Cathay General Bancorp (CATY) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's second-quarter 2011 earnings conference call.

My name is Manesia, and I will be your operator for today.

At this time all participants are in a listen only mode.

We will conduct a question-and-answer session toward the end of the conference.

(Operator Instructions)

Today's call is being recorded and will be available for replay at www.CathayGeneralBancorp.com.

I would now like to turn the call over to Monica Chen, Investor Relations for Cathay General Bancorp.

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 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 positions 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 10K for the year-ended December 31, 2010, at Item 1A in particular, and 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 2011 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 the CEO, Mr.

Dunson Cheng.

Thank you, Monica, and good afternoon.

Welcome to our 2011 second-quarter earnings conference call.

This afternoon, Cathay General Bancorp reported net income of $24.3 million for the second quarter of 2011 or $0.26 per common share.

That compared to a net income of $22.1 million or $0.23 per common share for the first quarter.

We are happy to be able to report a fifth consecutive profitable quarter.

Our total loans at the end of the second quarter grew modestly to $6.92 billion, however, the mix of our loan portfolio continued to evolve.

Our CRE and construction loans dropped from a high of 68% of total loans in 2009 to below 60%.

In this quarter alone, they decreased by $124 million or at a 12% annualized rate.

On the other hand, commercial loans had a significant increase of $106 million or 27% annualized in the second quarter and $196 million for the first half of 2011.

Our residential mortgage loans also increased by $44 million in the quarter and $89 million for the first half of the year or 20% annualized.

As a percentage of loan portfolio, commercial and residential mortgages increased to over 37% of total loans from below 30% in 2009.

The growth in commercial loans came from increased borrowings from our pre-financed borrowers, new borrowers and growth in our Hong Kong branch.

We also plan to see continued progress in credit quality.

Our non-accrual loans decreased by $18.1 million during the quarter.

Subsequently, on July 1, we received a $7.4 million pay down of a non-accrual $9 million loan and on July 5, we obtained title to $14 million of Texas properties.

Our reserve to loans was 3.3% and the coverage of non-accrual loans were at 90%.

Net charge-offs for the second quarter of 2011 were $21.8 million or 1.26% of average loan on an annualized basis compared to $10.4 million in the first quarter of 2011.

Our loan loss provision was $10 million for the second quarter compared to $6 million for the quarter of 2011.

Our net interest margin improved from 3.06% in the first quarter of 2011 to 3.19% in the second quarter.

During the second quarter of 2011, we prepaid $100 million of fixed rate FHLB borrowings with a rate of 4.24% and $15 million of repurchase agreements with a rate of 4.83%.

Total prepayment costs of $5.2 million were offset by the like amount of security gains.

On June 30, 2011, our Tier 1 leverage capital ratio increased to 12.2%, Tier 1 risk-based capital ratio increased to 15.75%, and total risk-based capital ratio increased to 17.67%.

All ratios significantly exceeded well capitalized minimum ratios under regulatory guidelines.

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

Thank you, Dunson, and good afternoon, everyone.

For the second quarter, we announced net income of $24.3 million or $0.26 per share.

The net interest margin for the second quarter was 3.19%, an increase of 13 basis points from 3.06% for the first quarter 2011.

We expect continued and similar improvement in the net interest margin during the second half of 2011 as a result of additional prepayments of FHLB borrowings and higher yields on our securities portfolio.

We will also look into opportunities to repay any remaining FHLB borrowings and restructure a portion of our structured -- a portion of our repurchase agreements in 2012 to continue to lower the overall cost of funding.

Non-interest expense, excluding costs associated with retention of debt increased $1.3 million or 3.2% to $40.2 million in the second quarter of 2011 compared to $39 million in the same quarter a year ago due primarily to higher OREO and legal expense in the second quarter of 2011.

Income tax expense for the second quarter of 2011 was reduced by $610,000 from recognition of prior year new markets tax credits.

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, everyone.

I am pleased to report continued improvement in key credit metrics during the second quarter.

Classified loan and non-accrual loan totals both reflect improvement during the quarter and contributed to a provision for credit losses of $10 million compared to net charge-offs for the quarter of $21.8 million.

Net charge-offs for the first quarter totaled 1.26% of loans compared with 0.60% of loans in the prior quarter.

