Cathay General Bancorp (CATY) 0 Q0 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's fourth quarter and year end 2011 earnings conference call.

My name is Melanie and I will 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, Melanie, 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 as 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 statements to reflect future developments or events, except as required by law.

This afternoon, Cathay General Bancorp issued an earnings release outlining its fourth quarter and year end 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 CEO, Mr.

Dunson Cheng.

Thank you, Monica, and good afternoon.

Welcome to our 2011 fourth quarter earnings conference call.

This afternoon, Cathay General Bancorp reported a net income of $27.7 million for the fourth quarter of 2011, or $0.30 per common share.

And for the full year, a net income of $100.2 million, or $1.06 per common share.

That compared to a net income of $26.1 million, or $0.28 per common share for the third quarter.

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

Our commercial loans grew by $47 million, or 10% annualized.

That compared to $189 million increase in the third quarter.

The main reason for the small increase this quarter is seasonality.

Many of our trade financed customers pay off or reduced their lines of credit by about $100 million as they collected on their accounts receivables in the fourth quarter.

For the year, our C&I loans increased by $427 million, or 30%.

Our residential loans increased only by $5 million, although origination level remain at about the same level.

It is due to higher payoffs, and we also begin to sell more of these loans to the secondary market.

For the fourth quarter, our deposit increased by $104 million for the full year.

Total deposits increased by 3%, or $237 million.

Out of those the core deposits increased 6% to $3.6 billion.

Our net charge-off for the fourth quarter of 2011 was $4.6 million, or 0.26% of average loans on an annualized basis, and it's the lowest for any quarter since the second quarter 2008.

Our loan loss provision was $2 million for the fourth quarter of 2011 compared to $9 million for the third quarter when net charge-offs were $29.5 million.

Our non-accrual loans increased slightly by $8.5 million during the fourth quarter of 2011 to $201 million, but we're still covered by 103% by our loan loss reserve.

At December 31, 2011, our Tier 1 leverage capital ratio increase to 12.93%.

Tier 1 risk-based capital ratio increased to 15.98%, and our total risk-based total ratio increased to 17.27%.

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

And with that, I'll turn the floor over to our Executive Vice President and CFO, Heng Chen, to discuss the fourth quarter 2011 financials in more detail.

Thank you, Dunson, and good afternoon, everyone.

For the fourth quarter we announced net income of $27.7 million, or $0.30 per share.

Our net interest margin decreased slightly from 3.32% in the third quarter of 2011 to 3.28% in the fourth quarter of 2011, due mainly to slightly lower loan yields, in terms of dollar amount it's about $1 million due to interest received on non-accrual loans in the third quarter as well as higher reversals in the fourth quarter and $450,000 higher amortization of premiums on mortgage-backed securities.

During November 2011, we prepaid $50 million of fixed rate FHLB advances with the rate of 4.57% and incurred a pre-payment cost of $1.8 million.

In early January 2012, we prepaid the remaining $100 million of FHLB term advances with the rate of 4.6% with a pre-payment cost of $2.8 million and we expect security gains in the first quarter of 2011 to cover most or all of this charge.

We expect an improvement in the net interest margin during 2012 as a result of higher interest collections on non-accrual loans and a decrease in deposit costs as our CDs reprice at current market levels as they mature.

Non-interest expense, excluding costs associated with redemption of debt, decreased $581,000, or 1.4%, to $42.4 million in the fourth quarter of 2011 compared to $43 million in the same quarter a year ago, due primarily to lower OREO write-downs, which were partially offset by higher bonus accruals and higher professional expenses in the fourth 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, everyone.

I am pleased to report that net charge-offs for the fourth quarter of 2011 of $4.6 million, or 0.26% of average loan on an annualized basis, was the lowest since the second quarter of 2008 and decrease from charge-offs of 1.69% of loans during the third quarter.

The provision for credit losses was $2 million for the fourth quarter of 2011 compared to $9 million in the third quarter of the same year.

We anticipate that a continuation of current trends will allow for a quarterly loss provision that is less than net charge-offs during 2012.

