Cathay General Bancorp
NASDAQ:CATY
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Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's Fourth Quarter and Full-Year 2019 Earnings Conference Call. My name is Latif, 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, Latif, and good afternoon. Here to discuss the financial results today are Mr. Pin Tai, our 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 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 results 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 the 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 fourth quarter and year-end 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 fourth quarter earnings conference call. This afternoon, we reported net income of $67.4 million for the fourth quarter of 2019, a 4.3% increase when compared to net income of $64.6 million for the fourth quarter of 2018. Diluted earnings per share increased by 5% to $0.84 for the fourth quarter of 2019 compared to $0.80 per share for the same quarter a year ago.
In the fourth quarter of 2019, our gross loans grew by $346.9 million to $15.1 billion or an increase of 9.9% on an annualized basis. The increase in loans for the fourth quarter of 2019 was primarily driven by the growth in commercial real estate loans of $139.7 million or 8.3% annualized, commercial loans of $110.7 million or 16.1% annualized and residential mortgage loans of $77.8 million or 8.4% annualized. We anticipate loan growth in 2020 of between 6% to 7%.
For the fourth quarter of 2019, our total deposits grew slightly by $34 million or 1% annualized to $14.7 billion. During the fourth quarter of 2019 money market deposits grew by $165.4 million or 32.6% annualized. NOW deposit grew by $75.9 million or 22% annualized, while time deposits decreased by $176.2 million.
With respect to the now partially resolved trade dispute between the U.S. and China we continue to monitor and evaluate its potential impact of the comparing tariffs to our loan portfolio. Borrowers that we believe could be adversely impacted by the current tariffs hold approximately 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 fourth quarter 2019 financials in more detail.
Thank you, Pin, and good afternoon, everyone. For the fourth quarter, we announced net income of $67.4 million or $0.84 diluted earnings per share. Our net interest margin was 3.34% in the fourth quarter of 2019, as compared to 3.77% in the fourth quarter of 2018 and 3.56% for the third quarter of 2019. Excess liquidity during the fourth quarter reduced the NIM by two basis points.
In the fourth quarter of 2019, interest recoveries and prepayment penalties added four basis points to the net interest margin compared to three basis points for the fourth quarter of 2018 and 12 basis points for the third quarter of 2019. We expect our net interest margin for 2020 to be between 3.35% and 3.45%.
Non-interest income during the fourth quarter of 2019 decreased by $2.1 million to $8.7 million when compared to the fourth quarter of 2018, this decrease was primarily due to a $4 million decrease in net gains from equity securities and partially offset by $1.3 million increase in wealth management fees.
Non-interest expense decreased by $3.2 million or 4.3%, to $71.2 million in the fourth quarter of 2019 when compared to $74.4 million in the same quarter a year ago. This decrease was primarily due to a $5.7 million decrease in the amortization of investments in low income housing and alternative energy partnerships, partially offset by $1.2 million increase in FDIC and State assessments.
The effective tax rate for the fourth quarter of 2019 was 19.5% and 20.1% for the full year of 2019. The effective tax rate for the first quarter of 2020 is expected to be approximately 20% with the full year 2020 effective rate to be between 18% to 18.5%, assuming the closing of another solar tax credit investment in the second quarter of 2020.
Solar tax credit amortization was $6 million in the fourth quarter of 2019 and $17.4 million for the full year of 2019. Solar tax credit amortization is expected to be approximately $24 million in 2020, including $10 million of amortization from the proposed new investment, which we expect to close in the second quarter.
The amortization expense is expected to be $8 million in the first quarter of 2020 and $5.3 million in each of the last three quarters of 2020. At December 31, 2019, our Tier 1 leverage capital ratio was 10.83% the same as that December 31, 2018. Our Tier 1 risk-based capital ratio increased to 12.51% from 12.43% in December 31, 2018 and our total risk-based capital ratio decreased to 14.11% from 14.15% at December 31, 2018.
Net recoveries for the fourth quarter of 2019 were $2.3 million compared to net recoveries of $5.3 million in the third quarter of 2019 and net charge-offs of $1.1 million in the fourth quarter of 2018.
There was a loan loss reversal of $5 million for the fourth quarter of 2019 compared to a loan loss reversal of $2 million in the third quarter of 2019. And no loan loss provision or reversal in the fourth quarter of 2018. Our non-accrual loans decreased by $6.7 million to $40.5 million, or 0.27% of period-end loans as compared to the end of the third quarter of 2019.
Pin, please continue.
Thank you, Heng. We will now proceed to the question-and-answer portion of the call.
[Operator Instructions] Your first question comes from Chris McGratty of KBW. Your line is open.
