Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp's first quarter 2022 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. If you would like to participate in this portion of the call, please press star followed by one at any time during the conference. If assistance is needed at any time during the call, please press star followed by zero, and the coordinator will be happy to assist you. 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 Megan Cheung, Investor Relations of Cathay General Bancorp.
Thank you, Andrew, and good afternoon. Here to discuss the financial results today are Mr. Chang Liu, our 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 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, 2021, at Item 1-A 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. Any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update or review any forward-looking statements to reflect future circumstances, developments or events or the occurrence of unanticipated events. This afternoon, Cathay General Bancorp issued an earnings release outlining its first quarter 2022 results. To obtain a copy of our earnings release as well as our first quarter earnings presentation, 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 President and Chief Executive Officer, Mr. Chang Liu.
Thank you, Megan, and good afternoon, everyone. Welcome to our 2022 first quarter earnings conference call. This afternoon, we reported net income of $75 million for the first quarter of 2022, a 2.2% increase as compared to the net income of $73.4 million for the first quarter of 2021. Diluted earnings per share increased 7.6% to $0.99 per share for the first quarter of 2022, compared to $0.92 per share for the same quarter a year ago. In the first quarter of 2022, our gross loans increased $1.1 billion or 25.8% annualized. Organic loan growth, excluding PPP loans and HSBC acquired loans, increased by $431.8 million to $16.8 billion, which represents an annualized growth rate of 10.6%.
The increase in loans for the first quarter of 2022 was primarily driven by increases of $181.6 million or 25.1% annualized in commercial loans, excluding PPP and HSBC loans, $258.5 million or 12.7% annualized in commercial real estate loans, $33.4 million or 3.2% annualized in residential mortgage loans. That excludes HSBC acquired loans. The overall loan growth for 2022 is expected to range between 9%- 13%, including approximately $646.1 million of loans from the acquisition of certain HSBC West Coast branches. Without the HSBC acquisition, we project loan growth to be between 5% and 8% in 2022. During the first quarter of 2022, $37.4 million of PPP loans were forgiven.
As of March 31, 2022, our deferred PPP loan fees were $49,000. We continue to monitor our commercial real estate loans. Turning to slide eight of our earnings presentation. As of March 31, 2022, the average loan-to-value of our CRE loans was 51%. As of March 31, 2022, our retail property loan portfolio, shown on slide nine, comprises 23% of our total commercial real estate loan portfolio and 11% of our total loan portfolio. The majority, 88% of the $1.93 billion in retail loans, is secured by retail store buildings, neighborhood, mixed-use or strip centers, and only 11% is secured by shopping centers. For the first quarter of 2022, we reported net recoveries of $100,000, compared to net charge-offs of $300,000 in the fourth quarter of 2021.
Our non-accrual loans were 0.5% of total loans as of March 31, 2022, increased by $20.5 million- $86.3 million as compared to the end of the fourth quarter of 2021. A $14 million commercial loan was placed on non-accrual. Turning to slide 12. We were pleased to see that our classified loans decreased during the quarter from $266 million- $219 million at March 31, 2022.
Our special mention loans decreased during the quarter from $499 million- $389 million at March 31, 2022. We recorded a provision for credit loss of $8.6 million in the first quarter of 2022, as compared to a $3.5 million provision for credit losses in the fourth quarter of 2021, and a $13.6 million reversal of provisions for credit losses in the first quarter of 2021. The provision for credit losses of $8.6 million reflected the growth in loans during the first quarter, which included a $2.3 million Day 2-
CECL.
CECL charge for the loans acquired from the HSBC acquisition. Turning to slide five. Total average deposits, excluding HSBC acquired deposits, increased by $218.6 million or 7.4% annualized during the first quarter of 2022. On slide 13, average money market deposits increased $421.8 million or 35.6% annualized during the first quarter of 2022 compared to the fourth quarter of 2021. Average time deposit decreased by $314.8 million or 17.4% annualized, due partly to the runoff of brokered CDs and partly due to a migration of CDs to money market deposits.
For 2022, the overall deposit growth is expected to range between 9%-12%, which includes approximately $0.6 billion of low cost deposits from the HSBC acquisition. Excluding the acquired deposits from HSBC, we project deposit growth to be between 5%-8% in 2022. We repurchased 704,927 shares of our stock at an average cost of $46.67, totaling $32.9 million in the first quarter of 2022, completing the September 2021 stock repurchasing program. We are working on a new stock buyback program. The acquisition of certain West Coast branches from HSBC was successfully completed on February 7, 2022. We welcome the new customers and the HSBC associates in the 10 branches.
We acquired $646 million in loans, $575 million in deposits, and 10 branches expanding our Northern and Southern California branch network. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Chen, to discuss the first quarter of 2022 financial results in more detail.
Thank you, Chang, and good afternoon, everyone. For the first quarter of 2022, net income increased by $1.6 million or 2.2% to $75 million compared to the first quarter of 2021. The increase was primarily attributable to increase in net interest income due to continuing strong loan growth in the first quarter of 2022. Our net interest margin was 3.26% in the first quarter of 2022 as compared to 3.2% for the first quarter of 2021. In the first quarter of 2022, interest recoveries and prepayment penalties added 4 basis points to the net interest margin as compared to 6 basis points for the fourth quarter of 2021, and 3 basis points for the same quarter a year ago.