Loans rated substandard or worse increased from $587 million at September 30, 2011 to $630 million at December 31, due primarily to two relationships which are well secured but which became delinquent during the quarter.

We expect that a significant reduction in substandard loans during the first quarter of 2012 as a result of pending discounted loan settlements, anticipated loan payoffs and a number of accruing loans with near breakeven cash flows that are in the process of being restructured in an A/B note split.

Total non-accrual portfolio loans increased by 4.4%, or $8.5 million, to $201.2 million at December 31, 2011 compared to $192.7 million at September 30, 2011.

During the fourth quarter, total inflows to non-accruals loans were $40 million, transfers to OREO were $11 million, charge-offs were $7 million and cures and repayments combined for $14 million.

Loans past due 30 to 89 days at December 31 were $61.8 million and are suggestive of only moderate inflow of new non-accrual loans in the first quarter.

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

Thank you Kim.

We would now proceed to the question-and-answer portion of this call.

Thank you.

(Operator Instructions) Aaron Deer with Sandler O'Neill.

First question is concerning the credits, specifically the increase in the commercial real estate non-accruals in the quarter.

I'm wondering if you can give a little color as to why these are maybe just now showing up and had these already be considered impaired?

And then overall, where did classified stands at year end relative to the end of the third quarter?

Yes, well classifieds at the end of the year were about $630 million.

The downgrades during the quarter were really pretty lumpy.

We had four relationships with downgrades that totaled almost $45 million, which is a big chunk of the total.

And most of those -- well, three out of the four relationships were already acknowledged as troubled.

They're commercial real estate relationships where we had a number of loans supported by different repayment sources, some of which were doing all right and some of which were already acknowledged problems.

And during the fourth quarter, those formerly performing loans in some cases had payment performance problems and it pushed them into the classified classification.

Okay, that's helpful.

And then Heng, I might have missed this in your prepared comments, but was either the dollar or the basis point impact of the securities acceleration in the quarter, the premium amortization?

The dollar amount, the incremental premium amortization was about $450,000, that's Q3 versus Q4.

We think it's -- Q1 is going to be back to normal.

And it is about 2 basis points to the margin.

Okay.

All right, I'll step back.

Thank you for taking my questions.

Brett Rabatin with Sterne, Agee.

Wanted to follow up on the classified credit, given that your regulatory review is coming up, can you talk about-- obviously your coverage ratio hasn't changed much, can you give us some thoughts on where you might stand in terms of getting that coverage ratio below 40% in the next few quarters and how we should think about that?

Sure, yes this is Kim.

Yes, we're very sensitive to that particular issue and have really undertaken a multi-faceted approach to getting that number down significantly during the quarter.

As I said in my prepared comments, we have a significant number of loans that we believe will either be negotiated settlements, A/B splits or other kinds of resolutions that hopefully will lead to reductions on the order of what we saw in I believe it was Q3 of the prior year when we had a pretty significant reduction, and we should go -- we should see some significant movement in that adversely rated ratio.

Okay.

And then secondly, if you could just go back to the margin and you said it would be higher and you prepaid I think it was $100 million costing 4.6% during January.

What-- give us some thoughts maybe if you can on the margin incrementally from here and what the loan pipeline suggests in terms of replacing liquidity or securities cash flow with new loan production?

Yes, well Brett, this is Heng Chen.

First let me talk about the margin and then maybe Dunson or someone else can talk about the loan pipeline.

But in terms of what we see for the full year, we think the margin for 2012 would be 3.40% to 3.45%.

In terms of the first quarter, the FHLB prepayments will add 5 basis points to the margin, because we prepaid the $50 million in the middle of November and then the $100 million we prepaid in the first week of 2012.

The premium amortization I mentioned that was 2 basis points.

And then on the repricing of the CDs in the money market rates, we knocked down our money market rates in the -- late in the fourth quarter by 10 basis points.

So that's -- the CDs and the money market rates should improve the margin by 4 basis points.

And then lastly, we should be getting some back interest payments in the first -- in each quarter of 2012.

