Cathay General Bancorp (CATY) 2010 Q3 法說會逐字稿

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

My name is Adam 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 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.

Thank you, Adam, and good afternoon.

Here to discuss the financial results today are Mr.

Dunson Cheng, the Chairman of the Board, 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 position 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 statement 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 third 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 Cheng.

Thank you, Monica and good afternoon.

Welcome to our 2010 third quarter earnings conference call.

This afternoon Cathay General Bancorp reported a net income of $17.3 million for the third quarter of 2010, or $0.17 per common share.

That compared to a net income of $1.9 million, or a loss of $0.03 per common share for the second quarter.

We are gratified to be able to report a second consecutive profitable quarter and one at a substantial higher amount.

We are also encouraged by the continued decrease in net charge-offs and non-accrual loans in the third quarter.

Our new non-accrual loans were $34 million, the lowest amount in the last two years.

As a result, our non-accrual loans decreased by $30 million during the third quarter to $284 million.

Out of the $224 million, $67 million were troubled debt restructurings and we expect a good portion of these non-accrual TDRs to be restored to accrual basis during the fourth quarter.

At the same time, the provision for credit losses in the quarter dropped significantly to $17.9 million matching net charge-offs during the third quarter.

Our reserve to loans was 3.8%, and the coverage of non-accrual loans was 92%.

For the first nine months of 2010, our core deposits grew at a rate of 9.4%.

That allowed us to pay off $406 million in broker deposits and maintain a deposit-- loan to deposit ratio of 93.5%.

On the loan side, our loans outstanding grew for the first time in eight quarters.

We continue to see decreases in CRE and construction loans.

However, our C&I and residential mortgages picked up substantially, both categories increased more than $100 million.

Our capital ratios improved from June 30 as a result of the third quarter earnings and a reduction of total assets.

At September 30, our Tier 1 leverage capital ratio increased to 10.93%.

Tier 1 risk-based capital ratio increased to 14.95% and total risk-based capital ratio increased to 16.85%.

All the ratios significantly exceeded well-capitalized minimum ratios under all the regulatory guidelines.

In the fourth quarter of 2010, as part of our plan to improve the net interest margin, we expect to prepay $264 million of fixed rate FHLB borrowing with an average rate of 4.92%.

The net cost of this prepayment is estimated to be $3 million.

To fund part of the prepayment, we plan to sell $225 million of mortgage-backed securities from our investment portfolio.

With credit problems seemingly stabilized and credit ratio well above well capitalized levels, we're hopeful that our results will continue to improve and the worst is behind us.

With that I'll turn the floor over to our Executive Vice President and CFO, Heng Chen, to discuss the third quarter results in more detail.

Thank you, Dunson, and good afternoon, everyone.

For the third quarter, we announced net income of $17.3 million, or $0.17 per share.

The net interest margin for the third quarter was 2.74% compared to 2.73% for the second quarter and an increase of nine basis points from 2.65% for the third quarter of 2009.

We continue to maintain high liquidity with interest bearing cash at September 30 of $248 million.

We expect continued modest improvement in the net interest margin in the fourth quarter of 2010, but stronger improvement in 2011 as a result of the prepayment of the FHLB borrowings during the fourth quarter 2010.

So the maturity of $100 million of repurchased agreements in March of 2011 for the rate of 4.77%, the repricing of CDs to current market rates as they mature.

And then lastly, we are now making additional investments in higher yielding municipal and corporate securities.

Non-interest expense decreased $3.9 million, or 10.1%, to $34.9 million in the third quarter of 2010, compared to $38.8 million in the same quarter a year ago.

The efficiency ratio was 45.2% in the third quarter compared to 46.9% for the same period a year ago, due primarily to lower OREO expenses and occupancy expenses offset by lower security gains and by lower gains on sale of loans recorded in the third quarter of 2010.

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

Kim Bingham.

Thank you, Heng, and good afternoon to everyone.

In our second quarter earnings call, we expressed hope that our situation with respect to credit problems was stabilizing and that as the economy continues to improve our non-accruals will continue to decline, that other key credit metrics will improve and that we will no longer need to build up the loan loss reserve.

I am pleased to report that the positive trends apparent first in the second quarter have continued into the most recent quarter.

