Cathay General Bancorp
NASDAQ:CATY
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Good afternoon, ladies and gentlemen and welcome to Cathay General Bancorp's First Quarter 2019 Earnings Conference Call. My name is Andrew and I'll 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 Georgia Lo, Investor Relations of Cathay General Bancorp.
Thank you, Andrew and good afternoon. Here to discuss the financial results today are Mr. Pin Tai, our Chief Executive Officer and President; and Mr. Heng Chen, our Executive Vice President and Chief Financial Officer.
Before we begin, we wish to remind you that the speakers on 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, 2018, 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 speaks 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 first quarter 2019 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 Chief Executive Officer, Mr. Pin Tai.
Thank you, Georgia and good afternoon. Welcome to our 2019 first quarter earnings conference call. This afternoon, we reported net income of $66.7 million for the first quarter of 2019, a 4.5% increase when compared to a net income of $63.8 million for the first quarter of 2018. Diluted earnings per share increased 6.4% to $0.83 per share for the first quarter of 2019 compared to $0.78 per share for the same quarter a year ago.
In the first quarter of 2019, our gross loans grew by $281.6 million to $14.3 billion, or an increase of 8% on an annualized basis. The increase in loans for the first quarter of 2019 was primarily driven by the growth in commercial mortgage loans and residential mortgage loans of $164.7 million, or 9.8% annualized and $109.8 million or 11.9% annualized respectively. We anticipate loan growth in 2019 of between 7% to 8%.
For the first quarter of 2019, our total deposits increased $384 million, or 11.2% annualized to $14.1 billion, primarily as a result of a Chinese New Year CD promotion. We continued our stock buyback program and repurchased 233,700 shares of our stock at an average cost of $36.80 per share in the first quarter of 2019. We may purchase additional shares during 2019 depending upon stock price, general business, and market conditions and other certain risk factors.
With respect to the trade dispute between the U.S. and China, we continue to monitor and evaluate potential impact to our loan portfolio. As of March 31, 2019 we are not aware of any loan accruals or charge-offs that were linked to the imposition of the tariffs. Borrowers that we believe could be adversely impacted by the current tariffs will hold approximately 2.3% of the total loans.
With that, I will turn the floor over to our Executive Vice President and Chief Financial Officer, Heng Chen to discuss the first quarter 2019 financials in more detail.
Thank you, Pin and good afternoon everyone. For the first quarter, we announced net income of $66.7 million or $0.83 diluted earnings per share. Our net interest margin was 3.7% in the first quarter of 2019 as compared to 3.75% in the first quarter of 2018 and 3.77% for the fourth quarter of 2018.
In the first quarter of 2019, interest recoveries and prepayment penalties added only two basis points to the net interest margin, compared to five basis points for the first quarter 2018 and three basis points for the fourth quarter of 2018. We expect our net interest margin for the remainder of 2019 to be between 3.63% and 3.73%.
Non-interest income during the first quarter of 2019 increased by $7.6 million to $12.9 million when compared to the first quarter of 2018. The increase was primarily attributable to a gain of $4.2 million from equity securities, compared to a loss of $3.8 million in the prior year quarter. Non-interest expense increased by $10 million or 16.4% to $71 million in the first quarter of 2019, when compared to $61 million in the same quarter a year ago.
For the first quarter of 2019, the increase in non-interest expense was primarily due to a $5 million increase in the amortization expense of investments in low income housing and alternative energy partnerships, $1.8 million increase in salaries and employee benefits expense, a $1.6 million increase in the provision for unfunded commitments and a $1.3 million increase in marketing expense.
The effective tax rate for the first quarter of 2019 was 21.8% compared to 22.8% for the first quarter of 2018. We hope to complete an investment in a new solar tax credit fund during the second quarter. While there are no assurances that we will complete any such investment, if we proceed and complete such investment, we project that our full year 2019 effective tax rate will be approximately 19% to 19.5% and the second quarter effective tax rate will reflect the year-to-date catch-up to the new full year effective tax rate.
