Below is transcript of the Cathay General Bancorp (NASDAQ:CATY)’s Fourth Quarter 2014 Earnings Call, held on
January 21, 2014 at 6:00 p.m. ET.
Cathay General Bancorp (NASDAQ:CATY) is a holding company of Cathay Bank, a California state-chartered commercial bank (the Bank), six limited partnerships investing in affordable housing investments in which the Bank is the sole limited partner, and GBC Venture Capital, Inc.
Company Executives:
Monica Chen, Investor Relations Officer
Dunson K. Cheng, Chairman, President and CEO, Cathay General Bancorp
Heng W. Chen, Executive Vice President, Chief Financial Officer, and Treasurer, Cathay General Bancorp
Analysts:
Julianna Balicka, KBW
Aaron Deer, Sandler O’Neill & Partners
Joe Morford, RBC Capital Markets
Gary Tenner, D.A. Davidson
Lana Chan, BMO Capital Markets
Matthew Clark, Sterne Agee
Operator
Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp Fourth Quarter 2014 Earnings Conference Call. My name is Chris and I will be your conference moderator for today. At this time, all participants are in listen-only mode. Following the prepared remarks, there will be a question and answer session. Today’s call is being recorded and will be available for replay at www.cathaygeneralbancorp.com. And now, I would like to turn the call over to Monica Chen, Investor Relations for Cathay General Bancorp. Ma’am, you may proceed.
Monica Chen, Investor Relations Officer
Thank you Chris, and good afternoon. Here to discuss the financial results today are Mr. Dunson Cheng, our Chairman of the Board, President and Chief Executive Officer and Mr. Heng Chen, our Executive Vice President and Chief Financial 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 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, 2013, at 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.
We would also like to inform you that Cathay will be filing a Form S-4 registration statement that will include perspectives of Cathay in the Proxy Statement of Asia Bancshares regarding the merger we announced this morning. You are urged to read this document when it becomes available, because it will contain important information about the merger. In addition, Cathay and Asia Bancshares, and their directors and officers may be deemed to be participating in the solicitation of practice in favor of the proposed merger. You can find information about Cathay directors and executive officers in our Proxy Statement filed with the SEC. You may obtain a copy of these documents when they become available through the SEC’s website, Cathay’s website, or by requesting a copy from our Investor Relations Department. This afternoon, Cathay General Bancorp issued an earnings release outlining its fourth quarter 2014 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.
Dunson K. Cheng, Chairman, President and CEO
Thank you, Monica, and good afternoon. Welcome to our 2014 fourth quarter earnings conference call. This morning before the market opened, we announced the merger of Asia Bancshares of New York into our company. Asia Bank as a subsidiary of Bancshare was founded in 1984 in Flushing, New York. Its mission, same as Cathay, was and is to serve the Asian emigrant community of New York. We also share the same philosophy in running our banks. In 30 years, Asia Bank has assembled a loyal customer base and has established a solid reputation. As of September 2014, it’s total assets of $498 million, total loans of $490 million, and total deposits of $450 million. It has three branches in New York City, and one in Rockville, Maryland, which is 18 miles north of Washington D.C. The Asian population around Washington D.C. has grown 60% since year 2000.
Our experience with New York region has been largely positive. In 15 years, we have put together nine branches in New York City with a deposit base of $0.92 billion and a loan book of $1.84 billion. During the 2008 recession, New York’s loan portfolio has performed better with must lower losses than the rest of our loan portfolio. In 2014, New York was our fastest growing region for long with a year-over-year growth of 23%. This merger will bring the number of branches in New York City to 12 with the deposit base of $1.34 billion and total loans of $2.26 billion. It will also open up a new marketplace for Cathay Bank in Maryland and Washington D.C., and increase the number of states that Cathay has operations in to nine. Equally important, this merger will bring a group of experienced and dedicated officers and staff to Cathay. We are especially pleased that Asia Bank Chairman, President, and Deputy President will join our advisory board to facilitate the integration of the two banks and solidify customer retention. We expect this merger to be completed during the second quarter of 2015 after receiving regulatory and Asia Bancshares shareholders approvals. We believe this merger will strengthen our business in New York. Our CFO, Mr. Heng Chen will speak to the financials of this merger later on.