Net charge-offs for the third quarter totaled 1.04% of loans, down from 1.31% of loans in the second quarter.

These losses were concentrated in commercial real estate loans, this segment accounted for more than 70% of gross charge-offs for the period.

In the first quarter, we initiated a policy under which we require an appraisal of collateral securing real estate loans at least every six months for loans of $3 million or more and rated substandard or worse.

This policy remains in effect since 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 a bulk or as-is value as appropriate.

The provision for credit losses was $17.9 million for the third quarter of 2010, compared to $45 million in the second quarter of 2010, and $76 million the same quarter a year ago.

Trends regarding watch list credits and net charge-offs are currently positive.

A reduction in watch list credit exposure has the effect of reducing all other factors held constant the amount of our allowance for loan and lease losses.

Our loss migration is heavily weighted towards our most recent loss history and a reduction in net charge-offs will therefore also tend to reduce the amount of our all.

We anticipate that a continuation of current trends in these regards will allow for a quarterly loss provision that is less than net charge-offs during some point in 2011.

Total non-accrual portfolio loans, excluding $6.2 million of non-accrual loans held for sale, decreased by 9.5%, or $29.7 million, to $283.7 million at September 30, 2010, compared to $313.4 million at June 30.

Included in the September 30 non-accrual loans were $66.6 million of troubled debt restructures that was six months of payment performance can be returned to accrual status.

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

During the second quarter of 2010, this loan was restructured as an interest only loan for four years at a fixed rate of 4% for the first year, 4.5% for the second year and 5% thereafter.

We anticipate that this loan will be returned to accrual in the fourth quarter of this year.

During the third quarter, total in-flows to non-accruals were $34 million, transfers to OREO were $20 million, charge-offs, $19 million and cures or repayments of non-accrual loans, $26 million.

Loans past due 30 to 89 days at September 30 were $37 million and are suggestive of only moderate in-flow of new non-accrual loans in the fourth quarter.

And with that, I'd like to turn the call back to Dunson.

Thank you, Kim.

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

Thank you.

(Operator Instructions) Your first question today comes from the line of Aaron Deer of Sandler O'Neill & Partners.

Please proceed.

Good afternoon, everyone and congratulations on another quarter of profitability.

Yes, thank you, Aaron.

I'm just curious, it seemed like you had some pretty strong loan growth particularly in the C&I side during the quarter.

How does that pipeline look as you head into year end and can you kind of keep this growth pace on track?

Yes, I'm sorry, we're having problem hearing you.

But I'll just repeat the question.

The question is the pipeline of C&I loan growth at the end of the quarter, as to what it looks like.

Normally we don't disclose this information and it's not -- and I don't have a good number to talk about at this point in time.

Maybe we could talk about the places, is it trade finance or any particular sector that -- there's no particular concentration in any sector.

And it-- the increases that we have seen so far are from part of it from trade, part of it from commercial loans and we don't see any concentration in one area.

Well I have been just handed a piece of paper is saying that our pipeline is-- our C&I loan is about $18 million.

Okay, that's great.

And then Kim, you sounded hopeful that maybe by sometime in 2011 you could see provisions coming in below charge-offs.

Is it safe to assume that you're going to at least get to your reserve coverage above the non-accrual level, get that over 100% before you'd consider bringing under provide in any given quarter?

Yes, I think that's safe to say.

Our methodology is very heavily weighted towards our most recent loss history, and so as a natural consequence of lower charge-offs.

And as we see the in-flows in non-accrual really slow down, we expect it will be able to break the 100% coverage threshold and a natural consequence of the formulaic aspects of our all methodology will allow us to provide less.

Yes, I think (inaudible).

On the-- we have that one loan that Kim mentioned at $47 million that we expect to become accruing TDR in the fourth quarter.

So if that happens, we're already over 100%.

Right.

And we have some loans that we're working on foreclosures that we expect to become OREO in the fourth quarter.

So if the in-flows continue to be relatively low, the outlook is then going to be pretty good for a drop in non-accruals.

That's great.

That's super to see this improvement.

Thanks very much for taking my question.

Thank you.

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

Please proceed.

Thanks.

Good afternoon, everyone and congratulations as well on a good quarter.

Thank you, Joe.

I guess two things.

First, on the credit side, the OREO costs came down quite a bit this quarter and actually last several quarters.

