Cathay General Bancorp
NASDAQ:CATY
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Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's Second Quarter 2019 Earnings Conference Call. My name is Sherin, 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, Sherin, and good afternoon. Here to discuss the financial results today are Mr. Pin Tai, Chief Executive Officer and President; and Mr. Heng Chen, 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 second quarter 2019 results. To obtain a copy, please visit us at 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 second quarter earnings conference call. This afternoon, we reported net income of $72.2 million for the second quarter of 2019, a 2% decrease when compared to a net income of $73.7 million for the second quarter of 2018. Diluted earnings per share was $0.90 for both the second quarter of 2019 and 2018.
In the second quarter of 2019, our gross loans grew by $316.1 million to $14.6 billion or an increase of 9% on an annualized basis. The increase in loans for the second quarter of 2019 was primarily driven by the growth in residential mortgage loans of $163.4 million or 17.7% annualized. Commercial real estate loans of $56.7 million or 3.4% annualized and commercial loans of $36.8 million or 5.4% annualized. We anticipate loan growth in 2019 of between 7% to 8%.
For the second quarter of 2019, our total deposit increased $276.6 million or 8.1% annualized to $14.4 billion. The increase in deposit for the second quarter of 2019 was primarily driven by the growth in time deposits of $212.6 million or 12.2% annualized and money market deposits of $69.6 million or 13.7% annualized.
We continued our stock buyback program and repurchased 641,894 shares of our stock at an average cost of $35.84 per share in the third quarter -- in the second quarter of 2019. We may purchase additional shares in the second quarter, second half of 2019, depending upon stock price, general business and market conditions and other certain risk factors.
With respect to the ongoing trade disputes between US and China, we continue to monitor and evaluate the potential impact to our loan portfolio. Borrowers that we believe could be adversely impacted by the current tariffs will hold approximately 2.2% of our total loans.
With that, I'll turn the floor over to our Executive Vice President and Chief Financial Officer, Heng Chen to discuss the second quarter 2019 financials in more detail.
Thank you, Pin, and good afternoon everyone. For the second quarter, we announced net income of $72.2 million or $0.90 diluted per share. Our net interest margin was 3.58% in the second quarter of 2019 as compared to 3.83% in the second quarter of 2018 and 3.70% for the first quarter of 2019. In the second quarter of 2019, interest recoveries and prepayment penalty added three basis points to the net interest margin compared to 4 basis points for the second quarter of 2018 and two basis points for the first quarter of 2019.
We expect our net interest margin for the remainder of 2019 to be between 3.53% and 3.60% based on the assumption of a 25 basis point cut in the Fed Funds rate at the end of July. Net interest income during the second quarter of 2019 increased by $5 million to $12.8 million when compared to the second quarter of 2018. This increase was primarily due to higher gains from equity securities of $4.4 million. Non-interest expense increased by $6.4 million or 10.1% to $69.5 million in the second quarter of 2019 when compared to $63.1 million in the same quarter a year ago.
For the second quarter of 2019, the increase in non-interest expense was primarily due to a $4 million increase in amortization expense of investments in low income housing and alternative energy partnerships, a $2.6 million increase in salaries and employee benefits expense, and a $2.2 million increase in the provision for unfunded commitments, partially offset by a $2.4 million decrease in marketing expense.
The effective tax rate for the second quarter of 2019 was 16.6%. We completed our investment in the solar tax credit fund during the second quarter, which will we project will reduce our full year 2019 effective tax rate to approximately 19% to 19.5%. The second quarter effective tax rate reflects a year-to-date adjustment and a full year effective tax rate.
Solar tax credit amortization was $3.5 million in the second quarter of 2019. We project solar tax credit amortization of approximately $18 million in 2019 with $5 million a quarter for the remainder of 2019. At June 30, 2019, our Tier 1 leverage capital ratio decreased 10.73% as compared to 10.83% at December 31, 2018. Our Tier 1 risk-based capital ratio decreased to 12.26% from 12.43% at December 31, 2018. And our total risk-based capital ratio decreased to 13.92% from 14.15% at December 31, 2018.
Net recoveries for the second quarter of 2019 was $0.1 million compared to net recoveries of $0.2 million in the first quarter of 2019 and net charge-offs of $0.2 million in the second quarter of 2018. There was no loan loss provision in the second quarter of 2019, first quarter of 2019 and second quarter of 2018. Our nonaccrual loans decreased by $2 million to $54.7 million or 0.38% of period-end loans as compared to the end of the first quarter of 2019.