Solar tax credit amortization was $4.5 million in the first quarter of 2019. We project solar tax credit amortization of approximately $17 million in 2019 with $4 million a quarter for the remainder of 2019. At March 31, 2019, our Tier 1 leverage capital ratio decreased to 10.68% as compared to 10.83% at December 31, 2018. Our Tier 1 risk-based capital ratio decreased to 12.42% from 12.43% at December 31, 2018 and our total risk-based capital ratio decreased to 14.12% from 14.15% at December 31, 2018.
Net recoveries for the first quarter of 2019 were $0.2 million, compared with net charge-offs of $1.1 million in the fourth quarter of 2018 and net recoveries of $1.8 million in the first quarter of 2018. There was no loan loss provision in the first quarter of 2019 and in the fourth quarter of 2018 compared to a loan loss reversal of $3 million in the first quarter of 2018.
Our non-accrual loans increased by $14.9 million to $56.7 million or 0.4% of period-end loans as compared to the end of the fourth quarter of 2018. Most of this $14.9 million increase is from one loan of $10 million that is past due maturity, which we believe will be paid off by the end of April. Pin?
Thank you, Heng. We will now proceed to the question-and-answer portion of the call.
[Operator Instructions] Your first question comes from the line of Aaron Deer with Sandler O'Neill. Your line is now open.
Hi, good afternoon everybody.
Hi Aaron.
Heng I appreciate the margin guidance. I was hoping just to get a little bit more color on what's behind that and obviously you had some very favorable results with the CD campaign in the first quarter.
As you look at the CDs that are going to be maturing here in the second quarter, can you give us a sense of what the pricing is on those maturities and what rate you might expect to see renewals coming on at?
Yes. So, Aaron I think we have a steady stream of brokered CDs that are maturing and it's -- I guess the good news is at the -- in mid-March that rate for new brokered CDs was 2.58%.
And then just this last week on Monday, we were issuing new brokered CDs at 20 basis points lower. And so in terms of -- as you know we have two CD promotions; the Chinese New Year which was at 2.35% for under $100,000 and 2.4% for over $100,000; and then the summer CD program promotion last year was 2.25%.
I think based on the trajectory of interest rates come August of this year if we go forward four quarters, we're hopeful that we can renew our summer CD at a lower rate given the forward interest rate curve.
So, I think that's something that's going to help stabilize our NIM over time. But once again the second quarter will be lower than Q1 based on what we see.
Okay, that's helpful. Thank you. And then on the non-accruals, you mentioned that there was a look it sounded like a $10 million commercial real estate loan. Is there expectation that that's going to be paid down because the borrower's currently marketing a property is that what's going on in there? And it looked like C&I was up a little bit too?
Yes, well that was a C&I loan, okay? Unfortunately, our borrower was out of the country for most of the first quarter and we were unable to be able to renew the loan for that reason.
The -- we also have another -- a smaller CRE loan that we expect to renew in the second quarter. That was past due maturity but it was very well secured.
Okay. Very good. Thanks for the additional color. Appreciate that.
And then on the NIM I also forgot to mention that we are making an effort here in Q -- starting in Q2 to start -- now that we see where interest rates are, we're starting to hopefully reinvest $200 million or $300 million a quarter in cash that's right now at the Fed and we're hoping to -- we're able to reinvest that to something around 3%. So, there will be some small pickup to the NIM from that as well -- not pickup but sort of mitigation.
Thank you. And our next question comes from the line of Chris McGratty with KBW. Your line is now open.
Thanks. Thanks for the question. Heng going back to the margins the 3.63% to 3.73%, is that a reported number including the prepays or is that excluding the prepays?
Yes, yes.
Okay. One of your peers on the East Coast had similarly small prepayment penalty income this quarter. Last two quarters, it's kind of been two to three basis points. Is there any reason why this would pick up given kind of real estate activity? Or is this kind of a decent run rate you might think for the next few quarters?
Well I think, in the second quarter, we shift -- hopefully shifting a little bit higher because our non-accruals get cured. So that was -- that means the NIM there, when it get cured in Q2, there will be a little pickup. But we're completely -- we really can't foresee the pipeline of prepayments, but most of our CRE loans are fixed rate. They're on a five, four, three, two, one prepayment penalty regime. So it depends -- most of the time it happens because borrowers sell their real estate and once again, we don't have much visibility on that.