Great. Thanks for the question. Hey, I'm interested in the assumptions behind the 2020 margin of 3.35% to 3.45%, especially related to where we're starting in Q4. Could you provide kind of your interest rate assumptions and whether this will be primarily a function of dropping the deposit costs further or maybe the factors that go into that? Thanks.
Yes, Chris. We are assuming no further – no changes in the prime rate in 2020. And I think the biggest factor for guidance is in the first quarter, we have $2.6 billion of relatively higher cost CDs, the cost is – the average cost of these maturing CDs is 2.2%. And we expect to renew them at no higher than 1.8%. And these represent roughly 34% of our total CD portfolio. And this first quarter renewal should by itself add eight basis points or improve the NIM by eight basis points. And then secondarily, I mentioned in my remarks that we had two basis points of excess liquidity. So offsetting by all of that would be some loss of rate as loans mature from our existing portfolio.
Okay, great. Thanks for that. And then maybe a question on provisioning, given the implementation of CECL, in light of your 6% to 7% loan growth, how do you view the provision expense for 2020 given the change in accounting and given the pipeline of recoveries?
Well, we think we're not quite – we're still working on CECL. We’ve had 1.5 dry runs where it is. And so we're learning about that. I think we have not given guidance on the day one adjustment, which would be for a moderate increase in the yield, but we think in terms of provisioning that it would be just a little bit less than 1% of net loan growth. And that's in terms of our thinking on that 6% to 7% loan growth, a portion of that is residential mortgage. So that would be reserve debt at a lower rate than the rest of our loan portfolio.
And then lastly, we had recoveries for several quarters this year. Under CECL, we have to or companies have to book an asset for any probable recoveries of loans that were charged off before December 31, 2019. But based on our pending litigation – collection litigation outlook, we think will – we have a couple of prospects for C&I recoveries in 2020. So credit wise right now, it looks pretty benign to us. So that's sort of our outlook. We're not going to give more detailed guidance on that because nobody – the crystal ball is never perfect.
That's helpful. Thanks. And just one more and I'll step back. The low income housing tax credits, could you provide what that might be in 2020 as well?
The amortization should be slightly or about the same as in 2019. That would be about $5.5 million a quarter.
Great. Thank you.
Thank you. Your next question comes from Aaron Deer of Piper Sandler & Company. Your line is open.
Hey, good afternoon, everyone.
Hello. Hi Aaron.
Just curious with Phase 1 of the trade deal now complete, I'd like to get your thoughts on what that means perspectively for you and your clients. And what that might mean for the loan mix heading into 2020, it seems like you had pretty strong growth in commercial real estate and C&I heading into year-end. I’m just wondering if – how would that might be part of the mix relative to single-family in 2020?
Well, let me start and then Pin can give the more macro guidance. In terms of looking at 2020, we think our residential mortgage growth will be slower than in the past because mortgage book is so high. And then you might not have caught it but the group of loans that were – that might be impacted by the tariffs, that had dropped 2% of our total loan portfolio. So and then I think lastly, in terms of the Q4 loan growth, there wasn't that much, seasonally, it's a slow quarter for trade finance. Pin, you want to talk about 2020, the outlook for…
The outlook for 2018 look better than 2019, and then completed the signing of the first round of season. However, the second one we’re starting I think probably at December, August or September. In total customer, it looks like that they get handled as there is no additional tariff increase. So we are seeing actually a small reduction in the impact to our total loan portfolio and the customers impacted by the tariff.
Okay. And then how about any thoughts on capital deployment, I guess specifically on share repurchases and how you guys are thinking about that at this point?
Yes, we bought – I would say a fair amount, I think over 1 million shares in 2019. Most of it was in the first half. And we didn't buyback any shares in the fourth quarter, mainly due to the relative price of our stock. It's certainly something we will look at in 2020, particularly now that we know the impact from CECL and its being relatively modest for us. And so it's an item in our capital toolkit but it'll depend on – basically on the stock price.
Okay, great. Thanks for taking my questions.
Yes. Thank you, Aaron.
Thank you. Your next question comes from Lana Chan of BMO Capital Markets. Your question please.
Thanks. Good afternoon.
Hi Lana.
Hi Lana.
I was wondering given the strong loan growth at year-end, your loan-to-deposit ratio increased to 103%, what are the expectations for deposit growth in 2020 versus your 67% loan growth? And the reason why I'm asking is I'm just wondering how aggressive you can be with lower deposit costs given the loan-to-deposit ratio?