Returning to our first quarter results, we report net income of $35.6 million, an 11.5% increase when compared to net income available to common shareholders of $31.9 million for the fourth quarter of 2013. Diluted earnings per share increased 10% to $0.44 per share for the fourth quarter of 2014 compared to $0.40 per share of the same quarter a year ago. Our net loan growth slowed during the fourth quarter to $56 million or 0.06% of quarter-over-quarter. CRE loans grew by $72 million, while residential mortgages increased by 53 million. The pace of new loans book continue to be good while we experienced an unusually large loan payoffs and pay down of over $300 million in the quarter. For the twelve months ended December 31, 2014, our loans increased $830 million or 10.3% compared to an increase of $650 million or 8.8% of twelve months ended December 31, 2013. The main drivers of our annual increases came from CRE loans, which increased $453 million in residential mortgages, which grew by $250 million, while C&I loans grew by $84 million, and construction loans by $77 million. We expect that our loan growth in 2015 excluding the acquisition of Asia Bank will be over 10%.
The fourth quarter 2014, our total deposits increased by $89 million to $8.78 billion. For the twelve months ended December 31, 2014, the increase in deposits was $802 million which represent a 10.1 increase from December 31, 2013. Our core deposits increased by $14.5 million or $656 million from December 2013. In the fourth quarter, our efficiency ratio was 22.96%, an improvement of 42.96% and improvement over the third quarter of 44.51%, and an improvement over the fourth quarter of 2013 of 44.65%. With that, I will turn the floor over to our Executive Vice President and CFO, Heng Chen to discuss the fourth quarter financials in more details.
Heng W. Chen, EVP, CFO and Treasurer
Thank you, Dunson, and good afternoon everyone. Before we discuss our fourth quarter results I want to give the summary of the agreement of merger with Asia Bancshares. The purchase price is expected to be $126 million subject to adjustment, and so the purchase price will be approximately 1.6 times the expected closing book value, and it’s a mix of approximately 45% to 55% stock and the remainder in cash. We expect that this acquisition will be accreted by 2% to 3% to annual earnings, excluding any one-time merger and restructuring charges. This acquisition is expected to reduce our risk-based capital ratios by approximately 40 basis points. We expect the tangible book value dilution to be earned back in slightly over four years.
For the fourth quarter we announced net income of $35.6 million or $0.44 per share. Our net interest margin was 3.36% in the fourth quarter of 2014 compared to 3.31% in the third quarter 2014, and compared to 3.30% for the fourth quarter of 2013. In the fourth and third quarters of 2014, interest recoveries and prepayment penalties added four basis points and nine basis points respectively to the net interest margin. $100 million of structured repurchase agreements at 3.5% matured in November 2014, adding two basis points to the fourth quarter net interest margin. An additional $50 million of structured repurchase agreements at 3.5% matured on January 8, 2015 and together with the fourth quarter impact of $100 million of fourth quarter maturities or add additional four basis points to the net interest margin for the first quarter of 2015. Non–interest income during the fourth quarter of 2014 was $8.1 million. Non-interest expenses increased by $0.8 million to $41.1 million in the fourth quarter of 2014 compared to $40.3 million in the same quarter a year ago. The increase was mainly due to increases in marketing expenses of $0.7 million in the fourth quarter and increase of $0.5 million in OREO expense, partially offset by a decrease and $0.7 million in salaries and employee benefit expense in 2014. The effective tax rate for the fourth quarter of 2014 was 37.1%.
