans, that's correct, yes.

And on the non-accrual loans, are you generally I guess getting appraisals of that like twice a year?

At least once every six months, could be more frequent depending on the individual circumstances surrounding the loan.

Okay, I'll step back.

Thank you.

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

Please proceed.

Hi, good afternoon.

I had a couple questions.

I was wondering if you could be or show us a specific number in terms of in flows into non-performers this quarter.

I think it was about $100 million last quarter?

Yes, Kim?

Well, yes.

The number is actually, the net, well the gross in flows actually larger this quarter.

It's more on the order of about $173 million and that includes loans that went non-accrual but also were returned to accrual within the same quarter.

We had a rather significant number lodging loans to the same related borrowers, different properties but the same essential borrower that went to non-accrual status pending restructure and renewal.

We were able to renew those, they were all brought current and therefore put back on accrual status by quarter end.

Yes, so we also, we're still compiling the net movement in the non-accruals but we had several large loans that became OREO as well as charge-offs so it was a fairly active quarter but as Kim mentioned there was quite a bit of pressure from lodging and we were able to get most of that cured within the first quarter.

Yes, and then in terms of the remainder of our lodging exposure, the great bulk of it is in pretty good shape.

It's in the New York City area and that's holding up very well.

Okay, and how would you characterize I guess where the rest of the in flows are coming from?

Is it any particular area outside of those lodging loans?

Yes, there was a couple areas, Lana.

One would be retail properties.

There was a couple, not many loans but a couple of those went non-accrual this quarter.

These would be, one of these would be kind of very suburban center in Los Angeles County, another one in the Sacramento area.

The key here is that these are being driven primarily by construction loans on retail properties and they are obviously having trouble leasing them up as opposed to stabilized properties subject to commercial mortgage which lost tenants.

The other significant area of in flow was in warehouses.

We had one which is actually about half of the in flow for that category and it's an owner occupied warehouse up in Northern California where the operating companies having troubles and then there was a couple other smaller properties.

The other big single loan was an industrial property in Brooklyn that went non-accrual for payment performance this quarter as well and we ended up taking a charge on that as well.

Thank you for the color.

My second question was maybe I missed it but how much did you sell in non-performers OREO this quarter?

Well, on the OREO, it wasn't a real big number that we sold in the first quarter.

We do have about $30 million that's in escrow here plus we have a couple large OREOs that we have a number of parties bidding to buy them and we're trying to get the best price, which would be above our carrying price.

On the loans, on the non-accrual loans, we had just one, Kim I think just one?

No note sales, right?

Yes, I'm thinking none, I think that went ORE first.

Okay, and then just my last question and I'll let other people go, but the target for the reserve to non-performing loan ratios 100%, do you think that you can still possibly get there before that large loan cures in the fourth quarter?

Yes, I think that's conceivable.

The key will be in flow.

We seem to be doing a pretty effective job of resolving the non-accrual loans either through foreclosure or other means and on that point, we're encouraged by the fact that our 30-89 were only in the area of $90 million this year or this quarter rather because we have seen a pretty established pattern that around 65% to 70% of our 30-89 ends up being new in flows to non-accrual in the subsequent quarter, so having the non-accrual that low together with the fact that we were very proactive in looking for potentially impaired loans among our accruing loans leads us to believe that we're kind of out in front on that at this point.

Okay.

So I think it's entirely conceivable, yes.

Okay, thank you.

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

Please proceed.

Thanks, good afternoon, everyone.

Hi, Joe.

I guess just first a follow-up on the last question.

Beyond just I guess looking at the in flows, is that mostly just downward migration of previously identified problems or are you actually still seeing in flows into classified levels at this point?

Most of this was acknowledged problems that migrated down further.

We're still seeing down grades but we're starting to get to the point where particularly in the substandards that it's becoming neutral in some months essentially and in some months we're actually having upgrades exceed down grades, so we think we're kind of reaching the trough in that respect, but yes, there are still down grades to the lower classes.

Okay, and the release talked about having the opportunity to dispose of NPA's more aggressively.

Can you expand on that and what exactly are you looking to do?

Is that considering more bulk sales and what are the kind of bids you're seeing there and I don't know, just anything you can talk about on that.

Well, Joe, this is Heng Chen.

I think one is like if we go to the hospitality area, we did a note split.

It's not fully documented we did charge off quite a bit and then what's left is going to be supported by the properties cash flow, and then the B-notes when it's documented, we are going to, that's going to be very low interest.

They won't mature for several years and so forth, so I think our first preference is to work out deals with our borrowers to where the properties can, the current cash flow can support a reduced loan balance and to the extent we have the capital to be able to affect that strategy, I think that's the longer term, that's good generation of long term value.

