Cathay General Bancorp (CATY) 2010 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to Cathay General Bancorp's fourth quarter year and year-end 2010 earnings conference call. My name is Vanesia, and I will be your coordinator for today. At this time, all participants are in a 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.

Thank you, Vanesia, and good afternoon. Here to discuss the financial reports today are Mr. Dunson Cheng, our 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 today, 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 the 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 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 when it is required by law.

This afternoon, Cathay General Bancorp issued an earnings release outlining its fourth quarter and year-end 2010 results. To obtain a copy, please visit our website at www.CathayGeneralBancorp.com. After comments by Management today. we will open up his call for questions. I will now turn the call over to our Chairman of the Board, President and CEO, Mr. Dunson Chang.

Thank you Monica, and good afternoon, everyone. Welcome to our 2010 fourth quarter and year-end earnings conference call. This afternoon, Cathay General Bancorp reported net income of $18.1 million for the fourth quarter of 2010, or $0.18 per common share. That, compared to a net income of $17.3 million or $0.17 per common share for the third quarter. For the full year, net income was $11.6 million, compared to a loss of $67.4 million in 2009. We are gratified to be able to report a third consecutive profitable quarter, and positive net income for the full year of 2010.

We are also encouraged by the continuing stabilization in credit quality. During the fourth quarter, we placed a $47 million restructure loan back on accrue status, after it demonstrated sustained performance, under the restructured terms. As a result, our non-accrue loans decreased by $41 million during the fourth quarter to $242 million, or 3.5% of closed loans. In the same quarter, the provisions for credit losses dropped significantly to $10 million. That was lower than the net charge of $22.8 million for the quarter. Included in the charge off was a (inaudible) $7.4 million of selling expenses. Our reserve to loans was 3.6%, and the coverage of non-accrual loans was 101%.

For the full year, our core deposits grew 6.6% or $211 million. That allowed us to pay off $435 million in brokered deposits,and maintain a loan-to-deposit ratio of 94.6%. On the loan side, our C&I grew 10% to $1.44 billion, and residential mortgage loans increased 25% to $854 million,while CRE and construction loans dropped by 7.25% to $4.3 billion. Our net interest margin improved from 2.65% at 2009 year-end to 2.88% at year-end of 2010.

Through the fourth quarter of 2010, we pre-paid $340 million of fixed-rate FHLB borrowings, with an average rate of 4.85%, and incurred pre-payment costs of $13.4 million. To fund part of the repayment, we sold $304 million of mortgage-backed securities, from our investment portfolio for net gains of $9.6 million. Our capital ratios improved from September 30, 2010 as a result of the fourth-quarter earnings and the inclusion of our deferred tax assets in our capital. At December 31, 2010, our Tier 1 leveraged capital ratio increased to 11.44%. Tier 1 risk-based capital ratio increased to 15.37%, and our total risk-based capital ratio increased to 17.27%. Our ratios significantly exhibit well-capitalized minimum ratios under all the regulatory guidelines.

As our credit problems are stabilizing, and our capital ratio is strong, we are hopeful that our results will continue to improve, and that the worst is behind us. With that, I will turn the floor over to our Executive Vice President and CFO, Heng Chen, to discuss the fourth quarter and year-end 2010 financials in more details. Heng?

Thank you, Dunson, andgood afternoon, everyone. For the fourth quarter, we announced a net income of $18.1 million or $0.18 per share. The net interest margin for the fourth quarter was 2.88%, compared to 2.94% for the third quarter, and an increase of 23 basis points from 2.65% for the fourth quarter, 2009.

We expect steady improvement in the net interest margin in 2011 as a result of the pre-payment of another $200 million of FHLB borrowings, witha rate of 4.33% during the first quarter of 2011. The maturity of $100 million of repurchase agreements in March 2011 with a rate of 4.77%, the repricing of CDs to current market rates, and additional investments in mortgage-backed securities. Non-interest expense, excluding costs associated with redemption of debt, decreased $9.7 million or 18.4% to $43 million in the fourth quarter of 2010, compared to $52.7 million in the same quarter a year ago.

