Cathay General Bancorp Earnings Call INSIGHTS: Optimistic for Year’s End Net Interest Margin, Strong C&I Growth
On Tuesday, Cathay General Bancorp (NASDAQ:CATY) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.
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Optimistic for Year’s End Net Interest Margin
Joseph Morford – RBC Capital Markets: I guess, 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 kind of a stable rate environment to fall that place through what kind of ballpark would you expect to end up for the year for the net interest margin?
Heng W. Chen – EVP, CFO, and Treasurer: Well Joe, we are still optimistic that the fourth quarter would 3.4% for the net margin. I 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 that’s, but we are hopeful that would be in the second half of the year.
Joseph Morford – RBC Capital Markets: 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 full swoop?
Heng W. Chen – EVP, CFO, and Treasurer: It depends on classified asset ratio. If we show good progress to 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.
Joseph Morford – RBC Capital Markets: 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 and updated appraisals. Was that concentrated in a handful of properties? Are you seeing kind of widespread deterioration in property values and if so is it mostly related to land and then any other kind of expectations for OREO expense going forward?
Heng W. Chen – EVP, CFO, and Treasurer: As I mentioned in our prepared remarks $4.1 million is in write downs and off that the – 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 a write downs every quarter or every six months as we get appraisals on that. One, the buildings are essentially a 35% leased. They are Class A buildings, but with that much vacancy even in the good market there is write downs. Then, we have three plots of land in the Inland Empire, that’s about $1 million write downs on those three separate properties. Then we have others are – we have a vacant property in San Jose, a new appraisal indicator of $600,000 write down on that vacant land in San Jose. Then we also have some smaller write downs that are in California, but there is four or five that are about $300,000 a piece, so that really adds up. Then on the delinquent property taxes, they were $1.1 million 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 don’t hit OREO expense but we’ve looked at the accounting literature and so, going forward, which is 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’ll be a lesser impact.
Dunson K. Cheng – Chairman, President, and CEO: Joe this is Dunson Cheng. I can confirm with what Heng just mentioned and we don’t see such a larger OREO rate in the third quarter and as a matter of fact, we are seeing a number of our OREOs in escrow and hopefully we can do a little bit more in the third quarter to dispose of some of the OREOs.
Heng W. Chen – EVP, CFO, and Treasurer: Joe, Heng Chen again. I forgot to mention, just so, we give the full information on the OREO expense, we had two properties where we had net losses on sale of 600,000. So, that if you aggregate all that, that’s about 5.7 million, then the difference between that is a 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 OREOs.
Strong C&I Growth
Aaron Deer – Sandler O’Neill: I guess, 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, or is it reasonable to assume that that might reflect an improved regulatory rating or is there something else that might be going on there?
Heng W. Chen – EVP, CFO, and Treasurer: Yeah, last there was a catch-up adjustment in the second quarter. I believe it was about $600,000 that related for the first quarter. FDIC insurance, it’s a very complicated formula, but that takes into account your regulatory ratings, the different components, plus the level of classified loans, it’s on the FDIC website. But the level of classified assets and so forth, so as they come down that number will improve. So we are hopeful that our third quarter FDIC insurance would be several 100,000 lower.
Aaron Deer – Sandler O’Neill: Then you have posted some good strong C&I growth in the quarter. I was wondering what’s kind of the average size of those new loans or commitments and how much of that is trade finance related?
Heng W. Chen – EVP, CFO, and Treasurer: How much is trade finance related and the average size.
Dunson K. Cheng – Chairman, President, and CEO: I would say the average size is about $6 million to $7 million and last quarter it was little bit different from the previous one actually will be above 30% of our loan growth was centered in hi-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 traded customer would take shipment of the inventory in the third quarter and pay for it and so we expect in the third and fourth quarter to increase in the trading finance area would be higher.
Aaron Deer – Sandler O’Neill: Just as a follow-up. Can you talk a little bit about what you mean by the high-tech, what kind of loan structures are those, what kind of…
Dunson K. Cheng – Chairman, President, and CEO: Aaron, you kind broke-up. Please repeat the questions please.
Aaron Deer – Sandler O’Neill: The 30% that you highlighted is being the high-tech lending. Can you talk about what the nature of that lending is?
Dunson K. Cheng – Chairman, President, and CEO: There 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 if it’s multi payment.