Cathay General Bancorp (CATY) 2012 Q2 法說會逐字稿

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

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

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

Following the prepared remarks, there will be a question-and-answer session.

(Operator Instructions) Today's call is being recorded, and will be available for replay at www.CathayGeneralBancorp.com.

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

Thank you, Keith, 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 second-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.

Welcome to our 2012 second-quarter earnings conference call.

This afternoon, Cathay General Bancorp reported net income of $29.9 million for the second quarter of 2012, or $0.33 per common share.

That compared to a net income of $24.3 million, or $0.26 per common share for the third quarter of 2011.

And $28.9 million or $0.32 per common share for the first quarter of 2012.

We are happy to be reporting another consecutive profitable quarter.

Our commercial loans increased by $101 million in the second quarter, or 22% annualized.

For the first half of 2012, commercial loans increased by $77 million or 8% annualized.

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

Our residential loans increased $17 million, although new loan originations remain strong.

The small increase in balance is due to higher payoffs of existing mortgages, and we continue to sell some of those loans to the secondary market.

Beginning the third quarter, we will retain more of our new residential mortgages in our own portfolio.

Commercial mortgage loans increased by $33 million in the second quarter, compared to a decline of $87 million in the first quarter.

After consecutive declines in CRE loans in the last two years, we believe our CRE portfolio has been stabilized and will gradually increase.

Construction loans decreased $8 million to $180 million from $188 million at March 31, 2012.

Gross loans grew $135 million in the quarter or at a 8% annualized rate.

Gross loans were at $7.04 billion, compared to $7.06 billion at 2011 year-end.

We believe our loan growth of 2012 will be at least 6%.

Net recoveries for the trailing quarter of 2012 were $2.6 million, compared to net charge-offs of $8.1 million for the first quarter of 2012.

And compared to net charge-offs for $21.8 million for the same quarter a year ago, our loan loss provision was a negative $5 million for the second quarter of 2012, compared to a negative $4 million for the first quarter of 2012, and compared to a charge of $10 million in the same quarter a year ago.

Our non-accrual loans decreased by 39% or $78.4 million during the six months of 2012 to $122.8 million, and to 1.8% of period-end loans.

For the third quarter, our quarterly profit increased by $135 million, whereas total deposits only grew by $24 million during the quarter.

At June 30, 2012, our Tier 1 leverage capital ratio increased to 13.3%, Tier 1 risk-based capital ratio increased to 16.91%, and our total risk-based capital ratio increased to 18.82%.

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

With that, I will turn the floor over to our Executive Vice President and CFO, Heng Chen to discuss the second-quarter 2012 financials in more detail.

Thank you, Dunson, and good afternoon, everyone.

For the second quarter, we announced net income of $29.9 million or $0.33 per share.

Our net interest margin was 3.24% in the second quarter of 2012, compared to 3.33% in the first quarter of 2012, and compared to 3.19% in the same quarter a year ago.

During the second quarter, we extended the term of two structural repos, totalling $100 million by additional four years, effective June 1 and July 31 respectively.

Those extensions did not require a current prepayment penalty and lowered the rates on these two repos by an average of 150 basis points to an average yield rate of 2.86%.

We expect to enter into structural repo extensions in the third quarter for another $100 million, and expect reductions of at least 150 basis points on those new extensions.

Also, in July 2012, we prepaid $50 million of structural repos at the rate of 4.43% for the prepayment cost of $3.45 million, and expect to offset most of this cost with security gains taken in the third quarter.

We expect improvement in the net interest margin during the second half of 2012 as a result of the investment of excess liquidity, repayment of $139 million of broker CDs, with an average cost of 2.71% that will mature in the third quarter, repayment of additional structural repos, and a decrease in deposit costs as our CDs reprice to current market levels as they mature.

Repayment of TARP with cash on hand sometime during the second half of 2012 would also improve the net interest margin.

Non-interest expense, excluding costs associated with redemption of debt increased $7.1 million to $47.3 million in the second quarter of 2012, compared to $40.2 million in the same quarter a year ago, due primarily to higher OREO costs, higher bonus accruals and higher marketing expenses, which were partially offset by lower FDIC insurance premiums.

OREO costs remain elevated, due in part to $4.1 million of writedowns based on receipts of updated appraisals during the second quarter and $1.1 million of delinquent property taxes for new foreclosures.

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.

Our classified assets ratio was 35.9% at June 30, 2012 compared to 36.6% at March 31.

Loans rated substandard or worse increased from $467 million at March 31, 2012, to $472 million at June 30, an increase of $5 million.

