Cathay General Bancorp (CATY) 2011 Q3 法說會逐字稿

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

My name is Jonathan and I will be your coordinator for today.

At this time, all participants are in listen-only mode.

Following 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'd like to turn the call over to Monica Chen, Investor Relations for Cathay General Bancorp.

You may proceed ma'am.

Thank you, Jonathan, 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 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, 2010 at item 1A 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 forward-looking statement or to publicly announce any revision of any forward-looking statements to reflect future developments or events except as required by law.

This afternoon, Cathay General Bancorp issued an earnings release outlining its third quarter 2011 results.

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

After comment of 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 2011 third quarter earnings conference call.

This afternoon our Company reported net income of $26.1 million for the third quarter of 2011 or $0.28 per common share.

That compared to a net income of $24.3 million or $0.$0.26 per common share for the second quarter.

We are happy to report a sixth consecutive profitable quarter.

Our total loans grew 6% annualized during the third quarter to $7.02 billion.

Commercial loans increased by $184 million or 45% annualized.

The growth in commercial loans came from increased borrowings from our commercial and trade finance borrowers.

Also from new borrowers and to a lesser extent growth in our Hong Kong branch.

Our residential mortgage loans also increased by $26 million or 11% annualized.

Our CRE and construction loans dropped during the third quarter by $108 million or at 10% annualized rate and now comprise only 57% of our total loan portfolio.

We are also glad to see continued progress in credit quality.

Our non-accrual loans decreased by $49.6 million during the third quarter of 2011.

Our reserve to loans was 3% and the coverage of non-accrual loans was 109%.

Net charge-offs for the third quarter were $29.5 million or 1.69% of average loans on an annualized basis compared to a $21.8 million in the second quarter 2011.

Our loan loss provision was $9 million for third quarter compared to $10 million for the second quarter of 2011.

Our net interest margin improved from 3.19% in the second quarter to 3.32% in the third quarter of 2011.

During the third quarter, we prepaid $100 million of fixed rate FHLB borrowings with a rate of 4.57%.

Total prepayment costs of $4.5 million were more than offset by $8.8 million of security gains.

On September 30, 2011, our Tier 1 leverage capital ratio increased to 12.6%, Tier 1 risk-based capital ratio increased to 15.83%, and total risk-based capital ratio increased to 17.72%.

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

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

Heng?

Thank you, Dunson, and good afternoon everyone.

For the third quarter, we announced net income of $26.1 million or $0.28 per share.

As Dunson mentioned, the net interest margin for the third quarter was 3.32%, an increase of 13 basis points from 3.19% for the second quarter of 2011.

We expect continued improvements in the net interest margin during the fourth quarter of 2011 as a result of restructuring of FHLB borrowings and a decrease in short-term investments.

Non-interest expense excluding costs associated with redemption debt increased $13.5 million or 38.7% to $48.4 million in the third quarter of 2011 compared to $34.9 million in the same quarter a year ago due primarily to higher OREO write-downs and FHLB prepayment penalties in the third quarter of 2011.

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.

I'm pleased to report continued improvement in key credit metrics during the third quarter.

Classified loan and non-accrual loan totals both reflected improvement during the quarter and contributed to a provision for credit costs of $9 million compared to net charge-offs for the quarter of $29.5 million.

Net charge-offs for the quarter totaled 1.69% of loans compared with 1.26% of loans in the prior quarter.

As in recent quarters, losses were concentrated in real estate loans, as this segment accounted for 95% of gross charge-offs for the period.

Charge-offs were relatively concentrated during the quarter as 7 construction loans accounted for $23.5 million in charge-offs and 1 commercial mortgage accounted for $4 million in charge-offs.

The provision for credit losses was $9 million for the third-quarter of 2011, compared to $10 million for the second quarter of 2011, and $17.9 million the same quarter a year ago.

Trends for classified credits remain positive, as loans rated substandard or worse decreased from $687 million at June 30, 2011 to $587 million at September 30, 2011.

Reduction in classified credit exposure has the effect of reducing, all other factors held constant, the amount of our [AUL].

