Cathay General Bancorp (CATY) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Cathay General Bancorp's second 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 for replay at www.cathaygeneralbancorp.com.

Now I would like to turn the call over to Georgia [Lull] from Cathay's Investor Relations group.

Please proceed.

Thank you and good afternoon.

Here to discuss the financial results today are Mr.

Dunson Cheng, our Chairman of the Board, President, and Chief Executive Officer; Mr.

Heng Cheng, 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 further described in the Company's annual report on Form 10-K for the year ended December 31, 2009 at item 1-A in particular and in other reports and filings with the Securities and Exchange Commission from time to time.

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

We undertake no obligation to update any forward-looking statements or 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 second quarter 2010 results.

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

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

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

Dunson Cheng.

Thank you very much.

Good afternoon and welcome to our second quarter earnings conference call.

This afternoon, Cathay General Bancorp reported a net income of $1.9 million over the same quarter 2010, and after stock dividend a net loss attributable to common shareholders of $0.03 per share.

Though the net income was modest, nonetheless we are gratified our Company has returned to profitability after five quarters of losses.

In the second quarter, a meaningful portion of our nonpaying, non-accrual loan was restructured into TDR for paying non-accrual.

In addition, the inflow of non-accrual for this quarter was substantially lower than previous ones.

At the same time, provision for credit losses dropped significantly to $45 million, compared to $84 million in the first quarter 2010 and $93 million for the same quarter a year ago.

Our reserves for loans were 3.8%, and the coverage of non-accrual loans was 83%.

The near 50% drop in provisions is a result of a larger decline in net charge-offs.

In the second quarter, the charge-offs were $22.5 million compared to $63.1 million in the [first] quarter 2010, and $56 million the same quarter a year ago.

The decrease in the provision is the main reason for the bank returning to profitability.

For the first half of 2010, our core deposit grew by $120 million or 9.3%.

In the second quarter, we had $350 million (inaudible) mature and not renewed.

Our capital ratios improved on March 31st, 2010, mostly because our total assets declined from $11.9 billion at March 31st to $11.4 billion at June 30th.

On June 30th, 2010, Cathay General Bancorp significantly exceeded the regulatory well-capitalized ratio guidelines.

Our Tier 1 leveraged capital ratio increased to 10.31%, tier 1 risk based capital ratio increased to 14.9%, and total risk based capital ratio increased to 16.81%.

As our credit problems appear stabilizing and capital ratios are well above well-capitalized levels, we are hopeful that our result will continue to improve and that the worst is behind us.

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

Thank you, Dunson, and good afternoon, everyone.

For the second quarter, once again, we announced net income of $1.9 million, and after dividends on the preferred stock, the net loss attributable to common stockholders was a loss of $2.2 million or $0.03 per share.

In terms of highlights, the net interest margin for the second quarter was 2.73% compared to 2.72% for the first quarter, but it did increase by 24 basis points from 2.49% for the second quarter of 2009.

We continue to maintain high liquidity with interest bearing cash at the Fed at June 30 of over $400 million, and that has had an impact in terms of reducing the net interest margin.

We also reduced CDs by $602 million during the second quarter, primarily by allowing broker deposits to mature, and we also in the future expect broker CDs to continue to decrease at a rate of around $200 million in each quarter in the second half of 2010.

We expect continued modest improvement in the net interest margin in the second half of 2010, mainly from the impact of weak prices of CDs to current market rates.

In terms of non-interest expense, that decreased by $13.7 million or 25% to $40.3 million in the second quarter, compared to $54 million in the same quarter a year ago.

The efficiency ratio for the second quarter was 49.2% compared to 54.9% a year ago, due primarily to lower OREO expenses and lower FDIC assessments.

But they were offset by lower security gains recorded during the second quarter of 2010.

The tax benefit for the second quarter included a $1.3 million tax benefit related to prior period tax adjustments.

In terms of outlook for the second half, the tax provision for the second half of 2010 is expected to be at the 42% composite tax rate, reduced by $2.7 million per quarter from utilization of low income housing tax credits.

With that, I'd like to turn the call to our Executive Vice President and Chief Credit Officer, Mr.

Kim Bingham, to talk about credit trends.

Thank you, Heng, and good afternoon, everyone.

Which are hopeful that our credit problems are stabilizing, and that as the economy improves further, our non-accruals will begin to decline and we will no longer have to build up our loan loss reserves.

Our net charge-offs for the second quarter totaled 1.31% of loans.