We have a number of loans that have been on non-accrual for like 1.5 years and we expect full repayment whenever the properties are sold.

And so that would add to the margin if and when they repay.

So Dunson, on the loan pipeline?

Yes, Brett, let me talk about the loan schedule in three categories.

For C&I loans, 2011 was an unusual year for us whereby as I mentioned, that we book over $400 million in new loans at an increased rate of 30%.

The fourth quarter slowed down a bit, but however it's still pretty respectable in consideration of the over $100 million pay down of our (inaudible) financed by our customers.

And we believe that in 2012, our C&I loan growth can be maintained roughly at a range of 10% or so.

And for residential, single-family mortgages the -- we are in a mode of whenever we originated newer loans, we tend -- because of the low interest rate that we are seeing now, we tend to sell them down.

So I do not expect a big increase in mortgages.

C&I loans, we saw some pick up in the second half of 2011.

But the CRE loans are now very desirable compared to a couple of years ago, and the market is pretty competitive with CRE loans.

So I think our -- I think we have bought them out.

But the increase of CRE loans outstanding will take a little bit longer to materialize.

So that's what I am seeing of the three categories of loan growth.

Okay great, very good.

Thanks for all the color.

Herman Chan with Wells Fargo.

Wanted -- curious about your comments on profitability approaching historical record levels in 2012 that was in the press release.

Can you give a little bit of color of what was driving those comments?

Herman this is Heng Chen.

It's -- we sort of -- we look our 2012 budget which is near final, and given the fact that one, the margin and net interest income is going to improve in 2012 as well as the fact that if you annualize our fourth-quarter loan loss provision, the $2 million annualized, it's only going to be $8 million.

Anyway, that would indicate a pretty good increase in the net income for next year.

And the street estimate is I think $1.35 or something.

So we have a pretty good shot at hitting our all-time -- of approaching our all-time record of net income of $125 million.

So that was what we're trying for.

Okay great, thanks for the color.

And one other follow-up question, I wanted to talk about your resi mortgage origination.

One of your competitors saw continued increased loan balances on that front, but it looks that you guys are -- have decided to sell those off, can you tell us what type of rates you guys are originating on those types of resi mortgage loans?

They're at the market.

I guess the 30 year would be in the low 4s.

I mean we have a mix of the [smart] mortgage which is not conforming in terms of documentation, that we get higher a rate on.

But it's -- that's the range.

It's not unusual, it's slightly better than the market for conforming production.

Okay, great.

Thanks for your insights, thank you very much.

Joe Morford with RBC Capital Markets.

Hello, this is Jeanette for Joe.

In terms of your OREO expenses, can you provide a little bit of color on the dramatic decline that we observed in the quarter and maybe reconcile that also with the increase in the professional costs that we saw?

Yes, the OREO, the great bulk of it is due to the receipt of reprisals.

So it seems like the property values have stabilized for our particular OREO portfolio.

And then your other question was about the professional costs?

Yes, the professional costs, if there's any kind of correlation between that and OREO expenses?

No, the bulk of our professional costs were our legal expenses and we have been proactive in terms of hiring counsel to try to collect on our loans.

And then in the fourth quarter, we also had a spike in some -- in terms of some outsource internal audit costs as well as some additional consulting.

And then lastly, there's somewhat of a cleanup efforts in terms of us getting all the bills accrued and paid before the end of the year.

So -- but there was really no linkage to the OREO expense.

Okay, thank you.

Joe Gladue with B.

Riley.

I guess I've just got one housekeeping question left.

Just wondering where early stage delinquencies were and what the trend there was?

The question was early stage delinquencies in the 30 to 89 day.

The 30 to 89, yes, that number has been trending down for us.

It did spike up a little bit.

But this was the case of really two borrowers represent half of that amount and one of them brought the loan current right after year end.

So we believe generally speaking, we continue to see a decrease and we're getting to a stabilized level of accruing 30 to 89.

Yes that number Joe, was 61--

61.8%.

All right.

That's it, thank you.