We will, we might consider note sales but I think one of the things is that we had a very high quarter of in flows and yet the non-accruals were pretty much the same, so lastly, we are seeing many more borrowers willing to give us (inaudible) in lieu of foreclosure, because they realize they can't carry that when there's no more equity and they can't carry it, so we're going to push those to where we can get them into OREO and then sell the OREO much quicker, and then lastly, we do have a couple of our larger condo construction loans where they are going into the selling phase, so we're going to see I think better movement in the second and third quarter from that sector.

Okay, and then I guess lastly, you touched on this a little bit but particularly related to the OREO sales in escrow, in general, are they under contract at or around carrying values or should we be expecting much in the way of further marks in the fourth quarter or excuse me, in the second quarter on that?

Well, they are actually above our carrying cost, particularly for land, so the appraisals are very conservative, so when they become OREO, we have to take the appraised value but in two instances for a good size OREO, we are close to the $10 million mark.

We're getting offers that are 30% above our carrying cost, and under the, so unlike 2009, where we've taken writedowns on OREO, after they become OREO, to the extent a new appraisal comes in that supports the higher value, we can reverse those prior writedowns, so we're going to see less pressure in the OREO expense line in 2010 and of course our preference is to sell them and realize the cash.

All right, okay, that's great Heng.

Thanks so much.

Yes.

Our following question comes from the line of Aaron Deer with Sandler O'Neill & Partners.

Please proceed.

Hi, good afternoon, everyone.

Hi, Aaron.

A question on the large loan that was referenced in the press release, I think it was like $48 million.

What is the LTV on that type of property and what's LTV on that property, what type of property is it and what kind of cash flows might be coming off of that?

Well, the type of property, it's industrial space in downtown Los Angeles area.

It's got a variety of different tenants in it, an apparel manufacturer, and some produce wholesalers account for the majority of the space.

There is cash flow obviously associated with the property, but at the time they went bankrupt was really sufficient to service our loan.

I believe that's deteriorated slightly, but of course there's other issues that go into reaching a settlement with the borrower including getting the courts concurrent, et cetera, et cetera.

So from a cash flow perspective, we think we're well positioned with respect to our settlement.

On an LTV basis, I believe we're now in the neighborhood of probably 75% to 80% LTV on that property.

Okay, that's helpful, and then Heng, I'm curious of the DTA that has accumulated, how much of that would be disallowed at this point for regulatory purposes and have you evaluated the risk of a GAAP writedown?

Yes.

At the end of the first quarter, and this is still preliminary, a little over $30 million of the deferred tax asset has been excluded from the Tier 1 capital calculation .

It actually should get a little easier for us in 2010 as time goes on because for regulatory purposes, you look forward four quarters, so if we go to the end of the second quarter, we basically look out for the next four quarters which would include the first half of 2011 and as part of that, it would be based on the Company's projections for taxable income, and then secondly, so for regulatory capital purposes, if we, if things are continuing as sort of what we project, it will be easier.

We think we'll be profitable in the second half of 2010, so that would help things because then that will create tax capacity as well, and then on a GAAP basis, there's a three year cumulative profitability test, so if you do it on a quarterly basis, we still have cumulative profits for the last three years and that would still be the case for the second quarter and if we have a cumulative loss, then you have to do this sort of scheduling which for GAAP purposes, we're allowed to look forward more than one year, so we don't think there's an issue for GAAP purposes in terms of a writedown on the deferred tax

Our following question comes from the line of David Rochester with FBR Capital Markets.

Please proceed.

Hi, good afternoon guys.

Hi, Dave.

Just to clarify, were you saying that classified assets were generally stable from the fourth quarter to the first quarter or were they still up modestly?

Quarter-over-quarter, they were actually down.

I kind of made some comments about what's happening in individual months but quarter-over-quarter, they were down.

Okay, great.

Also the lodging loans you were talking about, could you quantify those, the ones that went non-accrual and then got brought back to accrual status?

Yes, you're talking about, let me see, it's approximately the total was around $30 million of which I think about $15 million of that came back to accruals through renewal and being brought absolutely current, and then the remainder of $15 million of the total amount was the one where we're contemplating the AB split.

We've taken the charge and are working on restructuring the A-note, the performing part.

Okay, and for the trouble debt restructurings that are on accrual status, and I know we don't have a whole lot of history here to deal with but what kind of redefault rates are you guys experiencing in that portfolio?

Thus far, very low, very very low.

I mean, you see the number.

It's not huge in terms of the number of borrowers and loans or the aggregate amount at this point.

And Dave, most of our trouble debt restructurings that we've reported are where we just gave a payment concession, we went to interest only or something like that.

Yes, it's either an interest concession on deferral principal or in some cases an out and out reduction in the rate.