As in recent quarters, losses were concentrated in real estate loans as this segment accounted for 68% of gross charge-offs for the period.

Commercial and industrial loans represented a material source of charge-offs during the quarter totaling $8.6 million in the current quarter compared to $1.4 million in the first quarter.

Charge-offs were relatively concentrated during the current quarter as 3 CRE loans accounted for $7.5 million in charge-offs, 3 C & I loans totaled $6.6 million in charges, and the sale of 6 notes, all financing commercial real estate, resulted in an additional $3.7 million in charge-offs.

The provision for credit losses was $10 million for the second quarter of 2011 compared to $6 million for the first quarter of 2011 and $45 million for the same quarter a year ago.

Trends for classified credits remain positive as loans rated substandard or worse decreased from $726 million at March 31, 2011, to $679 million at June 30, 2011.

A reduction in classified credit exposure has the effect of reducing all other factors held constant the amount of our all.

We anticipate that a continuation of current trends will allow for a quarterly loss provision that is less than net charge-offs for the 2 remaining quarters of 2011.

Total non-accrual portfolio loans, excluding $1.6 million of non-accrual loans held for sale, decreased by 6.6% or $18.1 million to $256.4 million at June 30, 2011, compared to $274.5 million at March 31, 2011.

During the second quarter, total in flows to non-accrual loans were $99 million, transfers to OREO were $27 million, charge-offs were $27 million, tiers and repayments were $25 million, and the sale of 6 loans, net of charge-offs, totaled $38 million.

On July 1, we received a $7.4 million payment which was mailed on June 30 for a loan on non-accrual status and on July 5, we obtained title to $14 million of Texas properties, so we are off to a very good start for the third quarter.

New non-accruals during the second quarter included 3 residential construction loans for $30 million, a loan on a nursing home for $17 million that, while restructured and paying according to terms, is currently performing poorly and generating insufficient cash flow to service debt, and a loan for $9 million that is subject to an eminent domain sale at less than the loan amount.

Loans past due 30 to 89 days at June 30, 2011, were $43 million and are suggestive of only moderate inflow of new non-accrual loans in the third quarter.

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

Thank you, Kim.

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

[OPERATOR INSTRUCTIONS].

Aaron Deer, Sandler O'Neill Partners.

Hi, good afternoon, gentlemen.

A couple questions for you.

I guess starting with credit.

It sounds like you're continuing to see some good success on that front.

I'm curious, given where the classified loans overall have come down to, is there a threshold at some point that the regulators are looking for before they might consider lifting the MOU?

Well, Aaron, it's Kim.

I don't -- we have in mind a threshold but there's nothing been firm stated as an absolute threshold that we would have to get to.

We think we're getting closer but still have a ways to go.

Okay, and then Heng, on the margin you mentioned some opportunities to continue to cut your funding costs I missed the last one.

Was that the structured repos that you were referring to that could also see some repayments that would help out?

Yes, that's more for 2012.

We've -- over -- these low interest rates have been here for 3 years and it looks like it's going to be around for another year and a half, so these are sort of unprecedented times, and what we've done over the last 18 months is, we've taken our $1 billion federal home loan bank funding and we've reduced it to $250 million, and in the third quarter we'll continue to pay that down, and then what we have left is a $1.4 billion of structured repos.

Of that, $650 million is at 3.5%, so we don't intend -- we have match invested those with MDS, and so what we have left is $750 million of structured repos that average about 4.7% in cost and starting in 2012, two-thirds of that will mature in 24 months.

So if interest rates still are going to be low, we would try to take those 2-year structured repos and extend them by another year or year and a half and that would reduce the cost of funding down to somewhere in the 3% range, so that's an alternative.

And then by doing that, there's no charge to earnings under GAAP, when you do a restructuring like that.

Okay, and then you had suggested that for this year, the pace that we've seen year-to-date in terms of margin expansion is likely to continue.

I guess that would put us up around the 350 level or so by the end of the year.

Does that sound about right?

Yes, I think it's probably closer to 3.45 on the December run rate.

It has to do, if our loan loss provision is lower, we would prepay FHLB borrowings sooner, so that might get us to a higher number but right now, we're kind of thinking we'll prepay like $100 million a quarter, sort of spread out through the quarter, so closer to 3.45 in December and then we'll continue to improve the margin in the first half of 2012.