Can you talk about a bit about kind of the values you're realizing when you complete a sale?

And also Kim, you talked about refreshing these appraisals, the more recent ones.

What are you kind of seeing in terms of updated values?

Well I think on the OREOs, we sold roughly $40 million or so in the third quarter.

No actually, [$34 million].

Thank you, all right.

And what we are finding is that, Joe, we are seeing that we can sell OREOs at least at the most recent appraised value.

And in couple of cases, we were able to sell above the book value and that is one of the reasons for the reduction of OREO charges, I believe.

Right, and then I think a couple of other things.

One is the -- for the condo projects, we have to use the bulk sale value and so to the extent that we we're able to sell them on a retail basis, what we'll be able to do better than that.

And then lastly we have about $20 million of net write-downs on OREO.

To the extent that we get new appraisals that reflect the increase in values, we can reverse those write-downs.

So that might start to happen in the fourth quarter or the first quarter.

Yes, Joe, and regarding the appraisal, the reappraisal issue, we're starting to see evidence of stabilization in most of the property types in the markets where we're active.

Of our charge-offs for the current quarter, there was only a handful of them that were over $1 million.

So we're still seeing some weakness in, it's predictably the weaker markets, the Las Vegas' and whatnot.

We're seeing continued weakness in land.

But on improved properties, where we're starting to see ever-growing signs of stabilization, and the resulting charge-offs when we appraise are-- there's either none or they're very small in relative terms.

Okay.

Great.

And then a separate question on the margin.

I guess, Heng, maybe you can potentially quantify a little bit more some of the upside opportunity you have given these improvements you're making in the earning asset mix with the loans growing and also the reduction in funding costs with the FHL prepay and the paying off the brokered deposits and what have you, particularly as we go through 2011.

Yes, Joe, the-- that program of paying off $264 million of FHLB borrowings in the fourth quarter, that on a run rate basis should add 12 basis to the margin, and then we have $600 million dollars of FHLB borrowings remaining.

The average cost is about 4.25 and our thought is that we would selectively prepay those in the first and second quarter of 2011 and that would -- you can do the math, that's probably another 25 basis points of the margin.

And then on the investing side, as we sell MBS, we're not losing any margin because we're reinvesting in municipals that have higher yields as well as some corporate bonds, high-grade corporate bonds.

So it's a combination of all those things as well as the CD repricing that's going to get our margin up throughout 2011.

Okay.

Thanks very much, everyone.

Thank you.

Your next question today comes from the line of Brett Rabatin of Sterne Agee.

Please proceed.

Hi, good afternoon, Sterne Agee.

Wanted to ask first, I was curious, maybe Kim can address the question regarding the watch list.

You had mentioned I think that that number was improved this quarter.

Is that a function more of the continued reduction in the construction portfolio or there are also improvements generally speaking in the commercial real estate book and if so, what categories?

Yes, well I think we're seeing some improvement in pretty much all the categories.

But the commercial real estate area is probably the area driving the numbers and it's a combination of cures of foreclosures and some upgrades to a better risk rating.

So it's a combination of things.

Okay.

And then also wanted to just ask on the TDR, the performing TDRs that were up, were those essentially just credits in the CRE bucket that were given concessions on rate or can you talk a little bit about the change in that bucket link quarter?

Yes, it's a tough-- our accruing TDRs are typically a rate in payment concession.

We'll go interest only for some period, for example.

We don't do a lot of TDRs where we actually reduce the interest rate.

There's some, but the majority of them really are in accommodation in the current payment for a specified period of time and then it'll revert back to the original terms.

And again-- and that's mostly CRE.

Okay.

And then wanted to ask on the capital side, is there a chance that you'll be thinking about repaying TARP soon or can you give us any update on your thoughts about capital ratios, the MOU and potential TARP repayment?

Yes, Brett, I-- we haven't thought about it very much because we're concentrated on getting out of the MOU at some time in 2011.

So I think once again, the earliest would be for repaying TARP would be for us would be sometime in 2012.

And then as to the MOU, we're making progress on getting things-- becoming profitable and reducing our watch list but it's -- I think that we really don't have a time on when it might get listed.

Okay.

That's good news to hear.

Thanks for all the color.

Thank you.

