Cathay General Bancorp (CATY) 2012 Q3 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Cathay General Bancorp third quarter 2012 conference call.

My name is Kim 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.

Thank you Kim, 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, and 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 any forward-looking statement or to publicly announce any revision of any forward-looking statement to reflect future developments or events, except as required by law.

This afternoon Cathay General Bancorp issued an earnings release outlining its third 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 third quarter earnings conference call.

This afternoon Cathay General Bancorp reported net income of $30.4 million for the third quarter of 2012, or $0.33 per common share.

That compared to a net income of $26.1 million, or $0.28 per common share, for the third quarter of 2011, and $29.9 million, or $0.33 per common share, for second quarter of 2012.

Our commercial loans increased by $137 million in the third quarter, or 26% annualized.

Majority of the increases were new originations.

For the first nine months of 2012, commercial loans increased by $215 million, or 14% annualized.

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

Our residential loans increased $72 million in the third quarter of 2012.

Beginning in the third quarter, we retained our new residential mortgages in our own loan portfolio.

Commercial mortgage loans increased by $9 million in the third quarter as new loan originations were almost completely offset by payoffs and amortizations.

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

Construction loans increased $7 million to $187 million at September 30, 2012, compared to $180 million at June 30, 2012.

Gross loans grew $216 million in third quarter, or at 12% annualized rate.

Gross loans were at $7.26 billion, compared to $7.06 billion at year end of 2011.

We believe loan growth for 2012 will be close to 6% when one takes into account of the reduction costs by resolution of problem loans in the first quarter.

Net charge-offs for the third quarter of 2012 were $7.7 million, and compared to net charge-offs of $29.5 million for the same quarter a year ago.

Our loan loss provision was zero for the third quarter of 2012, compared to negative $5 million for second quarter of 2012, and compared to a charge of $9 million in the same quarter a year ago.

Our nonaccrual loans decreased 53%, or $106.3 million, during the nine months of 2012, to $94.9 million, or 1.3 of period end.

For the third quarter, our core deposits increased by $134 million, almost offsetting the maturity of $130 million of brokered deposits during the quarter.

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

Heng?

Thank you Dunson, and good afternoon everyone.

For the third quarter we announced net income of $30.4 million, or $0.33 per share.

Our net interest margin was 3.26% in the third quarter of 2012, compared to 3.24% in the second quarter of 2012, and compared to 3.32% in the same quarter a year ago.

During the third quarter, we extended the terms of two $50 million structured repos by an additional two and additional three years, respectively.

These extensions did not require a current prepayment penalty, and lowered the rate on these two repos by an average of 185 basis points to an average new rate of 2.71%.

In July 2012, we prepaid $50 million of structural repos for the rate of 4.43%, at a prepayment cost of $3.45 million.

We expect a continued improvement in the net interest margin during the fourth quarter 2012, as a result of the full quarter impact of the third quarter actions, the repayment of an additional $100 million of structural repos with an average rate of 4.44%, and the impact of continued strong loan growth.

As we mentioned in last quarter's earnings conference call, we expect our net interest margin to improve by eight basis points from repayment of TARP.

Noninterest income during the third quarter 2012 was $15.6 million, including $8.7 million of security gains.

Noninterest expense, excluding costs associated with redemption of debt, increased $551,000 to $44.4 million in the third quarter of 2012, compared to $43.8 million in the same quarter a year ago.

During the third quarter, litigation accruals increased by $5.8 million, mainly due to an accrual for the Company's share of a jury verdict, which is not final in a trial that is not completed.

Bonus expense for the third quarter of 2012 was lower by $1.4 million compared to the second quarter of 2012, as a result of a revised forecast of full-year cash bonuses.

Operations of affordable housing investments were $1.5 million lower than the second quarter of 2012, due primarily to gains realized from sales of property owned by an affordable housing limited partnership.

OREO expense decreased $4.3 million to $1.8 million in the third quarter of 2012, compared to $6.1 million in the same quarter a year ago, primarily due to decreases in provisions for OREO write-downs, higher OREO gains, and decreases in OREO expenses.

At September 30, 2012, our Tier 1 leverage capital ratio increased to 13.57%.

Tier 1 risk-based capital ratio increased to 17.08%, and total risk-based capital ratio increased to 18.96%.