For 2015, as a result of additional purchases of low income housing and renewable energy tax credits, we expect that our effective tax rate for 2015 will be between 33.5% and 32%. The additional pretax amortization expense for these investments will be between $7.5 million and $10 million for the full year 2015. At December 31, 2014, our Tier 1 leverage capital ratio increased to 12.99%, our Tier 1 risk-based capital ratio increased to 14.97%, and our total risk-based capital ratio increased to 16.22% as compared to September 30, 2014. All ratios domestically exceeded well-capitalized minimum ratios under all the regulatory guidelines. At December 31, 2014, our Tier 1 common risk-based capital ratio was 13.74%. Net charge-offs for the fourth quarter of 2014 were $5.8 million or 0.07% of average loans compared to net recoveries of $5.2 million in the third quarter 2014 and charge-off at $8.3 million the same quarter a year ago. The substantial majority of the fourth quarter 2014 charge-offs were against specific reserves established in prior quarters for two impaired loans. Our loan loss reversal was $2 million for the fourth quarter 2014 compared to reversal of $5.1 million for the third quarter of 2014 and zero for the fourth quarter of 2013. Our non-accrual loans, excluding non-accrual loans held for sale increased 7.5% or $4.9 million during the fourth quarter to $70.2 million or 0.79% of period-end loans as compared to the third quarter of 2014.
Dunson K. Cheng, Chairman, President and CEO
Thank you, Heng. We will now proceed to the question and answer portion of the call.
Question and Answer Session
Operator
Thank you. And our first question comes from the line of Julianna Balicka with KBW. You may proceed.
Julianna Balicka, KBW
Good afternoon.
Dunson Cheng, Chairman, President and CEO
Good afternoon.
Heng W. Chen, EVP, CFO and Treasurer
Hi Julianna.
Julianna Balicka, KBW
Hi. I just wanted to ask a few questions on the deal. For the acquisition, are there any cost saves or any branch consolidation or any synergies in branch expansion that you are planning on?
Heng W. Chen, EVP, CFO and Treasurer
Julianna, this is Heng Chen. I think we will be covering that in the S4 perspective, but it’s an in-market deal, so we would expect that to be relatively high in the order of 40% plus, but we are not commenting on branch closures or anything specific beyond that.
Julianna Balicka, KBW
Very good, that makes sense. And then, in terms of the loan growth that you are looking for next year, the 10% organic loan growth, could you talk a little bit more about the key drivers of that? Is that C&I? Is that CRE-based? And what are the residential mortgage growth assumptions within that 10%?
Dunson Cheng, Chairman, President and CEO
Julianna, this is Dunson Cheng. Yeah, the expectation of 10% is based on the current pipeline that we have, which is over a billion dollar, and roughly our I would say above 60% to 70% CRE, and 30% or so C&I loans. We expect our residential mortgages to do a little better than what we have been seeing in 2014, which is roughly $14 million per quarter.
Julianna Balicka, KBW
Very good, that …
Heng W. Chen, EVP, CFO and Treasurer
Especially with the lower interest rates, we are seeing increase in application volume. Although, we are not offering 30-year mortgages except through Freddie Mac.
Julianna Balicka, KBW
Got it, and one quick housekeeping question on the deal, if I may? Do you have any preliminary sense in the fair value marks on the Asia Bank’s portfolio?
Heng W. Chen, EVP, CFO and Treasurer
Yes. Generally their loans are well-priced, particularly in our niche in New York. Based on review, most of them are floating rate that are tied to prime. Generally at least one, if not higher than that over prime. Their credit quality is excellent so we would think that one under the purchase accounting we would reverse their loan loss reserve which is, I am going from memory about, $6 million or so. That would be reversed out, and then, because they have excellent quality loans, we don’t think there is going to be a negative credit mark. And then because they are floating rate loans nor do we think we will be booking at higher than par. They do have some appreciative value in the real estate that they own, that they have owned for many years. And so there is going to be some purchase accounting write-up of that, which would reduce goodwill, but we are going to wait until the S4 to eliminate the goodwill, the purchase accounting pro forma, if it’s required.