The efficiency ratio was 61.7% in the fourth quarter of 2010, compared to 64.3% for the same period a year ago,due primarily to lower OREO expenses and occupancy expenses. Fourth quarter 2010 OREO expenses of $10.7 million increased from $453,000 in the third quarter 2010, as a result of write-downs on land OREOs from new appraisals obtained during the fourth quarter. With that, I would 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 third-quarter earnings call, we expressed our hope that our situation with respect to credit problems was stabilizing, and that as the economy continues to improve, our non-accruals would begin to decline, that other key credit metrics would improve, and that we would no longer need to build up the loan loss reserve. I am pleased to report that the positive trends first apparent in the second and then third quarters have continued through year-end. Net charge-offs for the fourth quarter totaled 1.33% of loans, compared with 1.04% of loans in the prior quarter. These losses were concentrated in real estate loans, as this segment accounted for more than 80% of gross charge-offs for the period.

Fourth-quarter figures include $7.4 million in nonrecurring charges related to a change in our ALL methodology. In the first quarter, we initiated a policy under which we required an appraisal of collateral securing real estate loans, at least every six months, if the loan is $3 million or more, and the risk rating is substandard or worse. This policy remains in effect, since we believe that with the stabilization of real estate property values, this process has reduced 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 value, or as-is value basis.

The provision for credit losses was $10 million for the fourth quarter of 2010, compared to $17.9 million in the third quarter and $91 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 ALL.Our loss migration is heavily weighted towards our most recent loss history, and the recent reduction in net charge-off 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 2011.

Total non-accrual portfolio loans, excluding $2.9 million of non-accrual loans held for sale, decreased by 14.6% or $41.4 million to $242.3 million at December 31, 2010, compared to $283.7 million at September 30, 2010. During the fourth quarter, total inflows to non-accruals were $75 million, transfers to OREO were $28 million, charge-offs $25 million, and cures and repayments $64 million. Loans past-due 30 to 89 days at December 31 were $75.5 million, and are suggestive of only moderate in-flow of new non-accruals during the first quarter of the current year. With that, I would like to the call back to Dunson.

Okay, thank you, Kim.We will now proceed to the Q&A portion of the call.

(Operator Instructions).The first question comes from the line of Mike Zaremski, with Credit Suisse.Please proceed.

Hello gentlemen. The first question is on your expectation for loan growth. I see you say solid commercial and residential mortgage loan growth, so when you say commercial, is that the C&I loan growth, and will that be enough to potentially offset if you guys see commercial real estate continuing to decline?

Yes. When we talk about commercial loan growth, we refer to C&I loan growth. The drop in the CRE loan area is really due to land and construction loans, and we expect that our loan growth in C&I and residential mortgages should compensate for any decrease in those two categories.

Okay. And Heng, could you update us on your NIM guidance, where expectations are for the end of the year? I thinkbefore, you had talked about pre-paying a little more FHLB than you said in your prepared remarks?

Yes. We are, we feel better about our guidance, first, in terms of the first quarter prepayments, that $200 million of prepayments, we expect to incur a charge of $8 million and we expect to have $5 million to $5.5 million of security gains to offset the bulk of that, and in terms of where our NIM is, it was 2.94% for the month of December, and in terms of the four components that we are looking at in addition to just better loan growth, we think the NIM will improve by 10 basis points from using up the cash and the short term repo left on the balance sheet, just by reinvesting that into securities, and then we had been fairly conservative, because interest rates were fairly low and we kept , we did not buy any mortgage-backed securities for most of 2010, and just by redeploying cash flow the back into MBS, we would see improvement of around 15 basis points in the NIM, and having the CDs repriced down to 1%, that is another 15 basis points, and then, the prepayments and the maturities of the repo, that's 25 basis points, so that gets us to about 3.6 by the beginning of the

Okay. So I guess, so we can get this 3.6 even if there's not -- assuming there is not that many more securities gains to be realized?