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

Given the reduced level of classified assets, and our Tier 1 common equity ratio of 12.4%, we have begun discussions during the third quarter with our REIT regulators for repayment of TARP using dividends from Cathay Bank as a funding source.

We are unable to comment further on the timing or amount of TARP repayment.

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 32.8% at September 30, 2012, compared to 35.9% at June 30.

Loans rated substandard or worse decreased from $472 million at June 30 to $445 million at September 30, a decrease of $27 million.

The decrease in classified loans during the third quarter resulted from $34 million of net payments, $16 million of downgrades net, and $9 million of charge-offs.

These figures include $2.4 million in discounted settlements and A-B note splits.

These transactions resulted in charge-offs of $0.8 million, which amount is included in the $9 million total referenced above.

Net charge-offs for the third quarter of 2012 totaled $7.7 million, or 0.43% of average loans, compared to net recoveries of 0.15% of loans during the second quarter of 2012.

Provision for credit losses was zero, compared to a negative $5 million for the second quarter of 2012, and a provision of $9 million for the same quarter a year ago.

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

Total nonaccrual portfolio loans decreased 22.7%, or $27.9 million, to $94.1 million at September 30, 2012, compared to $122.1 million at June 30.

During the third quarter, total inflows to nonaccrual loans were $17 million, transfers to OREO were zero, charge-offs were $8.9 million, and cures and repayments were $36.0 million.

Loans past due 30 to 89 days at September 30 were $43.9 million, and are suggestive of only moderate inflow of nonaccrual 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 the question-and-answer portion of the call.

Kim?

Okay, ladies and gentlemen.

We're ready to open up the lines for your questions.

(Operator Instructions)

Please stand by for your first question.

Your first question comes from the line of Aaron Deer with Sandler O'Neill and Partners.

Heng, I was wondering, on the margin.

I know that you had previously guided for a fourth quarter margin around 3.4%.

The little bit of improvement that we saw this quarter seems like we are going to maybe come up a little shy of that.

I'm just wondering what actions you might be able to still be able take on the funding side.

It sounds like there's another $100 million on repos that could help you get there, or what your expectations are at this point.

Yes.

Aaron, as you mentioned, there's the $100 million of structural repo repayments, of which we've already prepaid $50 million last week.

In the first quarter of next year, we're likely to repay another $100 million of structural repos.

So that's something further, and then it's a matter of the loan growth gradually using up our excess cash.

The one reason for the variance is that our cash at the fed was $400 million in the second quarter, and in the third quarter, even with the loan growth and the prepayment of $130 million of brokered CDs and runoff of about $40 million of internet CDs, our cash at the fed was still $400 million.

So those are all things that we're going to work on.

We have some preliminary budget forecasts for 2013, and we see the margin there going over 3.4% early in the year.

Okay, and then I think I might have heard Dunson's comments on the, I think it might have been the C&I growth expectations for the full year.

I'm just wondering if we could get a little bit more color on expectations on that growth.

In particular, with respect to trade finance, and just given the seasonality in that particular category.

Yes.

As I mentioned, that the growth for the third quarter of $137 million, and most of that $100 million of that were really from new loans.

So the rest of $37 million would be drawn on the line, or maybe more than that because there might be some payoff during the third quarter.

So new loan originations in the C&I category in the third quarter seems to be pretty solid.

My sense is that the fourth quarter is going to continue to have some steady growth, and it's a little bit more difficult to look further into next year because there are a lot of uncertainties in the marketplace, and we have not completed our budget.

So it's difficult for me to give you an idea of what happened in the 2013.

Okay, thanks for taking my question.

Yes, thanks.

Your next question comes from the line of Joe Morford with RBC Capital Markets.

Please proceed.

Thanks.

Good afternoon, everyone.

hi, Joe.

I guess a question on the provision going forward.

Kim, you mentioned that given the trends, that it could lag charge-offs going forward.

Overall, the reserves still fairly healthy at 2.5%.

Could we actually see more zero provisions, and then just longer term, going into 2013, how do you think about the provision?

Well, so, yes, Joe.

So long as the trend continues, we can certainly envision more zero provision quarters going forward.

So long as we have healthy coverage of our nonperformers and we see a continued decrease in classified assets.

Our methodology really kind of drives down the required reserves, and we think it'll go that way.