We anticipate that a continuation of current trends will allow for a quarterly loss provision that is less than net charge-off for the fourth quarter of 2011.

Total non-accrual portfolio loans, excluding $1.3 million of non-accrual loans held for sale, decreased by 24.8% or $63.7 million to $192.7 million at September 30, 2011 compared to $256.4 million at June 30, 2011.

During the third quarter, total inflows to non-accruals were $52 million, transfers to OREO were $32 million, charge-offs were $31 million, and [cures] and repayments were $54 million.

New non-accruals during the third quarter included 1 non-residential construction loan for $20 million, 4 commercial mortgages for $13.8 million, 1 land loan for $1.2 million, and one C&I loan for $11.3 million.

Loans past due 30 to 89 days at September 30, 2011 were $29.3 million, and are suggestive of only moderate inflow of new non-accrual loans in the fourth quarter.

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

Thank you, Kim.

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

Ladies and gentlemen, we are ready to open the lines for your questions.

(Operator Instructions)

Chris Stulpin, Raymond James.

Last quarter, I asked if your deposit costs had any additional room to decline, and I believe you indicated there was very little room given, basically, the profile of your deposit base.

Yet, in the comments in the press release indicated that net interest margin may improve going forward in part, or in large part, driven by deposits repricing.

Can you tell me how you view deposits repricing going forward?

Yes, Chris, this is Heng Chen.

I think the change in our outlook is really due to the Fed.

In between our last conference call and now, the Fed came out and said that they weren't going to raise interest rates until late 2013.

And the short-term rates, obviously, were impacted.

So, we think that, based on what we see in the wholesale CD markets, that our time deposits, which have an average rate of 1.22%, that those should drop over the course of time to be below 1%.

Our average CDs, the average remaining maturity of our CDs is 6 months.

So, I think that's the area of greatest improvement.

Also, the money market accounts, we lowered those 10 basis points after the Fed's discussion -- or after the Fed's announcement.

And we continue to look at that.

So, those are the reasons for the changes and for the CD cost.

Sure, that makes sense.

That was my 1 question.

Thank you.

Joe Morford, RBC Capital.

Thanks, good afternoon, everyone.

Hi, Joe.

Questions on credit quality, first, with the OREO expense this quarter up $6 million or so, was that loss on sale, or largely coming from updated appraisals?

And, where you are seeing that?

Joe, this is Heng Chen.

About $4 million of it is from writedowns.

In terms of the actual sales, I believe we had a low quarter for sales, only about $9 million.

And there was generally no loss on sale.

But, one of the things that -- this was a relatively high quarter for new OREOs, so we pay property taxes upon foreclosure, and we also accrue future property taxes.

And then, lastly, on the $4 million of writedowns, there was about $2 million where it's for 2 office buildings in Texas that we -- even though the appraised value supported a higher number, we wrote that down because we started marketing it at a lower number in an effort to try to move that.

So, in terms of the fourth quarter, we have a number of new appraisals that are due, but we are hopeful that the expense will be a little lower.

Okay.

And then, the other question was just, Kim, if you could talk a little bit more about the increase in the charge-offs.

Sounds like really concentrated in the construction portfolio there.

What was driving that?

Was any of it related to any new non-accruals you had in the quarter, too?

Yes.

First, yes, they are very concentrated.

$23 million approximately was 7 loans.

It is related in part to some new non-accrual inflow.

We had 1 loan for $20 million, which went non-accrual, was also the subject of an A/B split.

And the A was subsequently returned to accrual, but we incurred a charge-off of about $10 million on that particular loan.

That was our largest charge-off for the quarter.

And then we had another construction project in the neighborhood of around $7 million in charge-offs.

So those two were the largest, and there was a handful of other ones over $1 million that got you to the total.

But most of those charge-offs were already in our allowance methodology.

So, that's the reason why the loan-loss provision was only $9 million when charge-offs were $29 million.

As well as a $100 million drop in substandard loans.

Okay, makes sense.

Thanks, Heng.

Aaron Deer, Sandler O'Neill & Partners.

Good afternoon, guys.

Following up on Chris's question with respect to the interest expense on deposits.