That's right.

Okay. Thank you very much.

Thank you.

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

Good afternoon everyone.

Well, hi, Aaron.

Heng, just following up on that question with respect to margins, you mentioned some of the maturities in the repo book, are you also looking to call any that might be ahead of maturity?

Yes, there was one that matures in January 2012, that's for $50 million. That is 4.8%, so we will consider prepaying that in the second or third quarter. That is a discretional item, so if things, if loan loss provisions are lower, we would try to improve our balance sheet by prepaying more of the stuff.

Sure. And then, Kim, any update you can give us on any quarterly date progress in terms curse or resolving non-performers, and then, your outlook for additional improvements?

Well, as far as the outlook for additional improvement, we think that our fourth quarter non-performers were heavily impacted by a small number of, a handful of loans to one borrower that totaled about $34 million for the quarter, and we think there's reasonably good prospects for a near-term return to accrual in that situation. Beyond that, it will be the more customary reduction through foreclosure repayments, et cetera,consistent with probably what you have seen in the past. We have one construction loan, which, it's for a project in West Hollywood, that is selling very rapidly, we have taken about $5 million of charge-offs and we're hopeful that sometime in the first half, that we could book, we could realize most of that as a recovery. We should give back all of our outstanding book balance on that loan.

That is great. Any color on the TDRs in the quarter, in terms of the flows between the two buckets of TDRs and what you've had in terms of flows with things going back to accrual or going to the non-accrual bucket from there?

Going forward, or the past quarter?

What kind of trends have you seen in that?

Well, obviously the last quarter was very much impacted by a single borrower's loans, $47 million, that went from non-accrual to accruing, but still remains on TDR status. Beyond that, we had a small number, a couple of relatively small loans, less than $2 million, that went ORE during the quarter, so there wasn't a lot of movement there. For the fourth quarter in total, we had about $13 million in new non-accrual TDRs, and $19 million in accruing new TDRs, of which $15 million of that is attributable to three loans to a single borrower, CRE and construction loan up in the Pacific Northwest and then we had about $3 million in pay-downs there. We had, including the $47 million loan, we only had two loans during the quarter that returned to accrual as a result of an A-B note split. There's a few others out there, but they are not going to be meaningful in absolute amounts, for the next couple of quarters.

Thank you very much for the help.

Sure.

The next question comes from the line of Chris Stulpin with Howe Barnes. Please proceed.

Good afternoon.

Oh, hi, Chris.

What is your current unrealized gains in your securities portfolio? I know you mentioned that you may take some gains to cover some charges in the next quarter but what is the unrealized gain, currently?

Chris, it's on a net basis, it is $3 million, but on a gross basis, I am speaking from memory, we have gross gains of something like $15 million and losses that are $18 million or something. Basically, there is not much more beyond that $5 million or $5.5 million that I mentioned.

Okay. And may have mentioned this already, and I apologize if you have, what causes the large linked quarter increase in other non-interest income?

Yes. We have $300 million of interest-rate swaps, which we put on in the third quarter of 2009. That was part of our overall interest rate management strategy. And so they, for the first three quarters of 2010, we were booking realized and unrealized losses of about $3 million to $3.5 million a quarter, so the cumulative number for the first three quarters was about $10 million, and in the fourth quarter, with the increase in interest rates, that went to zero, and if interest rates stayed where they are, we have accrued roughly $6 million in unrealized loss and that should be enough to cover the swaps, for until they mature in 2012.

Okay. Thank you very much. I appreciate it.

The next question comes from the line of Brett Rabatin with Sterne, Agee. Please proceed.

Hi, good afternoon.

Well, hi, Brett.