So I would anticipate that that would be the case, going into at least early 2013.

Joe, let me just add, we did a good number of A-B note splits, and so some of them now, they're generally designed to mature, the A and the B notes, are generally designed to mature in two or three years.

So with the improvement in real estate values, for example, last week we had a B note that -- or we had a loan where we had the partial charge-off of almost $1 million, where that was paid in full, and we expect that there's a fairly -- once again, there's a fairly large portfolio of charge-off B notes that will occasionally, here and there prepay in 2013, and to the extent we have net recoveries, we're certainly going to book negative provisions equal to net recoveries.

Your next question comes from the line of Brett Rabatin with Sterne Agee.

Hi, guys, good afternoon.

Hi.

I wanted to ask one clarification and then one question.

I didn't quite catch, I was trying to catch up on notes and didn't quite catch the comment on the cash bonuses.

Didn't know if that was for 3Q, 4Q.

I apologize, I couldn't keep up.

What was that comment during the prepared comments?

Yes.

Brett, this is Heng Chen.

It's difficult for us to get a good handle on cash bonuses, because it's a moving target as to, in our situation, a good portion of our bonuses relate to the top 15 officers.

So earlier in the year we had a -- we were accruing based on an estimate of, potentially a full repayment of TARP late in the year.

So as time has gone by, we have a better picture on that.

So as a result, we've lowered the cash bonus pool in light of the TARP situation, one.

Two, we also trued up -- we finalized our cash bonus program for 2012, and so we have a clearer picture of what we expect to pay, and so there's a one-time adjustment in the third quarter downward.

So that by the end of the third quarter, we have accrued 75% of what we expect to pay in cash bonuses.

Okay, and so I apologize, what was the reversal?

It's about $1.4 million.

$1.4 million, okay.

Then my question is, just around, you guys are to the point now where you've submitted your application to repay TARP, and that's given your capital ratios and your improvement in credit.

That's obviously something that's very feasible.

Given that we're at this stage, what is the strategy going forward?

Can you guys talk a little bit, elaborate what your focus will be?

Will you look at M&A?

Will you open more branches?

What will you be doing as you get past this hurdle?

Brett, this is Dunson Cheng.

I think we have been pretty restrained in doing expansion in the last two years, making sure that we return to good profitability and balance sheet looks strong and we have reached this stage as of now.

Our plan is to begin to open up more branches, and if M&A opportunity comes by, we'll certainly take a look at it.

So it's a combination of opening more branches and M&A opportunities.

Also the dividend.

We want to increase the common dividend.

Right.

and that's all post-TARP.

Right.

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

Good afternoon.

In terms of the margin, you gave some indication on terms of going to the fourth quarter, the cost of funds coming down, but could you talk about the earning asset yields?

They came down this quarter.

What are you seeing with new loan origination yields, and where are you reinvesting the securities at?

Well, Lana, as for as loan yield is concerned, we are certainly seeing competition, and a really very acute competition from other banks offering favorable terms, favorable rates to borrowers.

So my expectation is that loan yield would not improve in any near future, and perhaps would go down a little bit.

The good thing is that we are sitting on top of $400 million cash, and so on the whole, hopefully we can maintain a level of margin that we are seeing.

Yes, that should improve, but yes, there's steady erosion in the margin, but we are -- here and there we're going to get some interest recoveries that will help increase loan yields, but as Dunson mentioned, there is pressure on loan yields.

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

Please proceed.

Hi.

Wondered, I guess, first if you could give us a little bit more color into troubled debt restructuring, I guess, performing TDRs.

Still a good bit of growth in that category.

Just wondering if you foresee the growth there slowing down, or if there's any chunk of those that could be coming off there any time soon.

well, we did have about $15 million in new inflows to accruing TDRs.

It's just part of the natural kind of resolution process to try and improve some of these commercial real estate loans.

I think a lot of our -- Joe, this is Heng Chen.

A lot of the TDRs, they're where we've made a concession on the amortization, where we've gone to interest only for a period, and then some of the regulatory guidance would have us put more loans, or has caused us to put more loans as TDR upon renewal, because even if we renew the loan at the same floating rate as before, given if the borrower's condition has weakened, that's going to be now, Kim corrected me if I'm wrong, we're flagging those as TDRs.

Absolutely, if it's a below market rate, even if it's the same or higher than what they were paying before.

