Cathay General Bancorp (CATY) 2012 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp's first quarter 2012 earnings conference call.

My name is Deanna and I will be the 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.

Please proceed.

Thank you, Deanna, 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, 2011, at item 1-A in particular, and in other reports and filings with the Securities and Exchange Commission from time to time.

As such, we caution you not to place undue reliance on such forward-looking statements, which speak only as of the date of this presentation.

We undertake no obligation to update any forward-looking 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 first quarter 2012 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, everyone.

Welcome to our 2012 first quarter earnings conference call.

This afternoon, Cathay General Bancorp reported net income of $28.9 million for the first quarter of 2012, or $0.32 per common share.

That compared to a net income of $22.1 million, or $0.23 per common share for the first quarter of 2011, and $27.7 million, or $0.30 per common share for the fourth quarter of 2011.

We are happy to be able to report an eighth consecutive profitable quarter.

We are also pleased to report that classified loans have decreased 28%, from $650 million at December 31, 2011 to $467 million at March 31, 2012, a reduction of $183 million.

As a result, our classified assets ratio has decreased from 50% at 2011 year end to 36.5% at first quarter end.

Most of the reduction in classified assets during the first quarter was achieved through loan sales and payoffs.

Consequently, our gross loans decreased by $151 million during the first quarter.

Our commercial loans decreased by $23 million during the quarter, compared to a $47 million, or 10% annualized increase in the fourth quarter.

The main reason for the decrease this quarter continues to be seasonality.

Many of our trade finance customers paid off or reduced their lines of credit as they collected on their accounts receivables in the first quarter.

For the full year, we expect our C&I loans to increase by around 10%, compared to 30% for the full year of 2011.

Our residential loans increased by $13 million, although new loan originations remain strong.

The small increase in balance is due to higher payoff of existing mortgages.

And we continue to sell some of the these loans to the secondary market.

Commercial mortgage loans decreased by $87 million, of which $28 million was due to sales from payoffs of sub-standard CRE loans.

Construction loans decreased $49 million, of which $41 million was due to the same reason.

Construction loans now comprise less than 3% of our loan portfolio.

In the quarter, we also wrote down OREOs by $3.5 million.

Net charge-off for the first quarter of 2012 were $8.1 million, or 0.46% of average loans on an annualized basis.

Our loan loss provision was a negative $4 million for the first quarter of 2012, compared to $2 million for the fourth quarter of 2011.

Our nonaccrual loans decreased 35 %, or $69.7 million, during the first quarter to $131 million, to 1.9 % of the period end alone.

In the first quarter, our deposits increased by $131 million, half of which were in core deposits.

As a result, the core deposits increased 5% to $3.8 billion.

At March 31, 2012 our Tier 1 leverage capital ratio increased to 13.14%, Tier 1 risk-based capital ratio increased to 16.71% and total risk-based capital ratio increased to 18.62%.

Our ratio significantly exceeded well capitalized minimum ratios under our regulatory guidelines.

With that, I will turn the floor over to our Executive Vice President and CFO, Harry Chang to discuss the first quarter 2012 financials in more detail.

Thank you, Dunson, and good afternoon, everyone.

For the first quarter, we announced net income of $28.9 million, or $0.32 per share.

Our net interest margin increased slightly, from 3.28% in the fourth quarter of 2011 to 3.33% in the first quarter of 2012.

In early January 2012, we prepaid the remaining $100 million of FHLB term advances with a rate of 4.6%, with a prepayment cost of $2.8 million.

We expect improvements in the net interest margin during 2012 as a result of investment of excess liquidity, additional purchases of [AU] CMBS securities, and a decrease in deposit costs as our CDs reprice at the current market level as they mature.

Non interest expense, excluding costs associated with the redemption of debt, increased $5.1 million to $44.1 million in the first quarter of 2012, compared to $39 million in the same quarter a year ago, due primarily to higher OREO costs, higher bonus accruals and higher professional expenses, which were partially offset by lower FDIC insurance premiums.

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 loans rated substandard or worse decreased from $650 million at December 31, 2011 to $467 million at March 31, 2012, a decline of $183 million.

The reduction in classified loans during the first quarter resulted from $51 million of net payments, $30 million of upgrades net, $26 million of note sales, $26 million of discounted loan settlements, $18 million in A/B note splits, $14 million in charge-offs, and $8 million of foreclosures.

The unfunded portion of classified loans declined by $15 million during the quarter.

Charge-offs include $5 million in charges associated with discounted settlements and A/B note splits.