The increase in classified loans during the second quarter resulted from $34 million of net payments, $45 million of downgrades net, $4 million of charge-offs, and $4 million of foreclosures.

The unfunded portion of classified loans increased by $2 million during the quarter.

These figures include $2.4 million in discounted settlements and a single A-B note split.

These transactions totaled $4.8 million, and resulted in charge-offs of $1.5 million.

This amount is included in the $4 million total referenced earlier.

Net recoveries for the second quarter of 2012 totaled $2.6 million or 0.15% of average loans, compared to net charge-offs of 0.46% of loans during the first quarter of 2012.

The provision for credit losses was a negative $5 million for the second quarter of 2012, as a result of the net recoveries during the quarter, compared to a provision of negative $4 million for the first quarter of 2012.

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

Total nonaccrual portfolio loans decreased by 7.1% or $8.7 million to $122.8 million at June 30, 2012, compared to $131.5 million at March 31.

During the second quarter, total inflows to nonaccrual loans were $30.9 million, transfers to OREO were $3.9 million, charge-offs were $4.4 million, and cures and repayments were $31.3 million.

Loans past due 30 to 89 days at June 30, 2012 were $68.8 million and are suggestive of only moderate inflow of new nonaccrual loans in the third quarter.

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

Thank you, Kim.

We now open the floor for questions.

(Operator Instructions)

Your first question is from the line of Joe Morford, with RBC Capital Markets.

Please go ahead.

Two quick follow-up questions.

First, Heng, you outlined a number of steps to help boost the margin in the second half of the year, assuming a stable rate environment.

If all that plays through, what kind of ballpark we do expect to end of for the year for the net interest margin?

Well, Joe, we are still optimistic that the fourth quarter would be 3.4% for the net margin.

I have said that in the past, we expect that for the full fourth quarter.

The TARP repayment, whenever it comes, would impact eight basis points of the margin improvement.

So, we are not certain as to when the TARP repayment would occur, so we are hopeful that it will be the second half of the year.

And on the TARP repayment would you still be expecting that to pay that off in installments or might you be able to do it all in one fell swoop?

It depends on the classified asset ratio.

If we showed good progress in the third quarter, just by the math, we could do it in one installment, but we are just starting the dialogue with the regulators now, and we will file a formal application in the middle of the third quarter, and that approval process takes several months.

Okay.

And then the other question was just on the OREO expense in the quarter.

It sounded like a good chunk of that came from write-downs an updated appraisals.

Was that concentrated on a handful of properties, are you are you seeing widespread deterioration in property values, and if so is it mostly related to land?

And then any other expectations for OREO expense going forward?

Yes, as I mentioned in our prepared remarks, $4.1 million is in write-downs and of that, I'm trying to add this up in my head, but about $1.2 million is for two office buildings in Dallas.

We have been taking write-downs every quarter or every six months as we get appraisals on that.

One, the buildings are essentially 35% leased.

They are Class A buildings, without much vacancy, but even in the good markets, there are write-downs.

Then we have three plots of land in the Inland Empire, that is about $1 million of write-downs on those three separate properties.

And then we have, others are, we have a vacant property in San Jose, a new appraisal indicated a $600,000 write-down on that vacant land in San Jose, and then we also have some smaller write-downs that are in California, but they are -- there are four or five that are about $300,000 apiece.

So that really adds up.

And then on the delinquent property taxes, they were $1.1 million in this quarter.

Historically, we have had many of our foreclosed real estate come with delinquent property taxes, and in the past, we have accrued them, we have taken loan charge-offs to, including the delinquent property taxes.

So when we foreclose and pay the taxes, the payment of the delinquent property taxes do not hit OREO expense, but we have looked at the accounting literature and so going forward, with this starting in the second quarter, those delinquent property taxes will be booked as OREO expense.

In the future we expect OREO foreclosures to be hopefully lower, so that would be a lesser impact.

Joe, this is Dunson Cheng, I can confirm with what Heng just mentioned.

And we don't see such a large OREO write off in the third quarter, and as a matter of fact, we are seeing a number of our OREO's in escrow, and hopefully we can do a little bit more in the third quarter to dispose of some of the OREOs.

And Joe, Heng Chen again, I forgot to mention do so we give those full information on the OREO expense.

We had two properties that -- where we had net losses on the sale of $600,000.

So that, if you aggregate all of that, that's about $5.7 million.