Okay, great.

Thanks for taking my questions.

Thank you, Aaron.

Joe Morford, RBC Capital Markets.

Good afternoon, everyone.

I guess a couple questions, first if you could just talk a bit more about the problem loan sale in the quarter, the types of credits.

It sounds like maybe it was a $3 million discount or loss on the sale of that and what kind of buyer, and do you see doing more of these going forward?

Yes, the total charges were about $3.7 million.

These were all CRE loans that we sold.

All of them classified assets at the time.

They were sold to generally individual buyers, as opposed to an institutional buyer buying a portfolio, so they were essentially negotiated as one-off individual sales.

Going forward, we would like to engage in these as the opportunities arise, because of the way you do them as a one-ff you obviously have to have somebody who has particular interest in a specific property as opposed to just buying a portfolio of assets, but we'll look for those opportunities going forward as well.

It's a relatively inexpensive way to dispose of classified loans.

Right.

2 of those, excuse me Joe, 2 of those were construction loans in New York where values have been stronger.

And also, Joe, this is Dunson.

The individuals that we are selling to are existing bank customers that has large deposits with us, and in this climate, it's difficult for them to make investment that's close to the yield that we're giving them, so that creates opportunity for the bank to sell some of the non-performing assets or notes to them.

Makes sense.

Okay, and then I guess the other question I had was, if you could just talk a bit more about the commercial loan growth in the quarter?

It sounds like a lot of that was the trade finance business and of that piece, I wondered how much of it was done in the Hong Kong office and just how big is that portfolio over in Hong Kong today?

I think the Hong Kong portfolio at this point in time is about $127 million, and the growth is pretty diversified and there are quite a number of loans that are generated on the branch level, at a lower amount below I would say a couple of million and then, of course, we are seeing recoveries of our importers, and because of that, they require a higher amount of credit and the outstanding are higher so that's another source of repayment and then we did acquire a number of new customers in the quarter, so it's pretty diversified, Joe.

Okay, and then I guess follow-up to that.

The $127 was the Hong Kong.

Where was that maybe 3 months ago?

Oh, I would say it's about $80 million.

Well I think at the beginning of the year, it was probably $80.

$80 million.

$80 okay.

Growth in the second quarter was 20 and then the first quarter was about 30.

Okay, that's fine.

Thanks so much.

Lana Chan, BMO Capital Markets.

Hi, good afternoon.

Just a follow-up to Joe's question on the C&I growth.

Just came in a little bit stronger than I expected this quarter given the softness in the economy, but can you talk about the pipeline, how it looks going into the third quarter, if it's sustainable?

Yes, the pipeline seems to be encouraging.

I would expect that in the third quarter the growth is similar, if not a little bit stronger.

Okay, so by the end of this year, we should see sort of mid-single-digit total loan growth as C & I picks up and we see less of a run-off in some of the other portfolios, would that be fair to say?

I think, Lana, it's Heng Chen.

I think maybe 3% or 4%.

I mean, we're still trying to work out some CRE customers and with loans, so there's going to be more decrease there.

Okay, and just in terms of the overall balance sheet, with the security sales this quarter and what your plan to do for the rest of the year, how should we think about sort of overall balance sheet levels or average earning asset levels going forward?

Lana, it should be flat to June 30, so as we have loan growth, we're going to shrink our securities portfolio.

Okay, thank you.

Lana, this is Dunson Cheng.

Let me add a little bit to what Heng said about our loan growth.

Up to now, we sort of restrained from making CRE loans and more recently we're seeing some uptick on the request of CRE loans so we'll see what happens in the fourth quarter.

Okay, thanks, Dunson.

Ram Shankar, FBR.

Good afternoon, gentlemen.

Thanks for taking my questions.

Just a question, so you've strung together 4 quarters of profitability now.

Do you guys have any kind of conversation with your auditors in terms of any opportunities to recover deferred tax assets pertaining to NOLs?

Actually, all of our deferred tax assets are on our balance sheet.

We have, for regulatory capital purposes, at the end of June we have about $10 million of deferred tax assets that's not allowed in capital.

We see that, it was about $25 million at the end of March and zero at the end of December, but anyway, those disallowed deferred tax assets, we see that reversing by September 30.