Also wanted to touch on FHLB borrowings.

Seems like you might still have some FHLB borrowings that could be prepaid.

What are the thoughts there?

Aaron, we have one for $150 million.

It would cost us, depending on when we prepaid it in the quarter, about $4 million to prepay it.

So that's 1 alternative.

Another alternative is a number of banks have restructured FHLB borrowings.

These $150 million of borrowings mature in August.

And so if we extend that event by, let's say, 3 years, we would lower the average cost from 4.6% to probably 2% without incurring any P&L charge.

So those are the 2 avenues that we would think about it.

And then more for 2012, we have $950 million of structured repos that mature in early 2014.

Those are generally 4.5%.

So, in early 2012, they would have 2 years left, and under the accounting rules, if we do extensions of those, we could lower the coupons by 1% to 1.5% without taking any P&L charge.

So, we are going to consider that for early next year.

Okay.

And then, if I may, as a follow-up, just inquire about the strong C&I growth you saw in the quarter.

Curious to how much of that might have been trade financed versus equipment financed or working capital and maybe what kind of industries that growth was coming from?

This is Dunson Cheng.

The growing C&I loans are pretty evenly spread.

And typically, in our portfolio, roughly 40% of our commercial loans are trade related.

So I would imagine that makes it still about the same.

There is no particular concentration in 1 or 2 industries.

And, in our portfolio, most of our commercial loans are really run-of-the-mill things, no concentration in any particular industry.

I think Hong Kong was about $35 million of that growth, too.

Yes, it's something about 12%.

Something like that, yes.

Okay, thank you for taking my call.

Christopher Nolan, CRT Capital.

Hi, guys.

Hi, Chris.

Heng, is there still a 3.45% net interest margin target for the fourth quarter?

Yes, that's a -- we think we will get there by December.

Maybe for the quarter it might be just a 3.4%, but it is going to be higher than the 3.32% for the third quarter.

Great.

And are you able to comment at all on any potential progress on the MOU or any resolution there?

We continue to have a dialogue with the regulators, and the annual wrap-up exam for us is in February.

There's a number of metrics that we need to improve on.

The classified assets to Tier 1 plus the [AUL] at the bank level.

That was a 52% at the end of June, and, Kim, might I say I think we got it down to 48% or 47%?

Yes, 48%.

Ideally, we want to get that below 40%.

So those -- and then there is just a couple of other items that we need to address in terms of corporate governance and things like that.

So, we are making progress on it, but it's -- we really don't -- we can't predict when they will be lifted.

Great.

And I haven't seen the press release.

What is the tangible book value per share in the quarter?

I don't have it.

I know the ratio, I calculated to be 9%.

Tangible common?

Tangible book value per share.

I'll call you with that.

No problem, thank you very much.

(Operator Instructions)

Joe Gladue, B.

Riley.

Good afternoon.

Just like to touch on if you could say where loan demand is going.

I know you had a big increase in the C&I, just wondering is the pipeline still fairly even with where you started the quarter?

Has it risen any?

Joe, this is Dunson Cheng.

You're exactly right.

At this point in time, we are seeing the commercial pipeline is about the same as we started the third quarter.

We expect some more growth in our commercial loans.

Then again, as you know, credit lines go up and down according to seasons.

And so, in the fourth quarter, there may be some paydown for our importing lines as imported collector money from their customers to paydown.

But at this point in time, the pipeline is about the same as we started the third quarter.

Okay.

And just one bookkeeping, you mentioned, Kim, the inflows into non-accruals is $52 million in the quarter.

Just wondering if you could remind us what they were in the second quarter.

They were at $99 million.

So that made a big difference.

All right.

That's it, thank you.

Julianna Balicka, KBW.

Good afternoon.

Hi, Julianna.

I have a question.

On the outflows from non-accruals this quarter, could you talk a little more about that?

Did you have loan sales and, if so, what kind of pricing or how the process went and what kind of trends are you seeing?

Sure, this is Kim Bingham.

During the quarter, we had 3 relatively large restructures through A/B note splits, which reduced non-accruals by just a shade under $23 million.