These losses were heavily concentrated in real estate loans, as this segment accounted for over 90% of total charge-offs for the period.

In the second quarter, or in the first quarter, rather, we initiated a policy under which we would require an appraisal of collateral securing real estate loans at least every six months for loans of $3 million or more that are also graded substandard or worse.

This policy remains in effect, as we believe that with the stabilization of real estate property values, this process has reduced the potential for unexpectedly large charge-offs in future quarters.

As in the past, we have determined the fair value of our collateral in these cases on bulk or as is value.

During the second quarter, we recorded $1.8 million in recoveries from sale of collateral on a retail basis on two condominium projects.

The provision for loan losses was $45 million for the second quarter of 2010, compared to $84 million in the first quarter of this year and $93 million in the same quarter a year ago.

The second quarter provision for credit losses included a provision of $19.3 million related to changes in the loan loss reserve methodology that served mainly to give greater weighting to the most recent 12 months of charge-offs in the calculation of loan loss reserve factor for past rated loans.

Total non-accrual portfolio loans, excluding $6.5 million in non-accrual loans held for sale, increased by 6% or $18 million to $313.4 million at the end of the second quarter, compared to $295.4 million at the end of the first quarter.

Included in the June 30th 2010 non-accrual loans were $65.6 million of troubled debt restructures that with six months payment performance can be returned to accrual status.

The largest such loan is one for $47 million that became non-accrual due to bankruptcy of the borrower.

During the second quarter of this year, the loan was restructured as an interest only loan for four years at a fixed interest rate of 4% for the first year, 4.5% for the second year, and 5% thereafter.

An impairment charge of $4 million was taken in the second quarter to reflect the below market rate of these terms.

During the second quarter, total in-flows of non-accrual loans totaled $91 million.

Transfers to OREO were $11 million.

Charge-offs, $22 million; and cures and repayments, $40 million.

Loans past due 30 to 89 days at June 30th were $56 million, and are indicative of only moderate in-flow of new non-accrual loans in the third quarter.

As of today, the Company has entered into agreements to sell 13 OREO properties with net book values totaling $31.8 million.

With that, I'd like to turn the meeting back to Dunson.

Thank you, Kim.

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

(Operator Instructions).

And your first question is coming from the line of Mike Zaremski, Credit Suisse.

You may proceed.

Hi, gentlemen, how are you?

Hi.

On the credit side, you said you mentioned you had a $32 million of book value up in contract to be sold.

Do you think the offers will come near book value?

I guess ultimately I'm wondering if you think the lower OREO and charge-off costs are sustainable or do we think they should ramp up as you guys try to reduce the OREO balances?

What we've done is if the market price is below our curing cost, we reflected that as of June 30th.

So we've had about $1 million of write-downs for that, and there's several where there's going to be gains and those we don't record until the escrows close.

So the -- there seems to be a stabilization of OREO -- of real estate values for our troubled properties.

So are you willing to say what you think the gains will be?

Or do you have to wait until they close?

They're not --

They're not material.

They're not huge.

I think maybe $1 million to $2 million out of that $31 million.

Okay.

And as a follow-up, in the past I think you've talked about 100% reserve to I think it was NPL ratio.

Correct me if I'm wrong.

Is that still a target, maybe an internal target?

And are you still committed to that, or maybe you're willing to exclude performing non-TDRs.

How are you guys thinking about that?

This is Heng Chen again.

We had talked about that I believe at the last conference call, where we said we were -- at the end of March, we were at 93%, if we exclude TDRs.

And here at the end of June, I think we're at 105%, if we exclude TDRs.

And in terms of the math, our loan loss provision was $45 million, and our charge-offs were $22.5 million.

And then we had changes in the old methodology, which were $19.3 million.

So basically if we didn't have -- if there was no further changes in the old methodology, in future quarters, it looks like we are matching net charge-offs.

Okay.

And lastly, just -- you said that you will probably run up another $200 million per quarter through the year end of broker deposits.

Are you making a positive or negative spread on those broker deposits?

Compared to -- we're leaving them at the Fed at 25 basis points, so any -- all our funding is at a negative spread.

Okay.

Thank you very much.

The next question is coming from the line of Joe Morford from RBC Capital Markets.

You may proceed.

Thanks.

Good afternoon, everyone.

Hi, Joe.

Hey.

I guess just following up on that last question about the provision, I guess two things.

Just talk a little bit more about what drove that decision to do the refinement and the methodology this quarter?