Hey. Wanted to ask, on listening, you talked about the production and borrowings here continuing in the first quarter, can you give us an update on where you might think the balance sheet will be at the end of the year? We talked in the past about it possibly being about $1 billion lower than previous 4Q, can you give us kind of an update on overall balance sheet size, and then if your capital ratios would be significantly higher, do you think you might apply earlier to repay TARP, possibly?

Yes, I think the balance sheet probably would drift down to $10.25 billion. It might be a little higher, if loan growth is stronger than we think. And then in terms of repaying TARP, we are more focused on resolving and getting out of the MOU, and that can only happen after we make some more progress on reducing the watch lists, so we are very focused on that.

So that is where we are, we haven't thought about repaying TARP, our focus has been getting out of the MOU. In terms of capital ratios, at the end of 2010, assuming if we exclude the TARP preferred, our Tier 1 to asset ratio will be 10.25% and equity, common equity to assets would be 9%, so those tend to be above what the TARP repairs are reporting after they repay TARP.So long story short, capital is not the issue, it is our level of substandard loans and our internal credit quality that we are working on.

Okay. As relates to that, and kind of a follow-up, maybe Kim, if you could give us some more color on the watch list trends. You're saying they are positive, are you seeing that across the board? Are you seeing the improvement in hotel-type credits, what are the underlying trends in the improvement and watch list?

I would not say it is really focused on any one property type or market even, we are really seeing the same sort of trends, if you will, over most of the areas in which we lend. So to some degree, things will be influenced by some of the very large transactions that we are in that became problems, that should be ready to be upgraded sometime during the year, and beyond that, it's simply a more aggressive stance on our part to resolve particularly the CRE problems, which are, not surprisingly, the overwhelming majority of the problem.

Okay. Thank you for the color.

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

Thanks. Good afternoon.

Oh, hi, Joe.

Just following up on a couple of the questions that have been asked already. I guess, if you could talk more about the OREO sales activity in the quarter, and values realized, versus where they are on the books, and get a little more understanding of that. $10 million, $11 million?

This is Dunson Cheng. In the fourth quarter we settled roughly 20 OREOs for a dollar amount of roughly $34 million or so, and I don't believe we have to write down substantially an amount that was carried on the books.

That was actually a small net gain of less $1 million, and then since the end of the year, we sold one property, one large property that was just a shade over $9 million on our portion, and we have almost a dozen in escrow.

Our [PPE] has been pretty brisk.

Our write-downs were all from land, and partially is, we are on a six-month cycle for new appraisals, and there were very few transactions, and the few land transactions, we would characterize those as distressed sales because they are leading appraisals from banks to investors. But the appraisers then use those values to come up with the new appraised amount for our land portfolio and we are writing them down to the appraised value.

Joe, just a correction to what Heng just mentioned, the large property we sold was roughly $12 million, and we wrote down maybe less than $200,000 for the selling expenses.

Okay. So the $10.7 million other real state owned expense this quarter was primarily this appraisal issue you were talking about, Heng?

Yes.

Okay. And then the other question was just, if you could talk about additional broker deposits maturing maybe here in the first quarter and going forward in general, and potential impact that could have on the margin as well?

Yes, Joe, there was about $300 million that would mature in 2011. They are pretty uniform, they're probably on $75 million a quarter, and they are in the 1.5% range, 1.75%. It is helpful, but it doesn't make that big of a difference.

Okay. That is great. I appreciate it.

Thank you.

(Operator Instructions).And the next question comes from the line of Julianna Balicka with KBW. Please proceed.

Good afternoon.

Hello, Julianna

How are you?

Good, good.

A couple of quick questions please. On the new loans from new loan originations this quarter, I do not be specified the dollar amount of the of the new C&I and the residential loans, please?

I specified the dollar amount

Right, on top of my head, and is very difficult to give you individual dollar amounts, that fourth-quarter increase is, how much?

Fourth quarter, the first quarter, or the fourth quarter?

We don't have that number. We don't have that number. We will have to get back to you.