Net charge-offs for the first quarter of 2012 of $8.1 million, or 0.46% of average loans, compared to charge-offs of 0.26% of loans during the fourth quarter of 2011.

The provision for credit losses was a negative $4 million for the first quarter of 2012, as a result of the significant reduction in classified loans during the first quarter compared to a provision of $2 million in the fourth quarter of 2011.

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

Total nonaccrual portfolio loans decreased by 35%, or $69.7 million, to $131.5 million at March 31, 2012, compared to $201.2 million at December 31, 2011.

During the first quarter, total inflows to nonaccrual loans were $51.3 million, transfers to OREO were $7.2 million, charge-offs were $14.2 million, and cures, note sales and repayments were $99.6 million.

Loans past due 39 -- 30 to 89 days at March 31, 2012 were $62.2 million and are suggestive of only moderate inflow of new nonaccrual loans in the second quarter.

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

Thank you, Kim.

We now proceed to the question-and-answers portion of the call.

(Operator Instructions) The first question will come from the line of Aaron Deer, Sandler O'Neill and Partners.

Good afternoon, everyone.

Hello, Aaron.

Congratulations to each of you, and the theme for the dramatic improvement you saw this fourth quarter in the classified assets.

I guess with that classified asset ratio now dropping below 40%, it seems reasonable that we could perhaps see the regulators lift their MOU sooner rather than later.

If that should happen, would that maybe accelerate your expectation as to when you would be looking to repay or redeem your TARP shares?

Yes.

Aaron, this is Heng Chen.

The regulators were on a continuous exam cycle.

But for the first quarter, their last day in the field was March 15.

And then they will come back in late May for the second quarter visitation.

So in terms of them validating our classified percentages, that should happen in May to mid-June period.

So our thinking is still we would submit that we would begin the dialogue with the regulators in the third quarter.

Our hope is that we could repay TARP in installments or maybe in total in the September, October, November period.

We haven't had formal discussions yet.

Okay.

That's helpful.

And then as a follow-up, Heng, you mentioned a few of the items that could help to benefit the margins here through the end of the year.

I don't know if I heard in there the accounting on the -- on your repo funding.

Could that also help lift the margin, and could you maybe update us on what your expectation would be for the margin by year end?

Yes.

First, during the first quarter, our cash built up, particularly in the month of March, as we sold loans and were paid off.

And we -- interest rates went up during the three weeks in March -- two or three weeks in March.

And we bought about $175 million of MBS in March, that settle in March.

And then in the first couple days of April, we bought another $75 million of MBS, which settled earlier this week.

So we are trying to reinvest our excess cash flows into MBS.

But meanwhile, interest rates keep on jumping around.

So now interest rates are as low as they were back in February or September.

We are going to sit on our hands for a little bit and just keep more in the -- in cash at the Fed.

In the second quarter and third quarter, we expect to see a stronger loan growth.

That is one source of repayment -- or usage of our cash.

And then secondly, we have $140 million of broker CDs.

That cost is 2.6%.

They mature in July and August, so that is another place for our cash.

And then, if we repay TARP -- the bulk of it TARP -- that would use up our excess cash as well.

So I think, in terms of -- we're more confident about the third and fourth quarter, where the margin should be 3.4 % or better.

In terms of the second quarter, it's hard to tell.

It's possible that the margin will remain the same, as 3.3%.

And then lastly, we might also look at doing some extensions on our structured repos, or we might prepay some of them in the second half of the year.

So those would help the margin.

I guess in summary, the second quarter, not too much improvement; but the second half should be closer to 3.4%.

Okay.

Great.

Thank you, Heng.

Yes.

Sure.

And the next question comes from Joe Morford, RBC Capital Markets.

Thanks.

Good afternoon, everyone.

Hello, Joe.

Heng, you talked about expecting a stronger loan growth.

What do you see as the drivers for that Which portfolios should we see the increases in primarily?

And do you see that kind of steadily building throughout the year, or is it more back-end loaded?

Yes.

This is Dunson Cheng.

As I mentioned in my remarks, we still feel very comfortable to project that our commercial loan portfolio should grow somewhere 10% or better.

And the entire loan portfolio about 6%.

So those are the numbers that we've been talking about, and we still feel that they are achievable.

Okay.

And then I guess the other question would just be on OREO expenses.

They bounced higher again in the quarter.

And is that the result of more aggressive write-downs to facilitate sales or is it kind of more reflective of updated appraisals?

Joe, it's Heng Chen.

It's a little of both.

We have one property in Texas that is in escrow for a little over $10 million, and we took about a half a million dollar write-down on that to sell it below the appraised value.