And then it sounds like to your answer that you're expecting charge-offs going forward to be kind of flat to down then, Heng?

I think Kim can answer that part about the -- well, actually on both.

Regarding the change in methodology, that was done in response to some recommendations from our primary regulator.

And the second half was on -- sorry, on charge-offs -- ?

Charge-off expectation, I guess looking for -- relative to the provision.

I think to the extent that they've been driven by -- sustained in the past, they've been really been driven by sustained reductions in the fair value rather of collateral on commercial real estate loans.

So to the extent that those values flatten, I would expect that charge-offs would reduce significantly compared to what you've seen in prior quarters.

Yes.

And then let me just add to that.

I think for a number of our larger non-accrual loans, even the ones that aren't restructured, the borrowers are stepping up to pledge more collateral or do things that would over the course of the next several months result in us being able to put those loans back on status.

So we're -- I would -- things look stable for us.

And I would just add on one more element.

The program that we started in the first quarter on the very frequent reappraisal of problem loans I think has really provided a great benefit in that it's really taking the outsized charge-offs pretty much out of the picture at this point.

And as things stabilize, I would only expect that to improve further.

Joe, this is Dunson Cheng.

What you just heard of course is our expectation.

But as you know, we can't really never straight-line them.

There may be unevenness in the recoveries or -- we hope of course that doesn't happen, but (inaudible).

No.

I understand.

I appreciate that.

I guess last, just a follow-up.

Kim, you mentioned there was a moderate in-flow of new NPLs this quarter.

I wonder if you could specifically quantify that and how it compared with last quarter?

Well, I think first what we talked about, $91 million in in-flows in this quarter -- that compares to $166 million in the prior quarter.

So it was a rather significant reduction, and we look to the 30 to 89 days as being a pretty good forward indicator, and we've seen continued drop in that figure.

So we would hope that things would continue in the same direction trendwise.

Okay.

Thanks so much.

Thank you.

Your next question is coming from the line of Aaron Deer from Sandler O'Neill & Partners.

You may proceed.

Good afternoon, guys.

Hi, Aaron.

Kim, you just mentioned the 30 to 89 day delinquencies.

Can you give us what that number was at the end of the quarter and how that compared to the previous quarter?

I believe it was $92.5 million at the end of the first quarter.

At year end it was, what, $130 million odd?

I think $140 million.

Yes, in the neighborhood of $135 million to $140 million.

And the $92.5 million was at June 30th, not March 31 -- is that correct?

No, that was March.

What was it at June?

$56 million.

$56 million.

Okay.

There was an interesting table that you put in that I don't recall having seen before with the charge-offs on non-accruals versus those without charge-offs in non-accrual, and I noted that the charge-offs -- cumulative charge-offs on the land bucket seemed relatively modest at 19%.

I just was wondering if you could talk about that a little bit and why that might be noticeably less than some of the other portfolios.

The reason that number is perhaps surprisingly low is because it's based on the amount of the loan that's left.

We foreclosed on quite a bit of that, so there's just not a lot left in that bucket.

Okay.

And the -- Heng, I think you had a $40 million DTA that was disallowed for regulatory capital at the end of March.

What are your advisors saying about any potential write-down for GAAP purposes, and can you give us an update on what the current value of the DTA is?

The disallowance at the end of June was about the same as at the end of March.

It was about $40 million.

And the DTA in terms of dollar size, I think it's about the same.

It was about $110 million at the end of June.

But in terms of outlook, the fact that we had a profitable quarter is a good sign and we're hopeful that we'll be profitable for the second half of the year, in which case that takes even more pressure off of the DTA from a GAAP basis.

And in terms of our forecast for taxable income for 2010, it's kind of un-American, but we're at a stage where we like to pay taxes and -- as a Company and we expect to be paying taxes in 2010.

So that's also another indication that supports the DTA, because once again, we expect to be profitable on a taxable basis for 2010.

That's great news.

Thanks very much, guys.

Thanks.

(Operator Instructions).

Your next question is coming from the line of Julianna Balicka from KBW.

You may proceed.

Good afternoon.

Hi, Julianna.

Hi, how are you?

Good, good, enjoying the weather in New York?

It's great this week.

Apparently the heat wave broke.

Good.

I have a couple quick questions.

On the margin improvement that you mentioned back half of the year from the CDs repricing, could you refresh our memory what price these CDs are repricing from and to?

Well, it's the average.

Right now, the average rate in the third quarter is 1.58%.