(Operator Instructions) Lana Chan with BMO Capital Markets.

I've got a couple of questions.

One on credit quality, it looks like the rate of cure in the quarter was fairly low.

What gives you the confidence that the first quarter is going to have more significant cures?

You've got -- and could you quantify for us what type of level you're looking at?

Sure, well, our confidence level comes from the fact that we've specifically identified the loans and tried to put a likelihood of resolution by quarter end on each one and we're tracking them through.

And as of this date, I realize it's still early in the quarter, but as of this date, things are continuing to go well.

For the quarter, we're hoping to get somewhere on the order of $100 million in cures.

We've identified significantly more than that, but we know they're certainly not all going to go as planned.

But in round numbers, that's kind of where we expect that number to be.

Okay, great thank you.

And my follow up to that is, are you expecting additional write-downs to be taken with some of those cures or in terms of OREO expense?

Should we expect that to bump up again in the first quarter?

I would -- there will -- if all of these close, there will be some charge-offs associated with them.

But it's in the single digits millions, it's not a huge number.

Okay, thank you.

And for Heng, in terms of the margin, I'm just turn to reconcile the decline this quarter and the guidance for the first quarter.

I know that the MBS prepayment speeds were unexpected in terms of picking up in the fourth quarter, but what else changed in terms of the guidance for the margin going into late last year and the 3.40%, 3.45% now for really full year 2012 now instead of 3.60%?

Yes, well I think one was the timing of that last prepayment for the $100 million, the -- it slipped into 2012.

And then the other thing that makes us somewhat cautious is that there's -- our loan yields are holding up pretty well, but we're not sure -- I guess if all goes well, they'll continue to hold up in 2012.

But the industry as a whole is experiencing a general drift down in the loan yields.

So that's the other thing that we're -- that makes the picture a little cloudy.

Okay, thank you.

Happy New Year.

Julianna Balicka with KBW.

A couple of follow ups to some of the topics have already been touched on.

On the margins and the loan yields, as you were just talking about, could you elaborate in terms of what kind of pricing are you seeing on new C&I and new CRE right now?

Typically, we are seeing -- we're still seeing variable rate prime plus quarter or something like that with the floors down to 4% to 3.75%.

And then we're not getting a lot of new CRE, so -- but we're trying to keep that above 5% for fixed.

Okay, that makes sense.

And then in terms of the securities portfolio outside of the amortization, could you talk about some of the moving parts in terms of what are you purchasing right now, at what kind of yields are you renewing some of the maturing instruments?

And so if you can give us a little bit more color on that side of the margin.

Yes.

The -- we purchased relatively little in the fourth quarter.

We bought $125 million of MBS early in the fourth quarter.

We bought 4 -- 30 or 4%, and then we bought one pool of 30 or 3.5%.

Those were -- and then we bought about I think $150 million of callable agencies, we bought those early.

The average yield on the callable agencies that we bought were 2.5%.

For the first quarter, we don't think we'll buy very much, if anything at all.

We have a fair amount of gross gains in our total securities portfolio, about $65 million.

And so we're going to use that, the great bulk of it is held to maturity, but we will take a look at those throughout 2012 on managing that portfolio.

So we should anticipate a balance sheet that is somewhat smaller on that side?

Yes.

To the extent we have loan growth, we will go and let the securities portfolio run down.

And then in the second half of the year, we -- we'll start -- we'll consider prepaying some of our structured repos.

We have $950 million that's maturing in 2014.

And the costs starting in the second -- in Q3, it will cost us maybe 6 points to prepay some of those off.

And we have plenty of security gains to offset that.

So that's something we're looking for in the second half of the year.

Glad to hear.

Thank you very much.

And ladies and gentlemen, I'm showing no further questions at this time.

(Operator Instructions) And I show no further questions.

I'd like to turn the call back over to Management for any closing remarks.

Please proceed.

Well, thank you for joining us for this call.

And we look forward again to talking with you at our next quarterly earnings release.

Thank you.

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

That does conclude the presentation, you may now disconnect.

Have a wonderful day.