Thank you, Heng. We will now proceed to the question-and-answer portion of the call.
[Operator Instructions] Our first question comes from Lana Chan with BMO Capital Markets.
I wanted to start with loan growth first of all. Had -- really you guys had continued very strong growth on the residential mortgage side. We're hearing or reading stories about a slowdown on housing, especially on the West Coast and foreign buyers from China. Are you seeing any of that effect yet in terms of your demand?
I think the demand from China that we have right now is still pretty strong. There is a slowdown in buyers on China, however, I think that local buyers are picking up.
Yes, that slowdown has still here for about a year and a half. So the non-residential purchases are around 20% of our originations since the beginning of 2018.
Okay. So right now the pipeline is still strong for your resi mortgage?
Yes.
Okay. And Heng, can I just clarify with the guidance range you gave for the margin, did you say 3.53% to 3.60%?
Yes, yes.
Okay. What do you have in debt in terms of deposit costs in that margin guidance? You had an increase in deposit costs this quarter little bit more than I had expected. But you do have some CDs that are repricing downward. Can you talk about what your expectations are?
Yes. So in Q3, we have about 24% of our CDs maturing, so it's about $1.8 billion. And the -- in August and September going into the first week in October is our traditional summer CD program. So the rate last year was 2.25%. We think the rate this year would be, let's say about 1.9%. And we may have more tiers than we have in the past for some of the smaller CDs. So there's 35 basis points for those CDs that are maturing in Q3.
Okay. And so the pressure on the margin from the second quarter going forward is more on the loan yield side, I assume, in terms of some of your variable rate loans. Could you remind us how that reprices was with the cuts?
Yes. I think probably the biggest factor in that is the -- our Chinese New Year promotion having the full quarter impact. So two quarters from now in Q1 and next year, we have $2.5 billion of our CDs repricing or 34% of our CD book. And those rates on average, about maybe 2.25%. So I think by that time, we could probably reprice close to about 1.80%, if not lower.
Then in terms of floating rate and so forth, so the commercial and construction loans are 23% of our loan portfolio and they're almost all variable rate. And then another 33% of our loan portfolio is variable rate CRE loans. So I guess there is not that much is -- that's variable. And I think another way I like to look at it is from our quarterly report. We give the repricing within the next three months. So about $3 billion or 21% of our total loans what was repriced.
Okay. That's very helpful. Thanks, Heng.
Yes, sure. Thank you.
Thank you. And our next question comes from Chris McGratty with KBW.
Great. Thanks for the question. Heng, I just want to come back to the margin for a sec. The 3.53% to 3.60%, what would need to occur to get to the high end of that range for the back half of the year?
Well, I think if we have some loan payoffs or loan recoveries, that have some past nonaccrual interest, so that's possible. And I think that's -- we will always like to give a range around where we are. And so that's -- so the upside is only 2 basis points from Q2.
Okay. But that would seemingly imply if we do get one or multiple cuts by the side to get to the high end, you would need to see kind of unusual episodic recovery versus sustainability?
That's right. That's right.
Can we shift to capital for a moment? I think last quarter you said you were going to be in the market for 200,000 to 300,000 shares, you deliver more because the market afforded to issue. Can you remind us what's the authorized and how you should -- how we should be thinking about the pace of buyback given more bank stocks are priced?
Yes. Well, the authorization is $50 million and so we're about I think $20 million, little less than $20 million into that. And so we think we'll probably buy about the same amount, maybe a little bit less than Q3. And originally we thought our buyback would go -- would finish in Q1 of next year I think at these price levels and what our capital is we might finish in Q4 and then start a new one in going into next year.
Okay, great. And then maybe if I just upon on the expenses. The bump up in personnel costs, could you just walk us through how you're thinking about the run rate of expenses? I heard the solar credit, wonder what the other play would be on the amortization in the back half of the year and just kind of core expenses? Thanks.
Yes. So the solar amortization would be $5 million in Q3 and $5 million in Q4. And then in the second quarter, we accrue bonus expense sort of based on how strong the net income is. So, we probably have $1 million of extra bonus accrual in Q2 based because of the catch-up in the tax rate. So I think the bonus expense for the second half of the year would be -- will be $1 million a quarter less than what we had in Q2.
Great. Thank you.