Going from the first to the second quarter, we reduced that average rate by 11 basis points, and we think -- beyond that order for the third and fourth quarters.

We're paying for six month CDs just a shade over 1%, and that's where the bulk of our CDs should be.

And we have in November and December, we have a big batch of CDs, a few hundred million coming off from our Chinese New Year promotion.

Those were at 1.8% and they should be repricing at less than 1%.

Okay.

Very good.

And then in terms of the CRE review that you discussed every six months, reappraise for the substandard or worse loans, what do you do for the larger CRE loans, that are say special mention or not yet in substandard, but on your watch list?

They're handled obviously on a case by case basis.

If we think that the likelihood is high that they're trending towards substandard, then we would generally want to order a new appraisal.

If we believe that the situation's getting better, we would take a less stringent standpoint or stance, rather.

Okay.

Very good.

And then I have a last final question, I'll step back.

Do you have a number for how many restructured loans returned to accrual this quarter?

Accrual status?

And then do you have the number for how many should -- if things go well -- return to accrual status in the third and fourth quarter, broken down by the quarter, I mean?

Yes.

Actually, we put that in the table now on page seven.

Sorry about that.

That's okay.

So that has it for December, March, and June.

Right.

So the non-accrual TDRs went from $42 million in December to -- went down to $27 million because one of the loans became OREO.

Right.

And then it went up to $66 million at the end of June.

That's [Alameda] primarily.

Right.

But none of them returned to accrual yet?

Right.

There will be some small amount in the third quarter, but the bulk of them will be in the fourth quarter.

I guess that's what I was getting at.

Thank you.

Thank you very much.

The next question comes from the line of Joe Gladue with B.

Riley.

You may proceed.

Hi.

Just wanted to touch -- we talked about I guess the repricing of CDs lower, looking at the other side of the net interest margin equation and the change in the asset side of the balance sheet.

You guys look a little different than most of the banks I'm seeing, where your securities balances are going down and -- rather than the loan balances, and of course you still have the excess liquidity.

Just wondering if you could talk a bit about where you expect that to go in the next quarter or two?

Yes.

Joe, what we're -- first, on the loans, the loans are stable now.

They actually on average went up from the first quarter.

And our margin on the loans went up by 3 basis points, linked quarter.

So we still are seeing an opportunity to I guess hold the line on pricing and hold the line on floors on our floating rate loans.

And then on the securities, we have kind of a bifurcated portfolio.

About $2 billion of that is MBS that -- the rate is about 4%, all 15 year MBS.

And the rest is agency securities at 2% and the callable agencies and we're trying -- we're holding those as callable agencies, because we see over the next six quarters a chance to have about $2 billion of our wholesale borrowing to be repaid.

So we want to keep the liquidity on the balance sheet to be able to repay those borrowings.

We have, for example, in the first quarter of next year, we have $100 million of structured repos that are at 4.8% that are going to mature, and then we have in the middle of next year almost $200 million of federal home loan bank borrowings that are in the mid-fives that will mature.

And then early in 2012, we have about $700 million in federal home loan bank borrowings [for the] quarter.

So we're trying to -- with the interest rate being so low, we're stuck with these high cost borrowings.

But for quite a bit of them, given a few more quarters, we'll be able to repay them and then improve our margin to where it should be.

Okay.

Thanks.

I guess that's all I had.

Okay.

Thank you.

(Operator Instructions).

You have a follow-up question coming from the line of Mike Zaremski with Credit Suisse.

You may proceed.

Hi, guys.

So I'm looking at loans, and it looks like CRE if I'm looking at it right actually grew quarter-over-quarter.

What's driving that?

Are you guys hiring people or what's going on there?

We continue to do some CRE lending on very conservative terms.

A lot of it is owner occupied and a lot of it is from our existing customer base, where we're able to command very low LTVs and/or a very high debt coverage, so we want to take advantage of that opportunity.

Though I would say a follow-on to that by saying that we're really making a concerted effort to reduce our overall exposure to CRE, including commercial loans to people in the real estate business or for real estate purposes, and I would expect that trend to continue throughout the remainder of the year.

So I would look to this as more of an aberration.

I think you'll see it stabilize to trend down.

Okay.

And let me just add one other thing -- this is Heng Chen -- which is on the real estate construction, at its height for us, that was almost $1 billion.

We're now down to $0.5 billion.

And 40% of what's left is from our New York region, about $200 million.

And through this recession, they have not had any charge-offs out of the construction loan portfolio, and what we have is very good quality.