So as we have more quarters of profitability, we shouldn't have any more deferred tax assets disallowed for regulatory capital.

Okay, thanks.

And just to clarify on the NIM guidance, the 3.45.

Is that comparable to, I think the last couple of quarters you've talked about the NIM hitting 3.6.

Is that a comparable number?

Are we talking about the same timeline?

Is it just a change in your propensity to prepay some of these FHLBs?

Yes.

I think we're less bullish on the NIM, obviously, with the economy being so weak, so it's going to take us longer to get to 3.6.

Some time in 2012.

Okay, fair enough and then one last question.

Last quarter, you also mentioned that you might have $3 million to $5 million of OREO gains.

Now did those materialize this quarter?

That was scheduled to close late in the third quarter and it just fell out of escrow this week, so that's one reason why we're slower to prepay our FHLB borrowings.

Okay, Thanks for taking my questions.

Appreciate it.

Sure.

Chris Stulpin with Raymond James.

Thanks and good afternoon.

If I missed this I apologize, but what was the loan production in the quarter, and if you have it for this quarter, what was it last quarter, total loan production?

We don't track that.

We just report a net number, but Dunson sort of covered that in his remarks.

It's $106 million for commercial loans and I think $40 million in mortgage, residential mortgage, on a net basis.

Yes, $44 million.

Okay, I did miss it then, sorry about that, and of the 91 basis point cost of deposits, how much lower can you bring that down over the next quarter or so in order to maybe support your NIM expansion?

A few basis points.

We don't have, we only have $300 million of broker CDs, true broker CDs and the rest is relationship CDs and so we want to be competitive and pay a fair interest rate, so in terms of the cost of deposits, maybe 5 to 7 basis points from here to the end of the year but there's not that much that we could achieve.

Okay, fantastic.

Thank you very much.

Okay, sure.

Gary Tenner, D.A.

Davidson

Hello, can you hear me?

Yes, hi, Gary.

Oh, hi, sorry about that.

Just a question on the construction portfolio, down about another $35 million or so this quarter.

Is there a level to which you think that that stabilizes in terms of whatever is in there that would be stuff that might not be worked out quite as aggressively?

We said in the past that it's probably down to $100 million and we haven't been making new construction loans.

So I mean based on, would that be on the current pace probably of run-off or are we looking at another 18 months or so until you get down to that level, would that be about.

Probably.

The timeline?

Yes.

Okay, and in terms of the reserve, can you tell us what the qualitative part of the reserve is this quarter versus where it was last quarter?

The qualitative reserve is generally the same.

We have, it's basically about 1% that's on environmental factors, and then we have moving averages on past credits but compared to a few quarters ago, we have a larger portion of our reserve that's unallocated which we're going to evaluate each quarter as to how much that should be.

Okay, great.

Thank you.

Ladies and Gentlemen,

[OPERATOR INSTRUCTIONS].

Julianna Balicka, Keefe, Bruyette & Woods.

Good afternoon.

I have a couple follow-up questions.

Can you, kind of touching on the topic that Ram began with the NIM, the 3.45 December run rate versus the 3.6 that you had previously kind of discussed and which had migrated down to maybe the 3.5 level during the course of the quarter.

In terms of getting from where you're at now, to the 3.45, can you kind of walk us through where the improvement will come from in terms of bips from this or that?

And also, in terms of just being less bullish on the economy, could you kind of discuss your thought process on how you changed your mind on the NIM, and therefore if the economy stays where it is now for the longer term, is this an ongoing moving target, or you know what I mean?

Yes, I guess first, I think one of the things that has changed is the fact that we continue to experience pressure on our floors.

They're still in the low 5% but if prime is not going to go up until late 2012, we're going to be less -- we're going to get some erosion there.

And then two, the fact that we're having more growth in commercial loans, that also puts a little more -- it has some impact on it,.

And then, I think the pace of prepaying the Federal Home Loan Bank, that guidance originally envisioned us prepaying all $250 million by October 1 and now, we're thinking that maybe $100 million of it would be prepaid in early 2012 of the Federal Home Loan Bank.

So those are some of the moving parts.

And then lastly, we were going to buy more MBS but given the very low interest rates here, we're not going to grow that securities portfolio, that part of the securities portfolio.