Okay, great. And just a couple quick modeling questions. The amortization you said four per quarter and then another what 5.5 for the low income? Is that about right?
Yes I think it's closer to six.
Okay. So 10 all in? Okay. And then could you just repeat the tax guide? I think you said there was a catch-up. But relative to the 21.8% this quarter, are you suggesting next quarter is going to be higher or lower? I'm just trying to get to the full year of 2019.
Yes, the pattern hopefully will be very much like last year where the second quarter was -- I'm doing this from memory maybe 16% in Q2 and then it normalizes to be 19.5% for Q3 and Q4.
Okay, great. Thank you.
Thank you. Bye Chris.
Thank you. And our next question comes from the line of Michael Young with SunTrust. Your line is now open.
Hey thanks, good afternoon.
Hi Michael.
Heng, wanted to ask just kind of given some of the commentary you made around credit, what your outlook is going forward on provision. With the mix shift maybe towards a little more commercial production and away from some single-family, do you think we'll get to a point where we'll start having net provisioning starting at some point this year?
Well first, if we have a small reserve for the trade war. So if that gets resolved in the second quarter, we may have to book a small negative provision for that. And then based on kind of what we see and the fact that our construction loans continue to sort of drift down, I think the second half of provisioning, it would be towards the end of the second half. So the year's turning out reasonably well in terms of the credit so far.
Okay. And on the securities reinvestment, it sounds like that's just kind of a shift from one bucket to another. There's no plans to kind of grow the size of the balance sheet through leverage strategy or anything else to offset kind of the slightly weaker NIM?
Well yes -- no. No. I think if we do a leverage strategy, you'll hurt the NIM even more. So, I think we'll probably target like $1.5 billion or $1.6 billion total for the securities portfolio.
Okay. And you gave a lot of good color on the deposit side and some of the pricing dynamics there. But could you just maybe talk as well on the asset side, the yields you're getting now? Have those compressed at all with the long end of the curve coming in, and any color there?
Well, on the residential mortgage portfolio, our new loans that we're generating right now is slightly above the current first quarter portfolio of 4.56%. The weighted average rate of new residential mortgage in the first quarter is 4.7%. And on the C&I loan, new loans are generating at rates similar to our first quarter portfolio yield of 5.11%.
And then on the new commercial mortgage loan we are generating -- originating at rates line below the first quarter portfolio yield of 5.26%. The weighted average yield on the first quarter is about 5%. So that is the situation right now. I will say our rates right now is probably slightly higher than the first quarter.
And that 5% that definitely includes loan fees. On CRE it might add a little bit.
Okay. That’s helpful. Thank you.
Okay. Thank you.
Thank you. And our next question comes from the line of Gary Tenner with D. A. Davidson. Your line is now open.
Thanks. Good afternoon. My questions largely answered, Heng but I mean just talk about the provision a little bit. But anything else in terms of recoveries out there that we should be thinking of as it impacts the provisioning?
I think it's not likely to be that much. And then I think one of the things we're learning about CECL is that when we transitioned to CECL it's -- the recoveries are embedded in your allowance. So anyway it's -- right now it's pretty much at the run rate.
Okay. Any initial indications in terms of what CECL may shake out to be in terms of the day one adjustment at this point?
It will be higher, but we're still testing our -- we have outside party doing our models. So we don't know yet.
Okay. And then just last question. On the expense side the FDIC and assessments dipped in the fourth quarter, got back up in the first quarter. Is this the run rate that we should be thinking about on the expense line there?
Yes, yes. We had some catch up adjustments favorable ones in the fourth quarter. But this is a -- that's a good run rate.
Okay, perfect. Thank you.
Yeah, sure.
Thank you. And our next question comes from the line of Matthew Clark with Piper Jaffray. Your line is now open.
Hey, good afternoon. I just had a follow-up question on expenses. Thinking about your core expense growth for the year just excluding the amortization, I guess how do you think about that? Is it still mid-single digits for the year? Or has that changed at all?
I think in dollar amount if we -- so we think our total non-interest expense is between $270 million to $275 million, which includes amortization of solar and low income housing of $41 million.