Your next question today comes from the line of Mike Zaremski of Credit Suisse.

Please proceed.

Hi, gentlemen.

Thanks for taking my question.

Yes, hi, Mike.

So circling back on some previous questions, so the OREO expense was negligible.

Are you guys kind of saying that you think this is a phenomenon that has some legs if certain appraisals can be reappraised upwards or is this-- should we start -- because the absolute OREO balance is sizable, so how should we think about that?

At this point in time, this is Dunson Cheng, our experience has been that as I mentioned before we have been able to sell the OREOs at the current book value and obviously there are going to be cases that it's going to be higher and there are cases it's going to be lower.

But my expectation is that there will be continuing amount of OREO charges.

However, the magnitude of that I believe is not going to be very significant.

Okay.

That's fair.

In terms of the loan growth, one of your competitors also had pretty good C&I loan growth.

So I'm curious, is this coming from new customers, existing customers?

Are you taking share from other banks outside maybe one of your biggest rivals, if you can give any color on that?

Well, most of the increases that we are seeing are coming from new customers and the new customers come from various institutions.

It's not entirely at certain of our competitors and so it's quite diversified.

And as you know that we have a new team that was organized in earlier this year and they focus mostly on the mainstream market and that team obviously is producing a part of the increase.

But we also see increases from our existing teams.

Okay.

And the commercial real estate loan side, I know you guys have perhaps, and you can correct me if I'm wrong, been de-emphasizing it a little bit in terms of its concentration.

It didn't run off that much this quarter.

What's your kind of outlook on commercial real estate loan balances going forward?

I would imagine that the balances will continue to drift down but it's not going to be very significant.

Okay.

And last, Heng, can you remind us what the DTA was and if you-- and how many quarters it would take to, if you stay profitable, to get it back?

Yes, actually we have, Mike, the DTA is around $100 million deferred taxed assets.

And this quarter that part that's disallowed for regulatory, for Tier 1-- for regulatory capital, that actually dropped a little bit, it's now about $20 million.

At the end of June it was $30 million.

And as-- if we continue to be profitable, each quarter will generate about $10 million, $10 million to $20 million of tax-- of deferred tax asset sheltering capacity.

So the-- so that's where we are.

We don't have an issue with having to write-off any portion of the book balance.

Okay.

That's very helpful.

Thank you guys.

Okay, thank you.

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

Please proceed.

Hi, good afternoon.

Hi, Lana.

Heng, I just want to see on the operating expenses this quarter it was very well controlled and lower than what I had anticipated.

Is the $35 million level sustainable?

OREO expense aside, is the rest of the decline that we saw linked quarter, is that a good run rate to use going forward?

The-- it should drift up a little bit.

We had about $800,000 adjustment in the occupancy expense this quarter.

We mentioned that in the text that's to correct an error in the depreciation on our-- at quarter's building.

And then we had some true-up on the FDIC insurance where we over-accrued at the end of June, that was about $700,000 or $800,000.

So I think we would -- the fourth quarter would-- should be increased by those two items and then hopefully in 2011 we might start to have bonus accruals.

But we haven't thought about that yet, so.

Okay.

So somewhere in the mid to high 30s is more reasonable run rate?

Yes, yes.

Okay.

Thanks, Heng.

Thank you.

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

Riley.

Please proceed.

Yes, hi.

Just wondering, first off, could you tell us where 30 to 89-day past dues stand?

Yes, it's around $37 million.

Okay.

And secondly, I guess aside from the reduction in occupancy expenses and the reduction in OREO, I guess there was a pretty good reduction in operating expenses pretty much all around.

Just wondering if that's sustainable, if there's any more savings to be had or what's a good run rate to use going forward?

Joe, I forgot, there was one other item which is on the operations of affordable housing investments, there was almost -- there was $900,000 of reduction on these investments.

We get K-1s for the prior year and otherwise we book on historical forecasts.

Anyway, that-- there was a catch-up adjustment here in the third quarter.

So I-- going back to Lana's question, I think a little closer to $38 million might be a good run rate.

Okay.

All right.

Thank you.

Your next question comes from the line of Julianna Balicka with Keefe, Bruyette & Woods.

Please proceed.

Good afternoon.

Good afternoon.

I was pleased to see some of your results this quarter including the decrease in your non-performing assets.