So what are you growing in your securities portfolio right now, if anything at all, although you did refer to offsetting securities with loans.

Well, it's flat to down.

When we had that prior guidance, we envisioned sort of growing the securities portfolio by another couple of million or $200 million or $300 million with MBS.

So now you're just going to keep -- are you planning on doing any more securities sales and replacing any, or are you going to keep the portfolio fairly steady from the mix perspective?

We sold some here in July to fund a small prepayment of Federal Home Loan Bank borrowings, and we'll consider more later on but it shouldn't be much.

Oh, very good.

Excellent, and then as a follow-up, also could you discuss the lower than previously tax rankings in a little bit more detail there just to help us understand?

Yes.

I think in my comments there's $610,000 of tax credits that we recognized here in the second quarter.

It relates to new markets tax credits and there were certain technical compliance requirements that, like audited financial statements for the special purpose sub, which we finally got completed, so based on those items, we were able to recognize this tax credit which related to prior years.

So okay, very good.

Excellent, and thank you very much.

Those are my follow-ups.

Okay, great.

Thanks.

Robert (inaudible), Wells Fargo.

Hello, Dunson.

After your TARP situation is resolved, what do you think your overall dividend policy will be?

Well, our dividend has always been to share an equal portion with our shareholders; however, at this point in time, our dividend situation has not changed.

We are still required to pay to repay our TARP before we can resume our -- at a higher dividend level.

At this juncture, we are thinking that we should, and hope to repay TARP in maybe in the middle of next year and if that occurs, then the next level we will consider increasing our dividend commensurate with our results.

Okay, so that's some time later in 2012?

Yes, hopefully.

Okay, thanks, Dunson.

Thank you, Bob.

Ram Shankar, FBR.

Thanks for taking my follow-up.

So one of your peers also reported today, and they also saw some sizeable increases in their trade finance and commercial book, they had about $500 million of new originations.

Is there something inherently in the second quarter?

Is there a seasonality that, despite weak economic signals, that you guys are able to see such strong loan growth, and does the competition affect pricing in any way?

Could you maybe just give some color on the pricing that you're seeing on these new originations?

Yes, and typically with importers, their peak season would be the second and the third quarter for them to import additional merchandise for the Christmas season, so the first and the second quarter would be, I would say it's still not into the peak season, I would imagine the third quarter would be the one that would see a high usage of our lines.

Okay, and do you see any effective competition on pricing?

I mean what are the pricing terms generally now?

I think pricing wise, we are still having a majority of our lines with the floor but the floor as Heng has reported is lower now from before.

Previously we were able to get a floor at maybe 5.5%, right now it may be 5% or even a little bit lower, so we do see some competition in pricing.

However, it's still quite profitable and sustainable at this juncture.

Okay, great.

Thanks.

Julianna Balicka, Keefe, Bruyette & Woods.

Thank you for letting me ask a follow-up.

Quick question.

On the non-accrual loans that you sold this quarter where you took the additional charge-offs, what were they marked to before the charge-offs, and what was the percentage, the average mark at which they were actually sold?

Well, in total, they were on our books for a little less than $41 million.

Yes, but the sum of those had charge-offs.

That was her question, compared to the contractual amount.

The sum of the charge-offs or the ones that did have charge-offs?

Right, right, right.

Oh, well of the 41, all but about 2.5 had some sort of charge-off, so it's about $3.2 million in charge-offs against roughly $38 million in loans that had charge-offs.

Well, no but what was the unpaid principal balance on that $41 million prior to the $3.2 million charge-off that happened with the sale?

I think it's closer to like $52 million, the customer balance.

Oh, yes probably around $50 or so.

Okay, and so then the $3 million additional charge-off, was that more related to like sale costs or, because they were already carried at fair value right, so it's just more like a typical charge sale or do the values just kind of move downwards with the market?

They just moved down a little bit.

Each one is an individually negotiated sale and that's just where the price came out.

And how much of that was sale costs?

None.

Oh, okay.

So none of that.

Very good.

Excellent, thank you very much.

Okay.

Thank you for your participation.

I will now turn the call back over to Cathay General Bancorp Management for closing remarks.

Thank you for joining us for this call and we look forward to talking with you again at our next quarterly earnings release that will be in October.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.