Julianna Balicka, KBW
Got it, okay. Thank you very, very much. I’ll step back.
Heng W. Chen, EVP, CFO and Treasurer
Thank you.
Operator
Our next question comes from the line of Aaron Deer with Sandler O’Neill & Partners. You may proceed.
Aaron Deer, Sandler O’Neill & Partners
Hi, good afternoon, everyone.
Dunson Cheng, Chairman, President and CEO
Hi, Aaron.
Heng W. Chen, EVP, CFO and Treasurer
Hi, Aaron.
Aaron Deer, Sandler O’Neill & Partners
Dunson, Heng, congratulations on the deal.
Dunson Cheng, Chairman, President and CEO
Thank you.
Heng W. Chen, EVP, CFO and Treasurer
Thank you. It’s been a long time.
Aaron Deer, Sandler O’Neill & Partners
It has been awhile. Following-up on Julianna’s question about the purchase accounting, I think you mentioned at the beginning of your comments, but I didn’t catch the value, did you give what the impact to book value was at the deal?
Heng W. Chen, EVP, CFO and Treasurer
No. We just said that the tangible book value would be earned back over four years so and that we said that the accretion will be 2% to 3%. So, just using that guidance if it’s $0.05 a share accretion to EPS, that would be in a four-year payback that would be $0.20 dilution to book value or slightly over that. This is just going by the math.
Aaron Deer, Sandler O’Neill & Partners
Right, I understand. Okay. It sounded like you’re pretty confident with respect to the loan outlook for 2015. I’m just curious, here in the fourth quarter it slowed, growth slowed down quite a bit. Were there any decisions that you made conscious because of what was — where rates were going or if it was just normal seasonal slowdown of the holidays? What caused things to not get booked here in the fourth quarter?
Dunson Cheng, Chairman, President and CEO
Yes. Aaron, this is Dunson Cheng. When you look at the pay downs on the fourth quarter, the thing that jumped out to us is that our C&I loan portfolio, we have closed $200 million pay downs. This $200 million roughly I would say, above $60 million is because of trade lines with different banks. We set up trade lines for banks to facilitate the payment of the use and fails and all of that. So, those are mostly very low interest rate loan — lines of credit. So we saw roughly $60 million pay down of that, and then there are some CD loans that’s been paid off and also we are seeing a seasonably higher pay down in the fourth quarter, which would come in the fourth quarter of every year and that maybe related to the huge increase in the third quarter of last year that we have seen over $250 million. So I think things are — maybe we’ll borrow some of the loans both in third quarter and now it’s been paid off in the fourth. So we feel that those are trade-related seasonal adjusted type of situation and it should not affect what our projection for 2015.
Aaron Deer, Sandler O’Neill & Partners
Okay, that’s good color, Dunson. I appreciate it. I’ll get back in the queue with my remaining questions.
Operator
Our next question comes from the line of Joe Morford with RBC Capital Markets. You may proceed.
Joe Morford, RBC Capital Markets
Thanks. Good afternoon and offer congratulations as well.
Dunson Cheng, Chairman, President and CEO
Thank you, Joe.
Heng W. Chen, EVP, CFO and Treasurer
Thank you, Joe.
Joe Morford, RBC Capital Markets
I have — first question was on the expense side. Did the decline in the compensation costs this quarter largely reflect the full run rate of the savings from the core systems conversion earlier this year, or is there still more to come in the first quarter? And just in general, how do you feel about that run rate going into 2015?
Dunson Cheng, Chairman, President and CEO
Let me answer, Joe, your first question first. The savings from our core conversion I would guess it’s about almost 80% completed by the fourth quarter. So there might be 20% left in 2015.