But the rest of it, we had roughly $3 million of write-downs to current appraised values.

Some of which -- some of those write-downs were due to sales in the first quarter.

So it's hard to predict as to how much the appraisals will cost us.

Okay.

Thanks so much.

The next question comes from the line of Brett Rabitan, Sterne, Agee.

Hello, guys.

Good afternoon.

Hello, Brett.

Wanted to ask on the margin, can you give any color on how much the margin benefited this quarter maybe from repayment of past interest on NPAs?

And then, if I understood you correctly, Heng, it sounded like you were considering possibly repaying some of the repos, but haven't made any firm decisions on that yet.

Yes.

In terms of collection on nonaccrual loans, it's roughly $700,000 or $800,000 this quarter.

We would expect maybe a similar level in Q2 and then possibly a higher amount in Q3.

They are hard to predict.

And then, Brett, your other question was on the repos, as to --

You mentioned, I think in the prior question, or the first question, that you were considering repaying some repos going forward.

So I didn't know if you had any amount in mind or how much you expected you might benefit the margin.

And I assume you would take some securities gains, although your AOCI is actually slightly negative now, I think, at the end of the quarter.

Yes.

It's probably not more than $200 million or $300 million in terms of what we prepaid.

We have about $50 million of unrealized gains in our held to maturity portfolio.

And the -- it's possible to trigger those gains, but you would have to transfer those securities available for sale.

And it's a function of our view on interest rates as to how fast they might go up, as to whether we transfer those securities and take the gains.

But most of those gains are in 15- and 30-year MBS, which have relatively long -- they have short durations now, but if interest rates were to go up, say, 75 basis points, they would extend out three or four years and most of the gains would evaporate.

So that's the trade-off we have, as to whether we try to capture those gains and then prepay some of the structured repos, or whether we just hold on.

Okay.

And then the follow-up I wanted to ask was just around the loan portfolio, and specifically the commercial and the trade financed.

Can you give any indication of how much trade finance payoffs were in the quarter?

How much that impacted what you otherwise would have grown your CNI book in 1Q?

Ooh.

Okay.

We don't have a statistic for that.

My guess would be in the neighborhood of about $40 million, something like that.

In terms of payoffs?

In terms of pay downs, payoff of the credit line.

Okay.

Great.

Thanks for the color.

And the next question comes from Lana Chan, BMO Capital Markets.

Hello.

Good afternoon.

Hello, Lana.

Just a couple of questions on the non-interest income expense lines.

The non-interest income other kind of lines, outside of deposit service charges and LCC's, looked weak this quarter relative to the past couple of quarters.

Were there any unusual things that brought that number down this quarter?

Yes.

There was about $700,000 in trading losses for securities.

That should be nonrecurring.

I mentioned before, we bought $175 million of securities of MBS in March.

You know, with the interest rates jumping around in March, this is somewhat technical, but MBS securities you generally can only settle them one day a month, for a CBA settlement.

And so we -- when interest rates started to go up, we bought 5-year Treasuries as a substitute for the MBS.

And our timing wasn't so good, because that $50 million of Treasuries that we bought wound up realizing a loss of roughly 1.5 points.

But when we unwound that position, we bought MBS at the same time.

So we bought the MBS at a lower rate.

That was unusual, because we couldn't get supply of MBS until later in March.

And given what happened, we are not going to do that again.

We'll just go and shop a little harder for MBS.

So that $700,000 should be nonrecurring for the rest of your.

Okay.

And then on the non-interest expense items, the increase in personnel expense from the fourth quarter, how much of that is seasonality related to FICA and things like that?

It's quite a bit.

It's probably $400,000.

We have not paid bonuses for a couple of years.

And so compared to 2011, that was the increase for the bonuses.

And then we also had about $0.5 million in vacation expense.

Apparently, very few people take vacation in the first quarter.

They save it for the summer.

So there is that seasonality as well.

Okay.

So a more normal run rate for at least the personnel line item would be closer to $19.5 million?

Yes, about a million less --

-- of the -- right.

Right.

Okay.

$19 million.

$19.5 million -- I'm sorry.

Our raises are on April 1.

They average about 3% for the officer group.

So maybe your $19.5 million is okay.

Okay.

Thanks, Heng.

And the next question comes from the line of Herman Chan, Wells Fargo Securities.

Hello.

Thanks.

Can you give us an update on further deposit repricing opportunities that you're seeing?

And also, give us an update on CD pricing in your markets these days?

This is Heng Chen.

As I mentioned, we have $140 million of broker CDs that mature in July and August.