Sure. Thank you.
Thank you. Our next question comes from Aaron Deer with Sandler O'Neill.
Hi. Good morning or good afternoon, everyone. Heng, following up on your commentary regarding the pricing and within the loan book, you mentioned, 33% is variable rate CRE loans. If I heard you correctly, is that when you say variable rate, is that repricing immediately or is that repricing based on a monthly, quarterly or annual renewal rate?
Most of them are tied to prime.
Okay. And the -- and then the -- the fee income, you had $1.1 million increase attributed to wealth management. Is there anything seasonal or nonrecurring in there? Or is this kind of a decent run rate for that fee income line?
I think last year it was kind of low. So I think we have a stronger Q2 and the momentum is pretty good for that.
Okay. And then just lastly on the growth outlook. You give some guidance in terms of expectations for overall portfolio growth for the year. Just curious, it's sounds like the -- you sound pretty positive on the residential mortgage continue to be good. How are the other pipelines and the other commercial and CRE and other books shaping up?
The pipeline looks pretty good. We did quite well in the oil and gas in the first half season ending by. And we also had couple of our new officers joined us. So hopefully, we see more C&I grew.
Okay, perfect. Thanks for taking my questions.
Thank you.
Thank you. Our next question comes from Matthew Clark with Piper Jaffray.
Hi. Good afternoon.
Hi, Matthew.
Just on the amortization expense. I'm not sure if I got it, the low income housing expense that you expect here in the third and fourth. It should be about $4 million a quarter in Q3 and Q4. It might be a little bit less. We do our impairment analysis in the fourth quarter. So we might reverse some in prior impairment expense. So for now, is that about $4 million or $5 million?
It's $5 million.
Oh, it's $5 million, I'm sorry. I thought that was -- I knew that was a solar, I just wasn't sure if we go into housing too. Okay. And then just on the -- I think last quarter you gave us a sense for what the all-in non-interest expense might be for the year. We're probably in the range, but I just wondered if you want to update that guidance, I think it was previously $270 million to $275 million?
Yes, we're going to confirm that guidance. We closed three branches in the last couple of months. Our telephone expenses, we have the telephone contract from far east finally expired. And so the savings there about $1 million per year. So for now we're going to hold to that.
Okay, great. And then on credit, any larger nonperformers that resolved during the quarter you expect to resolve in the third quarter and any recoveries along those lines you might experienced?
We had in last in Q1 conference call we had this $10 million -- we talked about this $10 million loan that was in the process being paid off and it actually paid off I believe in late April. And then we were hopeful that we can have a $4.5 million CRE nonaccrual, that's been on the books for many years, it's scheduled or is supposed to pay off hopefully before the end of this month. And there's a good size recovery on that particular loan. But I think generally the trend is in the nonaccruals is there is some churn, but it's we're hoping we can keep it stable.
Okay. And any migration in criticized classified that might be tied to the trade war in real estate?
There is some, that's why and Pin's comments that we didn't make the statement that we don't see any nonaccruals or charge-offs. So, it's not enough to where we have to add to the loan loss provision. But there is a couple isolated instances where we see pressure on different borrowers, some in for a smaller borrower, they import athletic shoes and that the tariffs had an impact on them. And then the exchange rate had an impact on another borrower, the weakening in the Chinese currency. So -- but nothing broader or systemic.
Okay, great. Thank you.
Sure. Thank you.
Thank you. [Operator Instructions] Our next question comes from David Chiaverini with Wedbush Securities.
Hi. Thanks. I wanted to follow up on that last question on credit quality. So when I look at the accruing loans past due in 90 days or more of about $14.5 million versus zero at March 31, is that what you were just referring to with some of the pressure from the trade war? Is that what's causing that uptick?
Well, that one is actually a CRE loan that was -- we approved that new a couple of months ago and there were some loan closing issues. And my understanding is we're renewing that loan today. So that's why we kept it in terms of over 90 days past due and still accruing. So it's -- once again it's the commercial real estate loan that's very well secured.
Got it. So that should reverse, come during the quarter?
Yes. Yes, David.
All right. That's all I had. Thank you.
Thank you.
Thank you. I'm showing no further questions in the queue at this time. Thank you for your participation in today's question-and-answer session. I will now turn the call back over to Cathay General Bancorp's management for closing remarks.
Thank you for joining us on 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 concludes the presentation. You may now disconnect. Have a good day.