And while you talked about the movement of that large unnamed performing TDR that will be returning to performing, I was wondering if you could maybe talk about some of the passthrough resolution of some of your other either restructured, accruing, OREO or NPLs?

You mean this, Julianna, in terms of what happened in the third quarter or -- ?

No, in terms of what's going to be happening in the fourth quarter or the first quarter, like are there certain loans that you've already identified as moving on into foreclosure?

Is there certain amounts of OREO, of your $80 million of OREO, that are in the foreclosure process that you expect will close coming up?

Just I'm kind of trying to figure out where the $444 million total will go in the near future, next couple quarters assuming no new non-accruals.

Well, the-- I mean we're working most of them pretty hard.

We have, I'll start and then Kim can help me out, we have two residential condo projects that are over $10 million apiece.

One we're hopeful on getting, it's in the San Fernando Valley.

We're working with a borrower on a Deed-in-Lieu that hopefully should happen in the fourth quarter.

And then there's another one in west Hollywood.

We're selling that on the retail basis and it's selling up pretty well and if things go well, we should get a -- in the next year, we should get a recovery of $4 million or $5 million from that.

And so, Kim, any other large ones that -- ?

There's a couple large ones but they're probably two to three quarters out.

They're commercial real estate loans where we've entered into some agreements with the borrowers and we would expect something to happen.

But it's not going to be a fourth quarter thing.

We have some smaller loans where we've done some AB splits and the A loan's approaching -- getting seasoned and those will come back but they don't -- those ones don't add up to a particularly large amount.

So if I'm understanding correctly then kind of thinking about your NPA levels going forward, just kind of in the next one or two quarters, other than that large unnamed TDR and the two OREOs that Heng mentioned, assuming no new non-accruals, we should be kind of seeing a maybe stable level of NPLs just for the near term?

No, I think you'll see them even taking away the one large one, I think if you look at the history, you'll see meaningful dispositions during each quarter through a combination of repayment and foreclosure.

So if we had no in-flow, I think historically we would expect to see, relative to where we are now, probably at least 10% of the loans being resolved in any given quarter.

Very good.

Thank you very much.

Okay, thank you.

(Operator Instructions) And your next question today comes from the line of [Rem Shakhar] with FBR Capital Markets.

Please proceed.

Good afternoon, thanks for taking my question.

Could you just remind, do you have any specific reserves against this large TDR that you may release when it goes back accruing?

That one, no.

But in our earnings release we have a table by loan category as to what reserves we have and that's on --

On page five here?

Right, right.

So we have on our non-accrual loans, we have $23 million of specific reserve and so the remainder of our allowance is not allocated to these non-accrual loans.

And then of those specific loans that are on non-accrual, we charged-off $104 million already, and hopefully some of that will come back as we work them out.

Okay.

Thanks.

And just maybe based on all the actions that you're taking to boost your NIM, where do you think your NIM can really peak at?

Could it reach 4% levels or -- ?

Maybe by early 2012 but not -- we like to -- we want to do it gradually because we -- on one thing, we don't want to be -- we don't have to have a big portfolio of low-yielding securities and then have a sudden sharp increase in interest rates.

Thanks.

And congratulations on the quarter.

Thank you.

Your next question comes from the line of Chris Stulpin of Howe Barnes.

Please proceed.

Hi.

Thanks for taking my call.

Just kind of a quick follow-up question here.

As far as your deposit composition, I know you are allowing a lot of the higher cost CDs to run off and to reprice some as well.

But do you have a targeted amounts or targeted percentage of CDs that you would like to consist on-- well represent your total deposit base at some point and what point would that be?

Did you have that?

We're targeting eventually probably like a 90% loan to deposit ratio.

And I think the CDs, given the nature of our depositor base, they're always going to be 50%, 60% of that deposit base.

Okay.

That's it.

Thanks.

Okay.

Thank you.

Ladies and gentlemen, if there are no further questions, I would like to thank you for your participation, and I would now like to turn the call back over to Cathay General Bancorp's Management for closing remarks.

Thank you for joining us for this call and we look forward to talking with you again next quarter, that would be in January.

2011.

2011.

So thank you.

Ladies and gentlemen, this concludes today's presentation.

Thank you for your participation.

You may now disconnect and have a great day.