Heng W. Chen, EVP, CFO and Treasurer
And then, Joe I think there was a couple of just discreet items that relate to the fourth quarter. First, we had higher bonus accruals of about $600,000 in the third quarter compared to the fourth. We also had more vacation paid taken in the fourth quarter because of the holidays. And then lastly, every 18 months or so, we do a cost study on our loan origination cost and we found that we have added more manpower or that we were understating the amount of manpower dedicated to loans, to originating loans. So that was about a little over a million in Q4 compared to Q3. And so that million that relates to the deferred loan origination cost, that will stay with us each quarter in 2015, and they will come back as the amortization of deferred loan cost and it will show up in the net interest income line.
Joe Morford, RBC Capital Markets
Okay, that’s helpful. Then I guess the second question was — if you could Dunson talk a little bit more about the operation you have in New York and specifically the loan portfolio there. What kind of growth rates have you been seeing in New York in the last couple of years? And with Asia Bank now, what kind of growth rates do you see for that portfolio going forward?
Dunson Cheng, Chairman, President and CEO
Joe, in 2010 which is December 2010, our outstanding in the New York region was $900 million. And by December of last year, which is four years, that has doubled to $1.8 billion. So you can see that the loan growth in our New York region has been quite good. In 2015, with the addition of Asia Bank, it would complement what we are doing in New York because Asia Bank is about $500 million and their loan book is $450 million or so. So they are concentrating more loans in the range of $0.5 million to maybe $2 million and I think that is a good diversification of our loan book in New York City. And our experience has been with our previous acquisition of Great Eastern Bank in New York. There are a lot of customers that have outgrown of the bank because of lending limit and we were able to recapture those customers that may have gone to other banks, so I believe that Asia Bank will contribute to the growth of our New York portfolio.
Joe Morford, RBC Capital Markets
That’s great. I appreciate the color.
Dunson Cheng, Chairman, President and CEO
Thank you.
Heng W. Chen, EVP, CFO and Treasurer
Thank you.
Operator
Our next question comes from the line of Gary Tenner with D.A. Davidson. You may proceed.
Gary Tenner, D.A. Davidson
Thanks, good afternoon. A couple of questions. First, just regarding the structured repos, do you have anything else maturing over the course of ’14?
Dunson Cheng, Chairman, President and CEO
Of ’15 …
Gary Tenner, D.A. Davidson
I’m sorry, ’15.
Dunson K. Cheng, Chairman, President and CEO
That’s $50 million matured, and then the rest of the maturities are I believe in 2016 and ’17 and ’18.
Gary Tenner, D.A. Davidson
Okay. And then, Heng, you had just mentioned the recalculation of the loan origination cost. Of the million dollar reduction in salary expense in the fourth quarter that came out of that, how much of that actually flowed through net interest income in the fourth quarter?
Heng W. Chen, EVP, CFO and Treasurer
Not that much because much of that relates to commercial real estate loans. So if they have five-year returns they would amortize that over five years.
Gary Tenner, D.A. Davidson
Okay. So I mean that represents certainly a short-term boost to earnings until it sort of levels out. Is that a fair way to look at it?
Heng W. Chen, EVP, CFO and Treasurer
Yes.
Gary Tenner, D.A. Davidson
Yes.
Heng W. Chen, EVP, CFO and Treasurer
I mean we are just following the — it’s updating of estimate that were required to make every so often under GAAP.
Gary Tenner, D.A. Davidson
Right, and the million dollars was not a catch-up for the full year of 2014, but it was specific to the fourth quarter, correct? So it should impact 2015 by $1 million per quarter?
Heng W. Chen, EVP, CFO and Treasurer
Well, yes, I mean that level of net expense will just continue into 2015 plus regular salary increases.
Gary Tenner, D.A. Davidson
Right, okay. Alright, thanks very much.
Heng W. Chen, EVP, CFO and Treasurer
Yes.
Operator
Our next question comes from the line of Lana Chan with BMO Capital Markets. You may proceed.
Lana Chan, BMO Capital Markets
Thanks, good afternoon.