So one reason we see that $1.6 million provision in Q1 for the reserve for unfunded commitments, we see that being reversed during the course of 2019 as the loans get funded. So you shouldn't annualize that $1.6 million. And then our charitable contributions were a little bit higher in Q1. So maybe that's high by $0.5 million or so. So -- and, of course, we've had the FICA again in Q1, which is about $1 million for us.
Yes, I was going to ask about the comp line as well. And given the seasonality and recent hires on the C&I side, just, it looks like that comp line basically be down $1 million it sounds like in the upcoming quarter.
Well, I think, it'll be flat because our merit increases occur on April 1. So it was up 3% per year.
Got it. Okay, great. Thank you.
Yes, yes.
Thank you. [Operator Instructions] Our next question comes from the line of Lana Chan with BMO Capital Markets. Your line is now open.
Thanks. Good afternoon.
Hi, Lana.
Hi. Just to follow up on the tax rate. I think you said there was a catch-up in the second quarter. Can you quantify that?
Yes. Well, it would -- the tax rate would drop. It was 21.5%. And if we're going to -- if the full year rate is going to be 19.5%, then the second quarter tax rate would go down to about 16% or 17%. So the same thing happened last year. This is assuming our -- the funding of our new solar investment.
Okay. Got it. And Heng could you talk about the guidance range? I just wanted to talk about the, kind of, what the drivers are, or puts and takes on the margin range for the rest of the year between 3.63 to 3.73. I mean, at the higher end, are you assuming deposit costs stabilize out in the back half of the year?
I think on the high end, we normally give guidance in 10 basis point ranges. So the high end would be in the unlikely case, if there's a primary increase late in the year. But in terms of the momentum is -- we know the Q2 NIM will be lower by a few basis points compared to Q1.
Okay. And just, I mean, in terms of where you think the deposit pricing -- without any more rate hikes if the Fed is on pause for the rest of the year, do you think your deposit rates could potentially stabilize towards the back half of the year or...
Yes, yes.
Yes.
Particularly, if we do a good job on lowering the summer CD promotion rates.
Okay. Great. Thank you.
Sure. Yes, thank you.
Thank you. And our next question comes from the line of David Chiaverini with Wedbush Securities. Your line is now open.
Hey, thank you. A quick follow-up on the margin. So down a few basis points in the second quarter and then trend further down towards the 3.63% level to end the year. Is that kind of the way to think about it and then stabilization thereafter?
Yes. Yes. I mean, yes, I think it will be down more than by a couple basis points. I mean, if you look at the progression from 3.77% to 3.70%, it's a few more basis points, and hopefully, it will start to go up in Q4.
Got it. Okay. Okay. And then shifting to -- so loan growth was pretty strong for a first quarter. How is the demand environment? Do you see demand kind of being a little bit stronger than you otherwise would see? And is that carrying forward into the second quarter?
Well, we still have a strong -- a pretty healthy and strong pipeline that we're working on. But usually the first quarter C&I outstanding is typically lower. So we may expect an increase in the C&I outstanding in the second quarter.
And then the residential mortgage pipeline is still pretty strong too.
Okay. Great. Great. And then lastly on capital, how much is left on the current authorization?
Only about $1 million. We're now -- as some of you may know, new -- the Federal Reserve has approved new buybacks. So we're in the process of working with them on that. And once it's approved, we would then announce it. But our hope is to be buying back 300,000 or 400,000 shares a quarter for the next four quarters depending on the stock price.
Okay. And then last one for me is on -- back on credit quality. So outside of the loan that you highlighted driving the NPL increase in the quarter, how are you feeling? And are you seeing anything on the credit front that's been a change recently? It seems like some banks are seeing a few hiccups. Just curious as to what you're seeing out there.
We haven't seen any deterioration in the credit quality so far.
Great. Thanks very much.
Yes. Thank you.
Thank you for your participation. I will now turn the call back over to Cathay General Bancorp's management for closing remarks.
Thank you for joining us for this call and we look forward to speaking with you at our next quarterly earnings release date.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the presentation and you may now disconnect. Have a good day.