We had a number of CURs, 4 CRE CURs and 1 C&I CUR based on payment performance that got us $15 million in additional.

And then, about $9 million in other CURs for CRE -- not CURs, I'm sorry, but significant paydowns during the quarter.

Then the balance really is a $32 million in foreclosures and the $31 million in charge-offs.

Very good.

And, in your earlier remarks, one of the Q&As you were mentioning about moving the classified to Tier 1 and ALLL ratio to below 40%.

So, with your exam coming up, I believe you said February, are you anticipating that you will sell any loans?

Or do think that some of the similar solutions that you had this quarter, which seemed to have worked really well, you'll just continue doing more of that, or how do you see yourself getting below 40%?

It's going to be a combination of all the things we have done in the past.

I don't honestly, at this point, foresee being able to blow out $25 million due to restructures, but there will be probably a smaller amount.

So it will be a number of things.

You've seen our debt ratio come down rather steadily over the last few quarters.

And we would continue for it to continue on essentially the same slope.

Very good, excellent.

Thank you very much.

(Operator Instructions)

Jonathan Elmi, Macquarie.

Just a couple of real quick questions for you.

First, on the loan yields, it looks like they held up pretty well, actually increased a little bit.

If you could maybe comment on what kind of pricing you're seeing on new C&I loans?

This is Dunson Cheng.

The pricing of our commercial loans have been pretty steady throughout this year.

We have not any move to aggressively go out to lower pricing to attract new customers.

Typically, we would have a floating rate, with the floor -- now the floor is typically around 4.5% to 4% or so.

And the floating rate is prime or a little bit over prime, which at this point time really doesn't come into play.

So I think that is one thing that we are mindful not to do is to lower our pricing to sacrifice margin to gain additional business.

And most of the commercial loans that we have, we are seeing what we have done over the last, I don't know, 30 years.

So there's no new special lines that we have opened, especially for increase of commercial loans.

This is Heng Chen.

I think the other thing that helped improve the loan yields from Q2 to Q3 is that our non-accruals -- the inflows went from $99 million to $52 million.

And, more importantly, the Q3 non-accruals, some of the bigger ones were just 1 month delinquent.

So, the interest reversals when loans go on non-accruals was much lower compared to Q2.

So that added -- I don't have the exact number, but that was another factor for the improvement in the overall loan yield.

Great, thanks guys, that's very helpful.

And just 1other quick follow-up, a housekeeping question.

I saw that $1.6 million gain you guys mentioned in the press release on loan sales.

I'm just wondering what that was attributable to?

That was for 2 loans that were graded substandard.

It is to one of our largest borrowers.

It had been on non-accrual in prior years, and it was in Chapter 11.

And so there was roughly a year and a half worth of interest that was added to the loan balance when they came out of Chapter 11.

And so, in the third quarter, 1 loan for $10 million was purchased by a group of new investors that took over that project.

So that was purchased at par.

That was about $0.5 million of income and then we sold $25 million of substandard loans and we booked another $1 million of gain.

So it's all from the deferred interest.

Okay, that makes sense.

That's all I've got.

Thanks for your time.

Gary Tenner, D.A.

Davidson.

Kim, I just had 1 question for you regarding the 8 loans that you mentioned that you have the charge-offs totaling about $27 million.

What were those charge-offs as a percentage of the legal balance on those loans?

Charge-offs as a percentage, it's going to be I would say -- it's probably going to be about 30%.

Okay, and actually I don't know -- I don't recall if you mentioned this, but geographically, where were those loans?

The big charge-offs geographically, the biggest one is -- well, the biggest two which add up to about $17 million are our California one in Northern California, a non-residential project.

And one in Southern California, a residential mixed-use project.

After that, the next largest, which is about $4 million, is in actually Illinois.

It's a retail project.

And then, the next largest for the quarter was only $2 million, and that's in Chicago.

It's a residential mixed-use project.

Okay, great, thank you.

At this time, there are no further questions in queue, and we would like to thank you for your participation.

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

This is Dunson Cheng.

Thank you for joining us for this call and we look forward to talking to you again at our next quarterly earnings release date.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.