And will you typically give that deferral for a year period or two years?

What's the general or your typical range?

Well obviously it depends on the situation but generally, I would say about a year or so is the general, the way it comes out in most cases.

Okay, and just one last one.

When you guys are talking about achieving profitability in the second half of this year, are you at that point assuming that the reserves or reserve levels are at least stable or potentially that they are coming down at that point?

That would be stable.

We're not going to drawdown the reserve to become profitable, no.

Okay.

Great.

Thanks guys.

Appreciate it.

Yes.

Our following question comes from the line of Julianna Balicka with KBW.

Please proceed.

Good afternoon.

Hi, Julia.

Hi.

I have a couple follow-up questions please, following up on the questions about in flows to NPA, you were talking about the large number of out flows.

Could you quantify the total out flows from NPA, or I'm sorry of I missed that when you talked about it earlier.

Let us call you back because we need to pull that together to make sure that it's reconciled.

Okay, great, and then you mentioned, you had stated you were proactive for looking for impaired loans among your accruing loans so could you A) tell us what is your impaired loan number and B) can you just expand on that on what you meant by that proactive looking what kind of portfolio review that entailed?

Well, I think we don't give that number because it's our substandard loan number, but we got, I guess 50-60 appraisals that we normally, and you can figure out our average loans, whatever.

It's a large number of appraisals that we ordered for these substandard loans and we had just a few that showed any impairment and because they showed impairment, we took the charge and put them on non-accrual.

Okay, that makes sense and then switching gears for a second, can you talk a little bit, your net interest margin improved slightly linked quarter but can you kind of talk about your margin outlook for the remainder of the year and also perhaps as rates rise in terms of what you can do in terms of balance sheet management to kind of improve that?

Is there borrowing, remixing that you're planning on doing anymore securities you're mixing or anything like that?

Yes.

If you note, we kept a lot of cash at the Fed earning 25 basis points, so it's $432 million because we've got interest rates are likely to rise at some point in time, and so that was also the situation in the fourth quarter but in terms of our securities portfolio, we have been very careful.

We have not bought any mortgage backed securities since December.

We've been sellers, you can see we had some security gains here in the first quarter, and then what we're buying, it's generally fairly safe callables where the final maturity is 3.5 years, so we're keeping these securities portfolio the duration right now at the end of March was 3%, and then another reason we're keeping things fairly tight is that we are thinking that we would shrink the balance sheet by about $300 million a quarter, $250 million to $300 million a quarter and that's mainly just letting the broker CDs mature throughout the rest of this year, and so that's going to help our margin because we would use cash to pay off the maturing broker CDs and then we would sell some of our lower yielding securities to cover that, so in terms of opportunities, we have some maturities in the fourth quarter and then we have quite a bit of maturities in the middle of 2011 and to the extent that there's a jump in short-term interest rates and we can pre-pay the borrowings at a reasonable cost, we would look at that.

And I'm sorry, what is the total number of broker CDs you have outstanding right now?

It's about $900 million.

$900 million.

Yes.

And any changes to your FHLB borrowings that you're planning similarly?

So we prepaid $65 million in the first quarter and then we have some maturities in the middle of next year, so by the fourth quarter, we could prepay those off at a pretty low cost.

Very good.

Thank you very much.

Yes, thank you.

And we have a follow-up question from the line of Aaron Deer with Sandler O'Neill & Partners.

Please proceed, sir.

Hi, sorry.

I got cut off earlier but I just had a quick follow-up question.

I know in the past you've kind of downplayed any interest in taking advantage of any FDIC deals but I noted a couple weeks ago that there was another actually another Southern California bank that had an MOU in place and it was able to win a bid on an FDIC deal.

I'm just wondering if having seen that and knowing that you guys have boosted capital since your last exam, if that changes your thinking on the deal front.

Well, at this point in time, again, our highest priority is to make sure that we get our non-accrual and classified loans down and then hopefully to get the bank return to profitability in the second half of this year and if an opportunity comes along, we certainly will evaluate it and see what we can do with it.

Okay, that's helpful, thank you.

Okay.

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

Please proceed.

Hi, just one quick follow-up question on the margin.

Heng, I think you said previously that you expected a margin of 3% for the full year.

Are you still comfortable with that guidance?

Maybe I'm a few basis points off, but we haven't reforecasted on a detailed basis yet, so we're not sure.

Okay, thank you.

Yes.

I'm showing no questions at this time.

(Operator Instructions).

Okay I'm showing no further questions at this time.

Okay, thank you for joining us for this call and we'll look forward to talking to you again next quarter.

Thank you.

Ladies and gentlemen, that concludes Today's conference.

Thank you for your participation.

You may now disconnect and have a wonderful day.