And then meanwhile, on our own CDs, we are trying to price in the middle of the market.

We have a structure of interest rate concessions for larger depositors, and we've narrowed that down by -- we've scaled that back by 0.125% here in the first quarter.

So that should bring down the cost of CDs slightly.

And then, it takes generally a couple quarters for us to reprice all the CDs.

So there should be gradual improvement.

Okay.

Great.

Second question.

There has been some market commentary concerning the capital treatment and future pricing for trade finance under the ASO3 framework.

How do you think that issue plays out in the future?

Any thoughts on the issue?

And talk about any implications for Cathay General, as well.

You know, we haven't focused much on that.

My understanding is one of the impacts is heavier capital charges on the unused portion of borrowing lines.

And so if we have seasonality, we are going manage that better in terms of changing the amount of commitment during the year to match the customers' borrowing (Inaudible).

I think the other thing, if that issue is just on uncommitted -- on unused facilities is that, once they start attract capital, we would charge a fee for it, and that would reduce the demand.

And so I think generally I don't expect a big impact.

But once again, we haven't studied it very much.

But there is more work to be done here.

Okay.

Thanks for taking my questions.

Sure.

And the next question comes from the line of Julianna Balicka, KBW.

Good afternoon.

I was wondering if you can maybe clarify -- give us a little bit more color on the MBS that you purchased, the $175 million in March and the $75 million in April.

What kind of yields did you purchase them at, and what kind of durations?

A little bit more color?

They are all 30-year 3.5%.

I guess the purchase yield was probably 3.40%.

We bought them at like 101 and 102.

And the reason is that we have room under our rate shocks to take longer-term securities like that, and we would rather by those than -- the 30-year 4%'s are at 105.

So they may have less interest rate risk, but there is a lot more premium risk.

Right.

And those are held for sale?

Yes.

Everything we bought since the end of March of last year has -- is available for AFS.

Okay.

And then, as my follow-up question.

If you can please maybe talk about your CNI new loan originations, so we can try to get a run rate.

I would think, with our projection of 10 % --

Right, no, no, that's your projection.

I'm saying, what was your new loan originations in the first quarter on CNI?

We don't track that.

We have to go back and take a look at it and get back to you, Julianna.

Okay.

Very good.

Thank you very much.

(Operator Instructions) The next question comes from the line of Gary Tenner, D.A.

Davidson.

Thanks.

Good afternoon.

Most of my questions have been answered.

I just --Heng -- excuse me, Dunson, just for you.

You had talked about expectations for commercial loan growth of 10%.

I think you mentioned that a couple otimes.

And I think one of you're answers to a question, you kind of talked about total loan growth expectations.

But I'm not sure that I was able to clearly get those numbers.

So could you kind of just chat about what you think total loan growth looks like, and maybe specifically what commercial mortgage trends look like over the course of the year?

So, the question is the loan expectation of the growth in commercial loans?

Well, no.

I think -- this is Heng Chen.

What we have been saying was we expect total loan growth to be around 6% year-over-year.

So with the commercial being at least 10 % growth.

We expect some growth in residential mortgage, particularly as prepayment flow.

Construction, obviously, is then going to grow.

And then commercial real estate, we have a lot of room, because our CRE to total capital percentage now is down to 216 %.

And the regulatory guidance is 300 %, beyond which you've got to do more stress testing.

But our issue with the CRE is that the rates are very low for fixed-rate loans.

So we are more selective there.

Okay.

And if you were to exclude the TARP preferred capital, then that percentage would be higher still, correct?

So, is that 216 --

Yes, we still have room, yes.

Okay.

Great.

Thank you very much.

The next question is a follow-up question from the line of Julianna Balicka, KBW.

Hello.

Thank you for letting me come back in.

On the -- the classified asset improvement was excellent this quarter, and now kind of thinking into the second and the third quarter as you prepare for TARP repayment, do you have any -- what is your plan for reducing your classified to Tier 1 ratio further to maintain pro forma below 40%?

What should we be expecting --

Our intention is to continue the same sort of program that we worked in the first quarter.

We obviously don't expect to get the same high level of reductions, but we are targeting somewhere in the $40 million to $50 million net reduction in classifieds for Q2.

And then, we really don't have clarity on Q3 at this early time.

Great.

Thank you very much.

Thank you, everyone.

That concludes the question-and-answer portion for now.

I'd like to turn the call back to Cathay General Bancorp for closing remarks.

Thank you for joining us for this call and we look forward to talking with you again next quarter.

Thank you.

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

This concludes the presentation.

You may now disconnect.

Good day.