Then the difference between that and the $7.1 million is that normally we would expect property tax expense, just from the ongoing property tax expense to be $700,000 or so per quarter plus legal fees related to OREO's.

Okay, that is very helpful.

Thank you so much.

Your next question comes from the line of Aaron Deer, with Sandler O'Neill & Partners.

Please go ahead.

It's a pretty modest impact on the income statement, but I noticed that there was almost a 25% reduction in the rate that you paid on deposit insurance.

I'm wondering if it is reasonable to assume that might reflect an improved regulatory rate, or is there something else might be going on there?

Yes, Aaron, there was a catch-up adjustment in the second quarter.

I believe it was about $600,000 that related to the first-quarter FDIC insurance.

It is a very complicated formula, but that takes into account your regulatory ratings, the different components, plus the level of classified loans.

It is on the FDIC website.

Right.

But there was a true-up.

The level of classified assets and so forth.

So as they come down, that number will improve.

So, we're hopeful that our third-quarter FDIC insurance will be several hundred thousand lower.

And then you posted some good strong C&I growth in the quarter.

I was wondering what the average size of those new loans or commitments, and how much of that is trade and finance related?

Yes, how much is trade finance related in the average size?

I would say, this is Dunson Cheng, I would say the average size is about $6 million to $7 million, and last quarter was a little bit different from the previous one, actually, roughly about 30% of our loan growth was centered in high-tech area and most of the rest, I would say for commercial loans domestically, the trade finance loans is not that significant in the second quarter, as you know that most of the trade customers would take shipment of their inventory in the third quarter and pay for it, and so we expect in the third and fourth quarter the increase in the trade finance area would be higher.

Okay, and just as a follow-up on that, can you talk a little bit about what you mean by high-tech, what kind of loan structures are those?

Aaron, you broke up, can you repeat the question please?

The 30% that you highlighted as being high-tech, can you talk about what the nature of that lending is?

They were three high-tech loans, two of them are solar related and one is a wind farm.

So, typically, those are five-year deals and it's a monthly payment.

Thank you for taking my question.

Next question is from the line of Brett Rabatin with Sterne, Agee.

Please go ahead.

Wanted to ask, I guess related to asset quality first, was just curious, I think I heard the comment about the substandard downgrades being $45 million, I know you're trying to get the classified number down, can you talk maybe a little bit about the downgrade you had, and then the increase in the TDRs in the quarter as well?

Yes, this is Kim Bingham, the downgrades for the quarter were, I would classify them as being rather highly concentrated.

The $45 million number that we gave was net.

It is really more on the order of about $81 million in gross downgrades, and $36 million in upgrades, but on the downgrade side, you really have four borrowing relationships that were -- accounted for about $54 million of that, and those relationships were -- two of them, about two of them were commercial real estate relationships primarily, and two of them were C&I relationships or relationships that had both a C&I and a real estate component.

Okay, and then on the commercial real estate side, is the downgrades a function of just the LTVs don't make as much sense as they used to or is it cash flow related?

No.

No, it is really more of a cash flow oriented thing, and they are both kind of unusual circumstances.

The larger of the two, which is around $50 million is a building that was stabilized, they lost a major tenant, we already have a new tenet coming in, but there is going to be a lag there, and the building is not self-supporting in the interim.

So, in relatively short order, we expect that will be ripe for an upgrade.

And then the second -- the other CRE-oriented loan, which is in the neighborhood of $8 million, this is actually an owner-occupied property, and the owner-occupant is having some very short-term cash flow problems associated with some mergers amongst its customers, and so they are having a more difficult time collecting their receivables, but we expect that will also resolve, that cash flow will once again be sufficient and that should also be a reasonably good candidate for near-term update.

Okay and then the other follow-up I wanted to ask was just around you gave pretty good guidance around the margin, and your expectations for loan growth.

With those two things in mind, and your capital ratios are obviously pretty strong, can you give us any thoughts around average balance sheet trends in the second half of the year?

Do you expect the liquidity to result in a smaller balance sheet, or will you actually be growing the average balance sheet and improving the margin at the same time?

Yes, Brett, we would hope that our average balance sheet shrinks by a little bit.

First, there is $130 million or so, it was earlier in my call, my comments about the broker CDs.

As those mature in July, August, and early September, we would just use up the cash.

We had the $50 million structural repo that we repaid on Monday and if we repay another $50 million this quarter, and another $50 million in early Q4, that would also come out of cash.

We also have some CDs, probably $50 million a quarter that we expect, they are non-relationship CDs, we would expect those to mature and leave the bank.