There were $2.3 billion in loans at the flow rate as of March 31, 2022, reducing from $3.1 billion in December 31, 2021. Based on a year-end risk funds target of 2.25%, we have increased our net interest margin expectation for 2022 to be 3.3%-3.40%. Net interest income during the first quarter of 2022 increased by $10.2 million- $20.2 million when compared to the first quarter of 2021, primarily due to increase of $8.7 million in mark-to-market gains on equity securities and an increase of $1.3 million in swap income.
Non-interest expense increased by $1.3 million or 1.8% to $72.7 million in the first quarter of 2022, when compared to $71.4 million in the first quarter of 2021. The increase was primarily due to an increase of $3.2 million in acquisition of the HSBC branches and $2.8 million in higher salaries and bonuses due to additional personnel as a result of the acquisition of the HSBC branches, offset by $3.3 million decrease in amortization of solar tax credit investments and $1.9 million decrease in marketing expense due to timing. The effective tax rate for the first quarter of 2022 was 23.5% as compared to 21.9% for the first quarter of 2021.
For the second quarter of 2022, we expect an effective tax rate of around 19.5%. For the second half of 2022, we expect an effective tax rate of between 21%-22%. We expect solar tax credit amortization of half a million in the second quarter, $1.5 million in the third quarter, and $7.5 million in the fourth quarter of 2022. As of March 31, 2022, our Tier 1 leverage capital ratio decreased to 10.11% as compared to 10.40% as of December 31, 2021. Our Tier 1 risk-based capital ratio decreased to 12.37% from 12.8% as of December 31, 2021.
Our total risk-based capital ratio decreased to 13.97% from 14.1% as of December 31, 2021.
Thank you, Heng. We will now proceed to the question-and-answer portion of the call.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then one key on your touch tone telephone. We ask that you please limit yourself to one question and one follow-up question. You may then return to the queue. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place yourself on mute once your question has been stated. Our first question comes from the line of Brandon King with Truist Securities.
Thank you. Good evening.
Hi.
Hi, Brandon.
I wanted to first discuss the loan growth guidance. It was pretty strong in the quarter, and it seems like with such a strong quarter, you're expecting kind of softer growth throughout the year. If you could just talk about that, what you're seeing in your markets and with your customer base, that went into your loan growth updated guidance.
Sure. You know, as the economy continues to improve, I think you saw that we had experienced a surge of our loan demand, which was also caused by the perceived interest rate hikes for the remaining of 2022. We expect that the overall loan growth for 2022 continues to range between 9%-12%. That includes the growth from HSBC or 5%-8% excluding HSBC. We also expect the loan demand to soften or slow later in the year as a result of the higher interest rates.
Okay. Did you benefit from any increase in C&I utilization?
Slightly. We looked at utilization rate. It probably increased by 2%-3%.
Okay. Then for deposits, seems like you're matching your loan growth with deposits. A lot of banks that have reported already are experiencing slower deposit growth. Could you talk about what you're seeing in your ability to grow deposits, and what gives you confidence that you can grow deposits at the same pace of loan growth?
On the deposit side, I think it's a little bit of both. It's both as the Fed increased the rates, we have to kind of look at that, but I think we have a tendency to lag behind our beta expectation on that. It's been about 30%. And also at the same time, I think we're continuing our business promotions, so we're marketing for business deposits and continue to look for growth there as well.
Okay. Within that deposit guidance and for your strategy for the year, do you plan on doing any more CD specials, or locking in any sort of long-term funding?
No. We may start going back to the brokered CD market, but what we're not gonna run any specials in our relationship CD market. I think our customers are uncertain as to how fast the Fed will increase, so they're gonna be reluctant to jump at anything being offered because many people think, you know, rates will be much higher.
Thank you very much.
Thank you.
Thank you. Your next question comes from the line of Matthew Clark with Piper Sandler.
Hey, good afternoon. Maybe just starting with the increase in non-accruals, the $20 million increase in C&I, it looks like. I think you mentioned $14 million credit was added. Can you just give us more color on what drove that increase and specific situation?
Sure. It's a C&I loan collateralized for the assets of the business, and we also have a residential home that's part of the collateral in the Pacific Palisades of Southern California, which is a strong area. We provided a small reserve for the loan. The loan is substantially collateralized in our opinion at this point.
Okay. You built reserves in the quarter. I think part of that, at least within SFR, was related to HSBC. There was some additional build in commercial real estate. Can you give us a sense for, you know, what drove the increase in reserves? How much of it was kinda macro-driven, versus more specific, or any other kinda key factors?
Yeah, Matthew. It's mostly macro-driven. You know, we looked at the Moody's forecast very closely, and it was prepared, as we understand it, on March 10th. For example, in their base case, they were projecting a year-end Fed funds rate of 85 basis points. We have a fairly strong overlay on top of Moody's to factor in the higher interest rates that, you know, it'll affect. We expect them to have, in the June forecast, much relatively lower GDP, which is one of the variables in our econometric equations. We think we capture much of that. Then there's credit improvement, as Chang mentioned.