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

Hey, guys, good afternoon.

Thanks for taking my questions.

Yes.

Just wanted to follow up on the earlier questions about the securities portfolio.

Just want to get a sense for what drove some of the yield compression, whether any of that was related to premium amortization.

Then if you could just disclose what the approximate duration is of the portfolio today.

Just trying to get a sense for where those yields might be headed.

Yes, Jonathan.

This is Heng Chen.

The premium amortization, I don't have the number at my fingertips, but it wasn't much higher than prior quarters.

We, in recent years, we have tried not to pay more than 102.5 on MBS, and so once again the premium -- there's not a lot of premium to amortize in the first place.

Then the average duration, we have the bulk of our MBS portfolio is 30 years securities, and we generally have continued to buy the current coupon.

So our duration is relatively long, but right now it's about 2.4 years.

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

Please proceed.

Thanks.

Good afternoon.

Hi, Gary.

Heng, I just wondered if you just could go back over for a second the repo prepayments.

I know you did the one for $50 million in July, and then you said there'll be -- you did one already in the fourth quarter for $50 million?

Right, and we're going do another one for $50 million.

Depending on how things are, we might do a little bit more here in Q4.

Okay, and can you just tell us what the rates are, I guess the combined rate was 4.44%, Is that what you had said?

Yes, yes.

Okay, and when would that second one occur?

Let's say you only did two.

When would the second one be?

Right now it's scheduled for the first week in December.

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

Good afternoon.

Hi, Julianna.

Hi.

I have two questions.

One, on the legal accrual that you were making for this unresolved trial, if the trial gets resolved in your favor, then you'll be reversing this accrual, right?

We have our fingers crossed, yes.

okay, excellent.

Then in terms of, going back for a second to the repo -- the prepayments, how much prepayment did you incur with the one that you just prepaid, and what are you expecting for the fourth quarter on the prepayments, and also what kind of security gains do you think you may be taking this coming quarter?

Yes.

The prepayments penalties are about $5.5 million, and we took security gains in the first week of the quarter when MBS prices were higher.

Anyway, we have well over $5 million of MBS gains in Q4.

So they should offset.

your next question comes from the line of Herman Chan with Wells Fargo Securities.

Hi, thanks.

Can you give us some color on the loan growth on the residential mortgage side?

What type of loans and yields are you originating at this juncture?

Also talk about how you're thinking about future rate risk in retaining these loans.

Thanks.

Yes.

Herman, the bulk of our residential mortgage production is 15 years, in part because our borrowers prefer a lower -- they prefer a lower coupon, and rather longer term.

Then I believe the majority of our production is limited documentation loans, so we charge a little bit more for that.

I don't have the current statistics, but I think in terms of our new production, the 30-year -- we did a study in the first quarter.

We're generally about 50 basis points higher than Freddie Mac mortgage coupons for 30- and 15-year.

So that, I assume, would continue, because of the nature of our borrowers.

(Operator Instructions)

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

Please proceed.

Hey, guys, I think Julianna asked the follow-ups that I had on the repo questions, but just if you would comment on the professional service fees.

They kind of were flat this quarter.

At what point do we expect to see more of a decline?

I mean, obviously MPAs and classified loans are down quite a bit.

So at what point do we see some reduction in maybe some of those other credit-related fee items?

Gary, you're talking about the collection, legal fees, and workout staff?

Yes, the professional service expenses.

Yes.

For us, a good part of it now relates to our conversion, our core system conversion.

So it's about $1.5 million a quarter for that.

That conversion is scheduled for July of next year, and then my guess is for legal and special asset and appraisal fees related to problem loans, that's about $2 million a quarter.

At some point, it should subside.

In the third quarter we had a little bump in legal fees because of this jury trial, but with the non-accruals now down under $100 million, I would think the work load in special assets should be coming down, and so the expenses should -- they're going to lag, but they'll continue to drop.

Your next question comes from the line of Joe Morford with RBC Capital Markets.

Please proceed.

Thanks.

Just a couple of quick follow-ups.

First just on that last question, can you also break out the OREO expense for the quarter between any gain or loss on sale write-downs on update appraisals, property taxes, things like that?

Yes, Joe.

The write-downs in the third quarter were roughly $2.9 million, and then the gains, I believe the gains -- we had net gains this quarter of about $1 million, and then the expenses were a little bit lighter this quarter, because we had some property tax recoveries from appealing the property taxes.

They're typically about $1 million a quarter, but this quarter is a little bit lighter.

Then for Q4, we think the OREO expense should not be much higher than Q3, based on what we know right now.

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

Please proceed.

Hi, thank you.

I have a quick follow-up.

I'm sorry if I didn't catch this earlier.

In terms of your interest income on loans, how much of that this quarter was the reversal, income reversals from loans coming back to accrual, et cetera?

You mean interest collected or interest --

Income recaptured, yes.

It was, I think, $300,000 or $400,000.

Okay, thank you.

so it's about an average quarter, yes.

Your next question comes from the line of Don Destino with Cathay General Bancorp.

If you guys are making offers, I might be available.

Hi, Don.

Hi, how are you?

Hey, nice quarter, nice improvement in credit.

Can you just give us some perspective on how much of the improvement in NPAs is from the A-B splits versus sales and cures and those kinds of things?

Then I have one follow-up.

Yes.

This is Kim Bingham.

For the current quarter, it was pretty low.

A-B splits were just a shade over $2 million, and short sales were just a shade over $300,000.

We had one that didn't require charge-off, the one on the East Coast.

That's A-B split.

That's true, the timing, yes.

There was -- we took the charge in -- we didn't have to take another charge because we had already taken the charge-off long ago, but we did restructure one rather sizable loan on the East Coast.

I forgot about that.

What I'm trying to get at, and I apologize if I just maybe don't understand how it works, is if you had a $10 million loan that was on -- that would have been on nonaccrual but you did an A-B split, is it possible that you would have a $5 million performing loan and an $5 million nonperformer, and that would be a $5 improvement in nonperformers, or is that not how it works?

That's not quite how it works, because when you do the split you have to charge off the B note.

Okay,

So to follow your example, you'd have a $5 million performing loan, and that's it, and a charge-off for $5 million.

Okay, So you would have a $5 million charge-off, and you would -- or you'd charge off the $5 million B note to wherever you thought realizable value was, but your NPAs would come down by $10 million.

Yes, that would be correct in that particular --

Okay, and you're saying that kind of transaction only helped NPAs by about $2 million this quarter?

Well, total of $13 million, because I forgot about the one big one.

Okay.

Is this a typical quarter, or how -- I'm just trying to get a sense of kind of the trajectory -- you know what I'm saying.

If you look back into our -- in the near term history, it's been very volatile.

In Q2 when we had about $180 million reduction in substandard -- Q1, sorry -- in substandards, we had a lot of activity going.

This quarter, relatively little.

It's really, as the opportunity presents itself, and obviously it's driven a lot more by curing your big problems rather than a multitude of smaller ones.

Well, our expectation is that the activity should reduce, yes.

Yes, they'll be reduced, if for no other reason than you're having such low new inflow of new nonperformers, and the markets in general are getting better.

So you would expect that a lot of those borrowers who continue to perform but are a problem are less likely to cause (technical difficulties) nonperforming status, or cause us to do something to prevent that nonperform status.

Your next question comes from the line of Hermann Cahn with Wells Fargo Securities.

Please proceed.

Thanks for taking my follow-up.

In the prepared remarks there was a mention of refraining from giving a timetable on TARP repayment, but can you give us an update on the MOU and expectations for resolution at this time?

Thanks.

Yes.

Hermann, Heng Chen.

As you know, we've got two MOUs, and the one at the bank and one at the holding company.

The one at the bank level, we've satisfied, actually for both of them, we've satisfied all of the provisions, and then at the bank one, the regulators have been onsite every quarter, and they finished -- their third quarter visitation finished in the third week of September.

So if there's any -- there's a processing period after that for the -- if they were to have any -- if it were to be lifted.

So whenever that happens, we would put out 8-K.

Then typically the holding company, the Federal Reserve waits for a period of time after the bank's MOU has been lifted.

They have their own criteria and timetable.

So that's -- if there's news, it would it happen at the bank first.

At this time there are no questions in queue.

Thank you for your participation.

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

Thank you Kim, and thank you for joining us for this call.

We'll look forward to talking with you again next quarter.

Thank you.

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

This concludes the presentation.

You may now disconnect, and have a great day.