So, all of that as well as we have the $258 million TARP, which if it is paid late in the year, that would also shrink cash.

So, we would normally like to run with a much lower cash balance because the reinvest -- because the security yields are very low, and so we avoid buying any securities this quarter except in early April.

This is Dunson Cheng.

With regard to loan growth for the second half, I would characterize our pipeline to be good, and I would expect the third-quarter loan growth should be a little bit higher than what we experienced in the second quarter.

Okay, great, that is very good color.

Thank you.

Your next question is from the line of Herman Chan with Wells Fargo Securities.

Please go ahead.

I wanted to zero in on your commentary regarding CRE balances which should gradually increase going forward.

You have also mentioned in the past that you are more cautious in CRE due to the lower yields.

So I wanted to get a sense of the yields you expect to bring on board on the CRE side?

Yes, we are beginning to see a little bit more demand on CRE, except that pricing is very competitive, and so I would imagine that the CRE loan portfolio will grow quite gradually from here forward.

Yes, and Herman, this is Heng Chen, on the pricing we are keeping low longest tenure at 5 years if we can for fixed-rate.

To the extent it is longer than 5 years, if it is 7 or 10 years, there's very few, and we intend to match-fund them with 5-year fixed-rate borrowings.

Okay, great.

And also wanted to touch on the DDA growth this quarter, which was impressive.

What was driving that increase?

Was it more caution from clients, or influx of commercial accounts, can you give some color there?

Thanks.

Yes, the -- I think part of the growth of the DDA is probably commercial customers, and they are keeping larger balance, and in this rate environment, it really makes a difference of whether they are in DDA or other interest yielding accounts.

Thank you very much.

Your next question is from the line of Jonathan Elmi with Macquarie.

Please go ahead.

Just wanted to follow-up on the comments regarding one-to-four family mortgage production, putting some of those originations on balance sheet, just wondering what kind of yields you are getting on those?

This is Heng Chen.

First we were selling $30 million a quarter to Freddie Mac.

We stopped selling that in April, but we have sold the forward pipeline to Freddie Mac.

So, I haven't updated for the second quarter, but our pricing was relatively good.

I believe that for the first quarter, we were getting for 30-year fixed, we were getting 4% and for 15-year fixed we were getting, I believe 3.2%.

One reason is that we are following the Freddie Mac pricing, and to the extent that the borrowers are not vanilla, if they are in -- if they are condos or if there's anything that they are straight out of the lowest denominator, there are rate add-ons, so we follow that, so we are getting better rates than just the normal by-the-book 30 or 15-year borrowing.

And most of our new originations are 15-year.

Okay, thanks, that is really helpful.

And then just one other follow-up question.

You guys had some pretty positive commentary in your outlook for trade finance to pick up in the back half of year.

Obviously, some of that is due to seasonality.

Just wondering how you are thinking about, or if you're seeing any impact from some of the economic slowdown that we've witnessed, particularly coming out of Asia and how that might be impacting demand at all?

Yes, this is Dunson Cheng.

We are seeing a definite slow down in our customers' revenue, when compared to 2011 and when we recall that in 2010, trade finance customers experienced, some of them experienced a reduction in revenue.

And in 2011, that picked up quite significantly, but this year, I would say that we are seeing roughly 5% increase, 0% to 5% increase in the revenue.

So it is definitely slowing down from what we can see on the revenue side of our trade finance customers.

Okay, great.

That is all I had.

Thanks for your time.

Your next question is from the line of Joe Gladue with B. Riley.

Please go ahead.

Hi.

Wanted to follow-up a little bit on the last question, particularly I guess in regard to C&I loans.

You had good growth in the quarter, and indicated you still expect further growth, but just wondering about the competitive environment.

You had, I guess it's been pretty competitive for C&I and just wondering if there's anybody who is getting more aggressive on rates and terms and if that's having any impact on your pipeline?

Joe, this is Dunson, again.

Yes, the pricing is very competitive, especially in the mainstream market, and we do have a team that is focused on that market and sometimes it's very difficult for us to match some of the pricing out there.

But in our particular segment of the market, I would say that pricing and the floor has definitely come down, but I would say that we are still getting somewhere near 4% at that level.

So, it's competitive, but it seems that fortunately, the Bank is able to secure new customers, and also see some expansion in some of our C&I customers.

Okay.

And I guess I'll also ask the question, I guess last question will was about the slowdown in international markets.

Are you seeing any impact from a slowing economy domestically on the loan pipeline?

So far I would say that it is pretty good, Joe.