Heng W. Chen, EVP, CFO and Treasurer
Hi Lana.
Lana Chan, BMO Capital Markets
If you could talk about the recent decline in longer term rates and the flattening of the yield curve, how does that, if any, change your outlook on the margins, specifically with loan yields as well as potentially investing in the securities portfolio?
Heng W. Chen, EVP, CFO and Treasurer
Yes, I guess one over the last 18 months ever since I believe, May of 2013 when the Fed started indicating interest rates which start to rise, for fixed rate loans, the great majority of our borrowers have gone into the rate lock program, where they put up a 1% fee to commit to a 60-day term for a given interest rate, and that’s non-refundable. So we have a large pipeline of loans that were rate locked in December when interest rates were high, and we expect almost all of those to fund at the rate lock rate. And then, the short-term rates, I mean, the interest rates, their swings, I would characterize as relatively violent. So I think our customers if they need to close the escrow or close the purchase, they don’t have a long window to say, “Well, I’m going to wait for the five-year to drop by 25 basis points,” they just go and rate lock. So, I think in terms of fixed rate CRE loans, it’s relatively — it will have a small impact, but hopefully interest rates will go up later on this quarter.
And then, the other side, at one time we had almost 800 million or 900 million or 30-year fixed rate mortgages and when interest rates start to increase we wanted to lower our exposure. So, during January we were able to sell about $275 million of 30 year-fixed rate mortgages at a negligible loss — yes, securities, I’m sorry. And so our current 30-year-fixed rate exposure in terms of securities is down to $150 million, and we have about $250 million at the same time we’re buying 50 year MBS. So we’ve taken this opportunity to shed a lot of interest rate risk out of our balance sheet. I mean those are the two impacts that we see.
Lana Chan, BMO Capital Markets
Just a follow-up, so the securities repositioning earlier in this year, wouldn’t that impact on the yield?
Heng W. Chen, EVP, CFO and Treasurer
Slightly, probably about 60 basis points and we’re going to over time put more buy more 15-year MBS to compensate that. And also, we don’t view our investment portfolio as a big source of interest income, we’re using that to fund loans to the extent possible. So there is going to be some natural shrinkage in our securities portfolio as we go into loans.
Lana Chan, BMO Capital Markets
Okay. My second question was on the capital. You said that with Asia Bank, the capital would go down about 40 basis points. Can you talk about, you still have excess capital to deploy, what the priorities are?
Heng W. Chen, EVP, CFO and Treasurer
Yes, I think, one, the first priority is that we want to try to have 10% or more loan growth in 2015. We would want to try to have a dividend increase hopefully in the middle of 2015. Our long-term goals to pay out about 30% of the prior year’s earnings. We also — over the last 18 months, we’ve issued through stock option exercises and RSU, best thing we issued about I believe about 1.5 million shares. So, once our stress testing is submitted and reviewed by the regulators. We would seek to buyback those shares that were issued for stock option, hopefully, in the third quarter. So, those – and then the acquisitions of Asian Bank used up around 40 basis points, but you can see here in the fourth quarter our capital ratio is built up by 22 basis points in one quarter, when the loan growth was little bit slower. It’s something that we will continue to work on.
Lana Chan, BMO Capital Markets
Okay. Thanks, Heng.
Heng W. Chen, EVP, CFO and Treasurer
Yeah thank you.
Operator
Our next question comes from the line of Julianna Balicka with KBW. You may proceed.
Julianna Balicka, KBW
Hi, I have two quick follow-ups, please. Heng, I’m sorry, I didn’t quite catch your remarks about the tax rate credits. You mentioned amortization that we should be seeing in 2014 but what is the underlying lower tax rate? And B, what would be the restructuring charges related to the Bank Asia deal?