Yes, I think on the loan-to-deposit ratio, we had a – we had a couple of large outflows on the last two days of the year. But in the fourth quarter as a whole, we have pretty strong core deposit growth. In terms of 2020 the biggest challenge for us is getting more core deposits. So as far as our Chinese New Year promotion lasts – that’s a six week sort of a promotional period where we don't have a set rate as we didn't pass. But the results for the first couple of days have been pretty good in that we're lowering the rate from 220 actually the rate in that promotion was higher than I think it was 235. And our current target rate is 165 to 170 but we actually had a net increase in CDs for the first two days of this renewal cycle.
And then lastly we think we'll have good momentum in getting money market, we’ll continue to have momentum getting money market deposits as which are lower rate than CDs on average because of the stabilization of the rate picture. And then we have, we hired a new cash manager last summer and we believe that we'll be able to execute better on getting business deposits.
So I think we – it is a start of a new year we feel pretty good right now and based on the results for the first three weeks, the core deposit growth is decent.
Okay. Thank you. Heng. And then could you I guess talk about expectations for core expense growth this year?
Yes, we finished with our budget. Our 2020 budget was approved last week or a few – maybe a week and half ago. And we think the increase on that excluding solar amortization, which is going to be higher because we're investing a little bit more in 2020 we think that overall the expenses, core expenses would be flat to maybe up by 1%. In terms of places we got pretty good savings from telecommunications.
Overall that's in 2020. We like most other banks, we're pretty tough on how we expect 2020 incentive bonuses to be. So we're budgeting for a lower amount and we also cut back on discretionary items such as marketing and things like that. So we're going to try real hard to maintain a neutral operating leverage.
Got it. Thank you. And just one last question, if I could if I look at your average securities, you talked about the elevated excess liquidity in the quarter, your average securities were $1.56 billion which was much higher than the end of period balance should that $1.56 billion come back down in the first quarter?
Yes, I think probably, closer to $1.45 billion or something like that. We – because of our excess security liquidity, we had $100 million, roughly $100 million in three months treasuries rather than keep it all at the Fed.
Okay. Great. Thank you very much.
Sure.
Thank you. Our next question comes from Gary Tenner of D.A. Davidson. Please go ahead.
Thanks. Good afternoon. My questions were partially answered, but just wanted to follow-up on the CD re-pricing talked about for the first quarter. I would think that the second quarter of the year might also have a decent delta in terms of the maturing rate versus the renewal rates. I'm wondering if you could detail any further into the year on CD re-pricing.
Yes. It's quite a bit less, the average rate is 1.93 so, and there's only 1.2 million of CDs re-pricing so that's going to contribute very little. The third quarter the rate is 1.85 and there is only 1.5 billion of CDs maturing. In the fourth quarter that's where we renewed, in the fourth quarter this year the average rate is already down to 1.72 and there's only a billion two. So most of it is going to be in the first quarter and hopefully while we have the first quarter conference call, I'll be able to give a favorable report on our NIM.
Okay, perfect. Thank you.
Thank you. [Operator Instructions] The next question comes from David Chiaverini of Wedbush Securities. Your line is open.
Hi, thanks. A couple of questions for you. So first on the money market deposit rate, it looks like it actually went up from the September quarter to the December quarter from 1.11% to 1.19%. I was curious as to why that increased?
We put a bigger emphasis on attracting those and so for larger depositers that have, multiple millions we would pay a higher rate. And then second, in the middle of the fourth quarter, we did start accepting wholesale money markets. And those are basically in a 1.8% range. And in 2020, we'll also be using those as the alternative to broker CDs.
Got it. And you've incorporated, I'm assuming that into your guidance, the expected growth in your money market at the higher rate into that.
Yes. We in December we re-priced our exceptional money market relationship, money market deposits downward by I think average on 20 basis points. So and then we'll look at that at least once a quarter to make sure we're not paying above the market for a large relationship money market balances.
Great. That makes sense. And then shifting over to credit quality, I saw that accruing loans past due 90 days increased about 6 million. What was the driver behind that?
It was one loan, which was – it's cash secured we had – and we expect that to be paid-off in a couple of weeks. There was some difficulties in, I guess contacting the borrower who I understand was – might have been out of the country, but there's no credit issue with that – that particular loan.
Great. And then the last one for me. So the easing, you mentioned about how the easing of – about the easing of the tariffs and how it led to net recoveries of 2.5 million in the fourth quarter.
Those were unrelated. Excuse me. We were talking about the provisioning as some of the negative loan loss provision was related to the easing. But sorry, go ahead.
Well, I guess to just finish that thought, would you expect, as this easing and Phase 1 is done and to the extent that we get additional progress or is there, are there any loans that you could possibly see additional recoveries on related to the trade war easing.
We have a general reserve for that trade war. So to the extent is and it's not a huge number, but to the extent there was further progress in 2020, we could reduce that general reserve and that reserve would carry over under CECL.
Great. Thanks very much.
Thank you.
Thank you for your participation. I would 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 your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.