Obviously, last year, our C&I loan grew 30%, I don't think we would repeat that feat.

And so the base is higher and it is definitely not as vibrant as last year.

So, we see a slowdown, but fortunately, we still are producing new loans.

Okay, all right, that all I had.

Thank you.

Your next question is from the line of Lana Chan with BMO Capital Markets.

Please go ahead.

A couple of questions I don't know if you addressed it, but on the margin, the securities yield came down about 14 basis points linked quarter.

Was there a pickup in premium amortization on the MDS book?

Yes, Lana, I haven't studied it carefully.

It wasn't that much different between the first and the second quarter.

We did buy -- we were very conservative in most of our new security purchases.

So, I believe we bought, between late in the first quarter and the second quarter, about $250 million of treasuries that would only yield 70 basis points, or I'm sorry 50 basis points.

And so that's pulling the average yield down.

I think that's one of the main reasons is that our new purchases, if we had to make them, we were buying just two-year treasuries.

Okay and is that a strategy that you expect to continue going forward?

No.

It depends on the length of time.

Our structural repos right now would cost us 7% to repay.

By the end of December or January, it would only cost us 5% or 4.5%.

We're going to, particularly in the first quarter next year, we're going to go on a much longer prepayment effort, because they will be relatively inexpensive by then.

If it only costs us 4%, we would prepay $200 million in Q1.

As we do that, we would then just sell the short-term treasuries, in case interest rates go up a lot, which is not likely, but that's our thinking.

We're trying to be defensive on our securities position.

As we shrink our total balance sheet, going into the middle of next year, we won't be tied, because we have securities where we have big losses if we were to sell them.

So, that's behind our thinking on our new securities purchases.

Okay.

And second question was when you talked about the TARP repayment potentially in the second half of the year.

Any update on the MOU?

Yes, as I mentioned to you the last time we spoke, we are under a quarterly review cycle by the primary regulators.

So, they were here in late May through the end of June.

We had our exit meeting very recently.

There is a one or two months processing time, but we won't know the result until they are finished reevaluating the exam up in San Francisco.

And -- so, if everything were to happen, we would put out an 8-K, but we are not going to give the odds on that until it happens.

Meanwhile, it is separate from the TARP repayment.

We are going to proceed with submitting applications, hopefully by the end of August, and then it will take several months for that to be evaluated.

On the TARP repayment, the next time -- the only formal notice you will have is the day after it is paid.

That is the protocol.

Right, right.

And then one last question on the capital ratios.

Have you had a chance to review the proposals for the new capital standards that were released about a month ago by the US regulators and particularly with some of the new risk weighting on some of the assets on commercial real estate?

We are focused on the stress testing that those regs came out more recently.

So, we spent a lot of time looking at that and try to understand them.

But, on the new Basel requirements, as well as the US applications of those, my quick reading of it is, it should not matter a lot to us.

Most of our residential mortgage, for example is the LTDs are reasonable, they are not high risk mortgages, and then on the CRE, we are generally okay.

The construction isn't going to require higher weighting and that is now down to less than $200 million of our total loan portfolio.

Okay.

Thanks, Heng.

Your next question is from the line of Gary Tenner with D.A. Davidson.

Please go ahead.

A couple of questions.

On the collections on non-accruals, I think in the first quarter they were in the $700,000 to $800,000 range.

Can you tell us what they were in the second quarter?

Gary, I don't have that number handy.

It was quite a bit lower.

We had one apartment loan in the first quarter that we were able to collect over a year's worth of back interest.

And so it was much lower in the second quarter.

And also, I mentioned the first quarter, we had one large CRE loan that was over $30 million that prepaid and we had $700,000 of deferred loan fees that we booked in interest income, upon the prepayment of that loan.

That us a bigger factor than the net change in the nonaccrual interest collections.

Okay.

Great.

On the topic of maintaining your production of your residential originations, first off, what was the gain the sale in the second quarter on what you did sell?

And then is this basically just in lieu of investing your cash flows this portfolio?

You're going to be holding onto these?

Yes, I don't have the exact number, but I believe it was $0.5 million, most of it is the servicing rights.

And then, yes, it is a matter of -- we don't mind the fixed rate exposure, particularly since most of it is 15-year fixed and the security yields are very poor.

And it is more the premium.

We normally buy MBS and the stuff we bought in April at 101 is now training at 105.5, and it is hard to buy new ones at that price and earnings of is less than 2% on them it so that is where we are.

But you will be keeping 15-year fixed mortgages?

We will be keeping 15 and 30s.