Heng W. Chen, EVP, CFO and Treasurer
Okay. So on the tax credit, I think if you compare the tax rate ranges versus where our fourth quarter effective tax rate is and factor in the amortization, you can come up with a EPS number, which is the — it would just be math. And then the restructuring for Asia, it’s still subject to change, but we have to buy out their data processing contract that cost about $800,000 there’s some severance for transitional personnel that — so, as estimate, it’s probably $1.5 million pretax to maybe $2 million.
Julianna Balicka, KBW
Thank you very much.
Heng W. Chen, EVP, CFO and Treasurer
Yes, thank you.
Operator
Our last question comes from the line of Matthew Clark with Sterne Agee. You may proceed.
Matthew Clark, Sterne Agee
We’ll try this again, can you hear me?
Heng W. Chen, EVP, CFO and Treasurer
Yes.
Dunson K. Cheng, Chairman, President and CEO
Yes.
Matthew Clark, Sterne Agee
I’m sorry. Okay. Heng, maybe a little bit more on the margin. I think you talked about a couple of moving parts but just wanted to make sure we’re capturing all of it going into the first quarter and beyond. I think you talked about the maturation of those structured repos and the full quarter benefit adding about four basis points to the upcoming margin. I think fewer less days will likely help too. Can you talk through the margin here in the upcoming quarter a little bit more specifically? And then beyond that, thinking about again what the curve has done, I know you touched on some of that already. But trying to think about the hedges you have on and what that impact could be going forward.
Heng W. Chen, EVP, CFO and Treasurer
Yeah, I think just the fact that February is the short month. It’s a 29-day month. So typically our margin goes up in the first quarter. And so, if we are at 3.36 in the fourth quarter and just those maturities and the full quarter impact, that’s four basis points if we should get to 3.4%. So we’ve been trying to get there for several years, so I’m hopeful that we might there in the first quarter. And then, in terms of the hedges, our interest rate swap on our trust preferred, that’s a cash flow hedge. So that was fully in place in Q3, and it doesn’t have any incremental change to the margin. And we did add — we had $140 million of fixed rate loans that we hedged into floating. In the fourth quarter, we added another $40 million to that. So the total of $181 million, but basically the full run rate, the cumulative sum of those two is probably six basis points and they are all in the margin run rate already.
And then lastly, one of the things is we have been sitting with $200 million of excess cash at the Fed, our goal is to run that down to about $50 million, which would be just what’s in Hong Kong, in our Hong Kong branch. So that would help give some lift to the margin just because the earning asset base is lower. And so, right now in the first quarter we are basically there where our cash at the Fed is down to, or where our interest-only cash is only $50 million. So I think generally our margin should improve in the first quarter and then it should be steady during the year and might even go up a little bit as we continue to put on loans and reduce our securities position.
Matthew Clark, Sterne Agee
Okay, that’s helpful. Thank you. And then just one more on expenses. You guys have done a great job in controlling expenses. It doesn’t seem like that’s going to change much. But can you offer any color on expenses around the DFAST process? I assume they’re baked in the run rate already? Unless you’ve — trying to get a sense for anything incremental here…
Heng W. Chen, EVP, CFO and Treasurer
Yes. We did have some — Kim, can correct me if I’m wrong, but I think we did extensive reapproach to our DFAST process to make it more statistical, and I believe the fourth quarter expenses in order of $300,000 or so, and so that — and we spent some additional amounts in the third quarter, but right now we believe we have transitioned to a more robust statistical model for DFAST. And in the first quarter we will have roughly — one of the requirements is that there is an independent validation of the model process. And so we will have a similar expense of about $300,000 in Q1 but then hopefully it will just be maintenance going forward. So DFAST.
Matthew Clark, Sterne Agee
Okay, thank you.
Heng W. Chen, EVP, CFO and Treasurer
Yes.
Operator
Thank you for your participation. I will now turn the call back over to Cathay General Bankcorp’s management for any closing remarks.
Dunson K. Cheng, Chairman, President and CEO
Thank you for joining us for this call, and we look forward to talking with you again at our next quarterly earnings release date. Thank you.
Operator
Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.