Thanks. In thinking about your margin, posted 3.6 number that you described earlier, what yields are new loans coming in at, and if I want to think about how are you going to go from 3.6 onwards, beyond the first quarter, outside of the brokered deposit repricing that you just referenced in Joe's question, what are some of the other moving parts that we can see anymore margin lift, or if the rates stay flat where they are right now, are you going to be a 3.6 level until basically loan demand comes back?

On the new originations, most of our new origination, first of all, we are not making any CRE loans, but we are trying to get floors in the low 5% on floating rate loans. So that is a little bit less than our average yield. And then, in terms of what happens, we have a steady stream of maturities in 2012 as well, and then in terms of improvement in the margin, if interest rates go up more, we can then resolve our $1.4 billion of structural repos that are still remaining at a minimal cost. So those are the drivers for improvement in the margin in 2012.

But if rates stay flat, we are basically going to be a little bit above 3.6 but not a huge shift for the remainder of the year?

Yes, not for 2011. Right.

Right. Okay yes. That is what I wanted to clarify. At a quick follow-up, if I may, to one of your comments earlier, I think Kim, you were mentioning $7.4 million of nonrecurring charges due to the change in allowance methodology. I did not catch that, was that in this quarter?

Right. Yes it was in this quarter.

Could you talk about that a little more, please?

Sure. Previously, our practice was to reserve rather than charge-off estimated disposition costs on real property securing non-accrual loans and we changed our methodology this quarter to charge that off rather than reserve it, and had we had a total of $7.4 million in reserve costs coming into this quarter that we charged off, in addition to anything that came in new this quarter, but the point is, the $7.4 million had already been reserved, and we simply charged it off.

What drove the change to your methodology, please?

Driving that really was, we were permitted to reserve rather than charge off by our primary regulators in prior periods, and their guidance has changed, or recommendations have changed, in that regard.

Very capricious of them. Thank you very much for taking my questions.

(laughter) Certainly.

The next question comes from the line of Ryan Stevens with Philadelphia Financial.

All of my questions have been answered at this point, thank you very much.

Thank you.

And the next question comes from the line of Mike Zaremski, with Credit Suisse. Please proceed.

Hey, I've just got a quick follow-up, and you could tell me off-line if you would like, a couple of the occupancy expense, do we expect a change in the methodology, is that a normal run rate, and non-interest income, I know there are swaps in there, I don't know what is a normalized trend line for that line item?

On the occupancy, that number was low in the fourth quarter because we corrected the 2009 mistake, so you should add $1.7 million to the fourth quarter number and that would be the quarterly run rate, but the non-interest income, if interest rates don't drop, the fourth quarter number, excluding the security gains, is a good run rate.

That is the $4 million figure in other operating income? Okay.

Yes.

Thanks for taking my questions.

Sure.

The next question comes from the line of Ram Shankar with FBR Capital Markets. Please proceed.

Good evening and thanks for taking my question. Most of my questions have been answered, but you briefly mentioned the MOU, now that your CRE concentration risk is less than 300% of your capital, what are the other steps that you need to show to get that removed?

Ram, I think what I mentioned, it's the internal watch list, and that is, we need to make progress in that, and we are hopeful by late in the year, that we'll get to a somewhat lower number, which would then be sufficient for removal of the MOU.

Okay. In terms of any market opportunities for pending mergers in your markets, do you see any opportunity absorbed by other lending teams?

We are hiring new loan officers. The MOU does not restrict us from that.

I mean pending mergers in your markets.

Not mergers, that's one of the outcomes of the MOU, is that we should be focused on our internal improvement.

Okay. Thank you for taking my question.

(Operator Instructions). Thank you for your participation. I will now turn the call back over to Cathay General Bancorp's management for closing remarks.

Thank you, this is Dunson Cheng again, thank you for joining us for this call, and we look forward to talking with you at our next quarterly earnings release date. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect.