Cathay General Bancorp (CATY) 2012 Q4 法說會逐字稿

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

My name is Ayesha 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, Ayesha, 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 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 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 fourth quarter earnings conference call.

This afternoon Cathay General Bancorp reported net income of $28.3 million for the fourth quarter of 2012, or $0.31 per common share.

That compared to a net income of $27.7 million, or $0.30 per common share, for the fourth quarter of 2011; and $30.4 million or $0.33 per share for the third quarter of 2012.

For the full year 2012, our net income was $117.4 million, a 17% increase from 2011 net income of $100.2 million.

In the fourth quarter, we saw increases in all categories of loans except for construction loans.

Commercial loans increased by $44 million, residential loans increased $72 million, and commercial mortgages increased by $64 million.

Construction loans had a small decrease of $6 million to $181 million at year end.

The majority of the increases in C&I loans were new originations.

In the second and third quarter, our CRE portfolio began to stabilize.

In the fourth quarter, we had the first meaningful increase in CRE balances for the last two years.

Gross loans grew $169 million in the quarter or at 9% annualized rate.

For the year ended 2012, our gross loans grew 5.24% or $370 million to $7.43 billion.

The two largest increases were C&I, which grew 13.9% or $259 million to $2.12 billion, And residential loans at 17.9% or $174 million to $1.15 billion.

At year end, our total deposits were $7.4 billion, an increase of $154.1 million or 2.1% from $7.2 billion at December 31, 2011.

Core deposits increased $624 million, while CDs dropped by $471 million.

Nets charge-off for the fourth quarter of 2012 were $1.4 million compared to net charge-off of $4.6 million for the same quarter a year ago.

Our loan loss provision was zero for the fourth quarter compared to a charge of $2 million in the same quarter a year ago.

Our non-accrual loans decreased by 48%, or $97.3 million during 2012 to $104 million or 1.4% of period end loans.

On November 7, 2012, the California DFI and the FDIC lifted the MOU with Cathay Bank.

We are looking for new branch locations to expand our service areas.

During December 2012, a special dividend of $125 million was paid from Cathay Bank to Cathay General Bancorp to provide funding for partial repayment of TARP.

With that, I will turn the floor over to our Executive Vice President and CFO, Heng Chen, to discuss the fourth quarter results further.

Thank you, Dunson, and good afternoon everyone.

For the fourth quarter, we announced net income of $28.3 million, or $0.31 per share.

Included in fourth quarter results were $5.9 million in prepayment penalties, as well as $4.8 million in security gains.

Also impacting fourth quarter results were a $1 million increase in cost related to our core conversion, and a $680,000 increase in marketing expenses.

Both compared to third quarter 2012 levels.

Our net interest margin was 3.28% in the fourth quarter of 2012, compared to 3.26% in the third quarter of 2012, and compared to 3.28% for the fourth quarter of 2011.

In October 2012, we prepaid $50 million of structural repos with a rate of 4.35% with a prepayment cost of $3.2 million.

In November 2012, we prepaid another $50 million of structural repos with a rate of 4.51% with a prepayment cost of $2.8 million.

We expect continued improvement in the net interest margin during 2013 as a result of the full quarter impact of the fourth quarter actions, the repayment during the first quarter of 2013 of $100 million of structural repos with an average rate of 4.61%, and the impact of continuing strong loan growth.

As we mentioned in our last earnings conference call, we expect our net interest margin to improve by 8 basis points from repayment of TARP.

Non-interest income during the fourth quarter 2012 was $12.2 million, including $4.8 million of security gains which offset most, but not all, of the $6 million repayment penalties incurred during the fourth quarter.

Non-interest expense, excluding costs associated with redemptions of debt, decreased $1.3 million to $43.6 million in the fourth quarter of 2012, compared to $42.3 million in the same quarter a year ago.

The increase was due to additional personnel related to the upcoming core conversion.

At December 31, 2012, our Tier 1 leverage ratio increased to 13.82%.

Tier 1 risk-based capital ratio increased to 17.36%.

And total risk-based capital ratio increased to 19.12%.

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

At December 31, 2012, our Tier 1 common risk-based capital ratio was 12.69%.

We continue to discuss with our regulators the repayment of TARP using dividends from Cathay Bank.

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.

The classified assets ratio for Cathay Bank increased to 33.5% at December 31, 2012, compared to 32.8% at September 30, 2012 as a result of dividends totaling $126.2 million paid to Cathay General Bancorp.

Loans rated substandard or worse decreased from $445 million at September 30, to $437 million at December 31, a decrease of $8 million.

The decrease in classified loans during the fourth quarter resulted from $30 million in net repayments, $28 million of downgrades net, $5 million of charge-offs, and $1 million of foreclosures.

Net charge-offs for the fourth quarter of 2012 totaled $1.4 million or 0.07% of average loans compared to net charge-offs of 0.43% of loans during the third quarter of 2012.

The net provision for credit losses was zero, compared to zero in the third quarter of 2012 and a provision of $2 million in the same quarter a year ago.

We anticipate that a continuation of current trends will allow for a zero or low quarterly loss provision in 2013.

Total non-accrual portfolio loans increased by 9.4% or $9 million to $103.9 million at December 31, 2012, compared to $94.9 million at September 30.

During the fourth quarter, total inflows to non-accrual were $36.4 million, transfers to OREO were $1.2 million, charge-offs were $4.7 million, and [cures] and repayments were $21.6 million.

Loans past due 30 to 89 days at December 31, 2012 were $52.4 million, and are suggestive of only moderate inflow of new, non-accrual loans in the first quarter of 2013.

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

Thank you Kim.

We will now proceed to the questions and answers period portion of the call.

(Operator Instructions) Julianna Kalika with KBW.

I have a couple of questions regarding loan growth expectations for next year.

In terms of the commercial real estate growth, this is the first quarter where there's been meaningful increase.

Could you talk about what kind of properties were you lending to, maybe comment on pricing duration and then your expectations for the trend in 2013?

Julianna, we expect our CRE loan growth to be pretty robust in 2013.

And ar far as products are concerned, I think it's pretty diversified among the shopping center, office building, apartments, etc., etc.

And for pricing, what we are seeing, of course, is very competitive pricing, and typically we would like to originate a fixed-rate loan for five year maturity between 4% to 5%, depending on the size of the loan as well as the credit worthiness of the loan, and for floating rate we typically we ask for prime plus a half, and for duration, again, for five to seven years.

Okay, that makes sense, very good.

And then to follow-up on residential loan growth, which has been good this year, could you comment on little bit about whether or not you will be impacted by the new -- by the rules regarding qualified mortgages?

And also, your thoughts on potential residential loan sales?

Yes.

As you know, the new regulations from CFPB will be effective in 2014.

And so for this year, we don't feel that there is a big impact on our origination of single-family mortgages.

And we are studying the new regulation and we will make a determination whether we continue to participate in the non-qualifying loan sector.

Yes, and Julianna, this is Heng Chen.

We are starting in December, we started to sell our conforming residential mortgage loan, so I think it will be in the range of $25 million to $30 million per quarter.

And then the remainder we will keep on balance sheet.

We are finding that pricing wise, our retain production is generally 1% higher than the conforming rate.

And then what kind of margin are you getting on your sales?

I have only saw the numbers for December, they are probably, counting the servicing rights, about 2%.

Okay, very good, thank you very much.

Joe Morford with RBC Capital Markets.

First just following up on Julianna's question, just broadly speaking what is your overall outlook for loan volumes in 2013?

And then also, how should we think about the overall size of the balance sheet?

Will there be net growth or will the increases in loans mostly be funded with securities?

Joe, at this point in time, we feel that we should be able to grow loans at the same rate that we did in 2012, that is to say, it will grow between 5% to 6% at the present time.

And then, Joe, on the size of the balance sheet, we will try to prepay, in the first quarter we prepaid $100 million, and we will try to prepay probably another $100 million in the second quarter.

And then we do have a lot of -- the TARP repayment would be $258 million.

That would come out of cash.

So, I would look for a balance sheet that is about the same size as what we have at year end.

Okay.

And then once -- the other question would be once TARP is repaid, what are your current thoughts about capital management?

You talked about interest and opening up some branches but are you interested in M&A as well or could we see share buybacks, dividend increases, things like that?

Joe, our first -- once TARP is repaid, and we were hopeful it will be in the first half of the year in installments, but we would then gradually increase our common dividend to shareholders.

In terms of buyback, we would look to see what acquisition targets there might before we would consider buybacks.

We do have a Federal Reserve holding company MOU which prevents us from doing any holding company acquisitions for the time being.

Okay, thanks very much.

Brett Rabatin with Sterne Agee.

Wanted to just get a little more color, guys, around, you mentioned the branch plan and I was curious how extensive that was going to be in terms of total offices?

And would that be something you rollout fairly shortly or was that something that would happen over the next two years?

And then, the other question I had was just around efficiency and you guys are already a pretty efficient operation, I was just curious if you were thinking any about efficiency in this current environment?

Thanks.

Yes, Brett, this is Dunson Cheng.

Our plan is to open about five new branches this year.

And some of them should take place relatively soon, meaning in first and second quarter.

As far as efficiency [which] was concerned, we are not satisfied at the level of efficiency that we operate -- operating at.

We feel that we should be able to do it a bit better than that.

And you might know that we are undergoing a core conversion, and we are spending money since the second half of the last year and the first half of this year to convert to a larger system.

And we are hopeful that by the conversion, we can generate some cost savings from that exercise.

Brett, this is Heng Chen.

On the conversion expense, it was about $5 million in 2012.

It is going to be about the same amount in 2013.

And in 2013, it will be spread over the first three quarters, with the bulk of it in the first two quarter.

And then, on our new branches, it has been a while since we opened branches, we have gone to a very streamlined format for most of the new branches that we are thinking of opening.

So they tend to be more satellite branches with just a few staff, not full-scale regional offices.

Okay.

So the (multiple speakers) should be relatively low, for the new branches.

If I am thinking about it the right way, I'm curious, the money you're going to spend on opening new facilities compared to what you are going to save from core conversion, lower cost from regulatory expenses, would it be fair to assume that expenses could be (inaudible) lower in 2013?

Brett, there is a lot of moving parts.

One, we have to exclude the prepayment penalties.

And then, the second one is the ORE expense, that was very high in 2012.

With the OREO being down to $46 million, and with a few that are in escrow, we think expenses will be low in 2013.

But we are going to try hard to have operating leverage in 2013.

Okay, that's good color.

Thank you.

Lana Chan with BMO Capital Markets.

Hi, good afternoon.

Just wanted to follow up again on the expenses.

Just asking it another way, in terms of the two that you highlighted this quarter in terms of the core conversion expenses and marketing expenses, is that -- should I assume that in the run rate for 2013?

Yes, Lana.

That's the conversion expenses this quarter were $2 million, so I think a good estimate would be $2 million a quarter for the first and second quarter, and then maybe $1 million in the third quarter.

And in the marketing, we had some year end marketing expenses, customer gifts and things like that.

But I think the full year, next year should be close to this year.

Okay.

Great, thank you.

Yes.

(Operator Instructions) Gary Tenner with D.A. Davidson.

Regarding the repo repayments or the prepayments, so you said $100 million, that was that the $461 million has already been repaid in the first quarter?

Yes.

What is the prepayment penalty associated with that?

$5.6 million.

Do you expect that to be offset by additional securities gains in the quarter?

Generally, yes.

The other $100 million that you have plans to repay in the second quarter, what is the rate on that?

We have to negotiate with the counter parties but I think that one is 4.7%.

4.7% meaning prepayment?

I'm sorry, 4.7%.

Okay, is the current rate you're paying, okay.

Yes.

All right.

And then just regarding the C&I growth in the fourth quarter, I assume that some of that is seasonal trade finance or is there other stuff in there that would be transitory nature that you think there are some draw downs late quarter that maybe get repaid early first quarter?

Or have you experienced that?

Typically, our fourth quarter and first quarter loan grows are a little bit slower.

And that is related to our trade finance loans.

Our customer would draw on the line to pay for inventory that they accumulate for Christmas season and after Christmas season.

They receive collection and pay down the line.

So generally, the fourth and the first quarter are the two slower growth periods for C&I loans.

And, as a matter of fact, that the increase of $44 million is net increase of the growth, and during the quarter, during the fourth quarter, there were quite a bit of pay down on our trade lines.

Okay, thank you.

Aaron Deer with Sandler O'Neill and Partner.

A couple quick questions.

What is the current cash than at the holding company now, Heng, and is that just sitting in cash equivalents?

Or is that part of the drag on the margin at this point?

Yes.

I believe that the number for the cash of the holding company is around $160 million.

And then we have a normal dividend capacity of, I am just doing this from memory, but it is a pretty good amount, it's, I believe it is like $90 million.

So in terms of the amount that we need to get bank regulatory approval in 2013, it is only about $20 million.

And then at the holding company, we need Federal Reserve approval to receive the dividends, as well as to repay TARP.

So we see no need to issue debt or equity to fully repay TARP.

Right.

Okay.

And then, I think most of my questions were answered.

Kim, just one question on the credits side.

But OREO and TDRs were down pretty sharply in the quarter but it looks like NPLs were up some, looks like it's mostly nonresidential construction.

Can you give any color behind that?

Yes, that was really relates to two individual loans, related to one another actually, that were identified quite some time ago as problems and transitioned to [non]-accrual status this last quarter.

Those, together, were about $26 million of our total inflow.

So that really accounted for what you see, in both the NPLs and also some changes in our TDRs, the distribution between accruing and non-accruing.

Okay, and given your earlier comments, it doesn't sound like that has any impact on your output just in terms of general improvements in the trends?

No, it doesn't.

We expect to see improvement in 2013 in both NPLs and classified levels in general.

That's great, thanks for taking my question.

Don Destino with Harvest.

Hey guys, thanks.

Aaron asked my first question on credit, just a quick follow-up on that, that particular borrower, and that $26 million in construction.

Is it safe to assume given the zero provision that that's something you think is a very low loss content?

Or what is the collateral there?

No, we actually have a sizable reserve against it, but at this point in the game, we don't believe we are collateral dependent.

So we don't see any imminent charge-offs there.

But we will have a reserve for a while.

Okay, you'd put a reserve against it but it hadn't been on NPL yet?

It was simultaneous with putting it on NPL, we recalculated the appropriate reserve.

And so does that -- I'm sorry, I'm confused.

Does that mean that maybe you would have done a negative, another negative provision in the quarter, but you could do zero because -- or attach to zero because this one would have taken up some of your reserves?

No, I think you would have seen the same provision given where our net charge-offs were for the quarter, very nominal just about $1.5 million.

And we have ample ability to absorb the reserve at this point.

Okay, sorry, that wasn't my primary question.

My primary question is on these debt repayments.

Could you just walk us through the IRR that you calculate on paying these prepayment penalties, and then I'm assuming they are not (technical difficulties) calls that you guys have a positive IRR.

Can you just help us understand what that return is?

Yes, yes.

Don, this is Heng Chen.

Generally, we are getting a creding rate of between 15 and 20 basis points against the coupon.

So for us, we would leave that in a -- we still have cash at the Fed, but once we've repaid TARP, we won't have that.

But it is still positive, and it helps us because we are taking security gains, it helps us -- we think we are still ahead because if interest rates go up, we are going to lose some portion of the security gains from the MBS.

Okay, so it's safe to assume that they are pretty modest IRRs, close to a [may call] with maybe a little bit of benefit?

Yes, yes.

Got you, all right, thank you very much, appreciate it.

(Operator Instructions) Herman Chan with Wells Fargo Securities.

Hi, thanks.

Can you talk about the geographies that you are targeting in terms of the branch openings?

At least the ones targeting earlier this year and also your latter expectations for branch openings as well?

Thanks.

Yes, Herman.

The area that we are looking at are some [holes] that we have in California, particularly in Northern California, in a city, that is one area we are looking at.

And then, in Texas we are also wanting to put in a couple more branches, and we also look at if there any opportunities for areas that we are not in yet.

We will look at that as well.

Got it.

And, wanted to get your refresh thoughts on M&A.

Are there any specific geographies that you would be interested in?

And would M&A be focused on banks serving the Chinese American community?

Yes, Herman, the answer is yes.

We will be looking at M&A that within our service area, mostly Asian Americans.

And we would look at both in-market and out-market mergers.

In-market, of course, you gain some consolidation, [our] market, to explain our market share.

It's not easy to find an appropriate M&A target, and also the pricing has to be correct, so it is hard to say which area is preferable at this point in time.

Got it.

Thank you very much.

At this time, there are no questions in the queue.

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.

Thank you all for joining us for this call.

And we look forward to talking with you again next quarter, first quarter in 2013.

Thank you.

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

This concludes the presentation.

You may now disconnect.

Have a great day.