So in terms of overall level of risks, I think we're -- the risk in the real estate construction portfolio is down quite a bit, just through the passage of time as we work through that portfolio.

Okay.

Thank you.

And Heng, you said $2 billion of our securities portfolio was MBS, yielding 4%.

What's the maturity schedule?

How much is coming due every quarter of the 4% piece?

Oh, it's not a lot.

They're 15 year [fours], so they're -- I think they tend to be -- I'm trying to think.

I think the prepayments are about I think 20% a year now.

Okay.

Okay.

I can do the math then.

And can I slip one more question in?

Sure.

Okay.

In terms of -- you had another loss on this interest rate swap, I think $3 million to $4 million this quarter.

Yes, it was I think $2.5 million, and then the other $1 million was actually the cash loss from the pay fix we see floating.

So I guess I'm ultimately asking how to think about it, because I know interest rates have dropped again, depending what interest rate you're looking at -- should we expect that to continue again next quarter or how should I think about that?

Hopefully it should be less.

We were positioning our balance sheet, thinking that interest rates were going to go up, like many banks.

And the notional amount of $300 million, we have taken a cumulative mark-to-market, about $5.5 million on that portfolio.

So it's going to be less.

We're hopeful it's going to be less here in the third quarter.

Okay.

Thank you guys.

Your next question is coming from the line of Ryan Stevens with Philadelphia Financial.

You may proceed.

Hey, guys.

It's actually Jordan Hymowitz.

Congratulations on an excellent quarter and returning to profitability, first of all.

Thanks, Jordan.

My question is let's take a little more positive outlook.

If these quarterly trends continue positive, what's the earliest you could repay TARP?

Jordan, we -- first, we're focused on taking care of our regulatory orders at the bank and the holding company, so we want to -- as part of that is we have to have -- show good progress on reducing our watch list of substandard loans, so we're focused on that.

And then the capital's a component and then profitability's a component.

So those are things we're trying to do first.

But in terms of -- after the regulators think that we've taken care of our immediate concerns, then we would start talking -- to think about TARP repayment.

But it's going to be a while for us.

And when's the earliest the MOU could be lifted?

We don't -- we can't comment on that because we're -- it's hard to predict the future.

Do you think if you raised capital, you could get the -- and repaid TARP, the MOU would be lifted sooner?

I don't know, Jordan.

Okay.

And last question is, I mean, there's a number of Asian American banks that are struggling and only you guys and East West were potential buyers of them.

Have there been any more flexibility in the willingness of the regulators to enable you to make acquisitions of failing companies at this point?

There's been one or two precedents of other companies doing it that have not repaid TARP yet.

We have not talked to them about that recently.

Once again, we're focused on getting our watch list loans taken care of as well as keeping our charge-offs low.

From anything you see today, the trends in the second quarter will continue into the third quarter?

Well, I think what -- it's kind of heartening to see that the charge-offs are pretty low.

If you look at even the second quarter charge-offs, first of all, the land loan that was almost $8 million of charge-offs, and we think we're near the end of that.

And then the recoveries were $5.3 million.

We think there's a number of other loans where we've taken charge-offs on the bulk sale basis that we're working out on a retail basis.

Couple of condo projects which we should get recoveries in the future.

So I think -- and then lastly, I think the most important thing is the fact that we've gotten current appraisals on all the substandard loans $3 million and higher.

So we shouldn't see -- we're not seeing surprises in terms of charge-offs and these -- Kim can talk more.

I think the values seem to be stabilizing.

Yes, they seem to be stabilizing.

At this particular point in the cycle, our real exposure is to the commercial mortgages.

I think the construction and the land problems have largely run their course.

There could be some minor problems.

But I think we're pretty much done with that.

And our concern obviously would be if you saw some continued severe deterioration in commercial property prices, but at this point we're just not seeing that.

We're seeing more gentle declines or being in the trough, and in some markets actually coming back a little bit.

Okay.

Final question is what region of the country would you be interested in being in that you're not in now if and when the MOU expires?

Well, at this point in time, again, we are sort of constrained by our MOU, and although the MOU says if we do anything, ask regulator for permission.

At this point in time we're not thinking very hard of expansion.

Okay.

Thank you.

Thank you.

There are no further questions at this time.

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

You may proceed.

Well, thank you.

I want to thank again for your participation in our second quarter earnings call.

And this quarter marks hopefully the return of bank's profitability and we look forward to speaking to you again next quarter.

Thank you again.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect and everyone have a great day.