15 and 30s.

Yes.

Great, thanks for the questions.

Your next question is from the line of Julianna Balicka with KBW.

Please go ahead.

We saw you put out your note already.

Sometimes I get it done more quickly than others.

Other times other quarters, but this quarter I had a quick follow-up.

There is a lot of really good questions already and I was wondering if you could talk a little bit about your outlook for growth by geography, meaning what are you seeing out in your New York market, northern California, a little bit more of the competitive color as well?

Julianna, as you know, our New York market has been pretty good to us for the last three years, and it still producing quite well.

And we are seeing the return of the California market.

So, the loans that -- the new loans that we book, I would say 70% of the new loans were originated in California.

And the Houston market is picking up, but slowly, but the balance is a little bit low and same with Washington and Chicago and Boston.

So, most of the production centers around New York and California.

Great, thank you very much.

And your next question is from the line of Don Destino with Harvest Capital.

Please go ahead.

I got on the call little bit late so I apologize if you addressed this, if you did, I'll go back and just listen to the replay.

The OREO status, the first six months of this year over last year is roughly about 5X or so, can you talk a little bit about the vintage of properties that are being -- that are driving that OREO expense, and if there is a reason why the initial stab at net charge-offs wasn't as accurate this year versus the stuff that generated OREO last year?

Yes, this is Heng, we didn't cover your question but we covered most of the other stuff about OREOs earlier in the call.

But the vintage -- the Texas properties we've had in OREO, I believe for six quarters, now?

Yes, the most difficult OREO to sell off, we can lend.

And we have a piece of land in San Antonio that is sizable, another one in Las Vegas area, and the third one is out in the Inland Empire.

But, fortunately, we are seeing some activity in two of them, and hopefully we would be able to get a deal done shortly.

And so, land is by far the most difficult OREO to dispose of, but I'm sure everybody has heard that the inventory of housing is dwindling down.

So, we are seeing some activity even in land, and Heng has talked about a couple of office buildings in Dallas area that have been on our book for I would say about 18 months or so.

And that one is going to take a little bit longer to sell off, and I also reported in the third quarter, we should see some higher activities in OREO sales.

So slowly but surely, our OREO should be reducing.

Yes, and Don --

I guess what I'm trying to get at is, is it a vintage issue that for whatever reason 12 months ago or 18 months ago, your marks, when you took things into OREO didn't turn out to be sufficient, or is it an issue of where you have OREO, real estate values have accelerated downward?

I'm just trying to get a feel for geography of when the loss in economic value occurred.

Was it understated to begin with or have the values deteriorated since then?

Well, let me make a stab at it.

On the land, that vintage was -- we've had it for over three years, and the appraised value has -- first, we had write-downs after a year, then for a period we had at one-time we had write-ups, and now this is -- we've gone a year without a write-down, and were surprised when the appraisal comes in of land on the Inland Empire, that this time it would be a write-down.

And then the property in Texas, I think it's just -- because it was only about 40% occupied, and the appraisers see that we haven't -- they know we've had it for 18 months, so, we've been trying to sell it.

So I think some of that reflects the appraisers following what's happening to this property.

But that one, we think is down to the all cash price that we turned down 18 months ago.

That would be the floor for it.

So, that is the color I have.

No.

That is very helpful, thank you.

I have one more quick technical question.

Heng, you mentioned that you may be prepaying early next year, there are some tranches that make more sense to prepay as the cost of prepayment comes down?

Yes.

That's one aspect.

Is the economic cost actually coming down, or is it just that -- my understanding that is if you bit it off now or pay it off in January, it's make-whole and you should be relatively indifferent.

Is it just, or is it just headlines you'd rather take a smaller loss on it later on or next year, as opposed to doing it right away?

Or is it actually economic that the present value was less, if you pay off later on?

Yes, I understand the question.

The economics are neutral to us.

The credit rate for us is, on average, is probably 20 basis points.

So, it's under LIBOR, but it's above what the Fed pays.

The offset for us is that we have about $20 million of security gain in MBS outside of the HPM portfolio.

And so, if those gains aren't going to go away anyway if interest rates go up.

So, we are weighing the two, and then we are also trying to manage the size of our balance sheet, because our leverage ratio improves as the balance sheet shrinks.

Got it.

Thank you very much.

And we have no other questions in the queue, so thank you for your participation.

I would now like to turn the call back over to Cathay General Bancorp's management for closing remarks.

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

Thank you.

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

This concludes today's event.

You may now disconnect.

Have a great day.