We did reserve for those for the non-accrual that went on in the first quarter.
Okay, great. Just, switching gears to the tax credit amortization, you gave the solar, and I think the low-income housing tend to be a little more stable. Can you provide your expectations for low-income housing tax credit amortization for the upcoming quarter in the second half of the year?
Yeah. It should be about $6.5 million a quarter for each of the next three quarters.
Okay, great. Thank you.
Thank you.
Our next question comes from the line of David Chiaverini with Wedbush Securities.
Hi, thanks. I wanted to follow up on that, the $14 million credit where it sounds like it's well covered. Just curious, you know, if you're able to share what industry that was in, and if you're seeing any kind of systemic issues in the industry where it was coming out of.
Sure. It's an office furniture industry and the principal of the company was trying to launch a new-
No, I think we wanna be-
Okay.
That's as general as we wanna get. Yeah.
Okay. Yep, that's helpful. Yeah, it seems very COVID-specific, the office market, so that makes sense. Thank you for that. Over on the loan growth front, you mentioned about your expectations and assumptions of slower growth, kind of towards the back half of the year with higher rates. Are you seeing any signs of an economic slowdown or any signs of a slowdown in loan demand as you sit here today?
There's some of that slowdown, for example, in the commercial real estate market. I think as the interest rates go up, some of the bridge or reposition plays in multifamily may not pencil out. That segment has slowed a bit for us. We're still seeing some, you know, purchases and some other activities in the commercial real estate side. The other multifamily reposition side has slowed a bit for us.
Got it. Thanks very much.
Thank you. Our next question comes from the line of Andrew Terrell with Stephens.
Hey, good afternoon.
Hi, Andrew.
Hi.
Hey, I just wanted to circle in on the net interest margin guidance, 3.30%-3.40% for the full year 2022, with Fed funds at year-end of 2.25%. Can you just remind us, I think it was 10 bps up on both sides from the prior guide. Can you just remind us what you were assuming for year-end Fed funds in the prior net interest margin guidance?
Well, the prior NIM guidance was 10 basis points lower. We don't update this NIM forecast all the time, so that guidance was based on seven 25 basis point Fed increases. Now it looks like May will be 50 basis points, so that would front load the NIM improvement.
Mm.
our floors, you know, if it's 50 basis points by the May Fed meeting, our loans will be all clear of the floors because the average is right around 50 basis points for the loans on floors.
Yep. Okay. Got it. Within that kind of margin guidance, do you assume any kind of further earning asset mix change, away from cash into securities or loans? Can you just talk about how we should think about just the size of the bond book as we work throughout the year?
Yeah. I think we'll get the target about a billion in cash at the Fed. We may move some of that into let's say nine-month treasuries because the yield curve is so flat. In terms of the bonds, you know, it's only 5% of our total assets, so our mark-to-market AFS adjustment was relatively light. We're gonna be cautious in terms of doing much more investing except in you know shorter duration securities such as treasuries. We may buy some MBS, but we wanna wait till it's clear that it's closer to the top, so we don't get any more unrealized AFS losses.
Mm-hmm. Understood. Okay. Thank you for taking my questions.
Yeah. Thank you.
Thank you.
Thank you. At this time, there are no questions in the queue. Again, to ask a question, please press star one. I'm showing we have a question from the line of Chris McGratty with KBW.
Hey, how's it going? This is Andrew Leischner for Chris McGratty.
Yeah.
On the expense guidance, I was just wondering, Heng Chen, can you remind us where the base starting point is, for that 4% expense growth?
Well, we're guiding to 3.5% and then 4% for the HSBC acquisition. The guidance is the full year 2021.
Yes. Do you have the actual number that you're basing that off of?
Well, you know, if you look at our slide 17, you know, if the quarters on the core expense growth, they tend to be right around $60 million. Then Q4, we were at $61.1 million, and I'm sorry, Q4. Then Q1 we're at $60.2 million. You might as well go on the Q4 number, $61.1 million, and you annualize that, and our guidance would go from there.
Okay, great. Thank you.
Okay.
Then with your loan deposit ratio at 96%, and given where your loan and deposit guidance is, should we assume that loan deposit ratio is staying fairly stable from here?
Can you repeat the last part?
Should we assume that 96% loan deposit ratio is going to stay fairly stable?
Yes. We have an upper limit of 100% and yeah, 96%-97% is probably the right level for us.
Okay, thank you. Just for that NIM guidance, can you remind us what the deposit betas were last cycle and what you're assuming for this upcoming cycle? Thank you.
Well, it was about 30% for the last cycle, and we think it'll be about 30% this cycle. We've gotten less dependent on CDs over the last couple years, so that'll provide a little bit of cushion. You know, the rate of Fed increases is fairly fast compared to the last 20 years, so.
Okay, thank you. That's all the questions I have.
Okay. Yeah. Thank you.
Thank you for your participation. I will now turn the call back over to Cathay General Bancorp's management for closing remarks.
I wanna thank everyone for joining us on our call, and we look forward to speaking with you in our next quarterly earnings release call.