Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's fourth quarter and full year 2021 earnings conference call. My name is Gigi, and I'll be your coordinator for today. At this time, all participants are in 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 a 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 Georgia Lo, investor relations of Cathay General Bancorp.
Thank you, Gigi, 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, 2020, 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. 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 fourth quarter 2021 results. To obtain a copy of our earnings release as well as our 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, Georgia, and good afternoon, everyone. Welcome to our 2021 fourth quarter earnings conference call. This afternoon, we reported net income of $75.3 million for the fourth quarter of 2021, a 4% increase as compared to the net income of $72.4 million for the third quarter of 2021. Diluted earnings per share increased 10% to $0.98 per share for the fourth quarter of 2021 compared to $0.89 per share for the same quarter a year ago. For the year ending December 31, 2021, we reported a record net income of $298.3 million, an EPS of $3.80 per share for 2021.
In the fourth quarter of 2021, our gross loans, excluding PPP loans, increased by $444.6 million to $16.3 billion, which represents an annualized growth rate of 11.4%. The increase in loans for the fourth quarter of 2021 was primarily driven by increases of $189.6 million or 29.2% annualized in commercial loans excluding PPP loans, $307.7 million or 16.3% annualized in commercial real estate loans, and $37.2 million or 0.9% annualized in residential mortgage loans, offset by a decrease of $77.2 million or -45.4% annualized in real estate construction loans.
The overall loan growth for 2022 is expected to range between 9%-11%, including approximately $700 million of loans from the acquisition of certain West Coast branches from HSBC. Excluding the HSBC acquisition, we project loan growth to be between 5% and 7% in 2022. During the fourth quarter of 2021, $72.5 million of PPP loans were forgiven. As of December 31, 2021, our deferred PPP loan fees were $643,000. We continue to monitor our commercial real estate loans. Turning to slide eight of our earnings presentation, as of December 31, 2021, the average loan-to-value of our CRE loans was 51%. As of December 31, 2021, our retail property loan portfolio comprises 23% of our total commercial real estate loan portfolio and 11% of our total loan portfolio.
The majority, 60% of the $1.87 billion in retail loans is secured by neighborhood, mixed use or strip centers, and only 10% is secured by shopping centers. For the fourth quarter of 2021, we reported net charge-offs of $300,000 compared to net charge-offs of $2.3 million in the third quarter of 2021. Our non-accrual loans were 0.4% of total loans as of December 31, 2021, decreased by $2.8 million to $65.8 million as compared to the end of the third quarter of 2021. We recorded a provision for credit losses of $3.5 million in the fourth quarter of 2021 as compared to $3.1 million provision for credit losses in the third quarter of 2021.
The provision for credit losses of $3.5 million reflected the net charge-offs of $300,000 and provisions for the loan growth during the fourth quarter. Turning to slide 13. Total average deposits increased by $345.6 million or 8.1% annualized during the fourth quarter of 2021. We were especially pleased by the $332.4 million increase or 34.4% annualized in average demand deposits during the fourth quarter compared to the third quarter. Average time deposits decreased by $278.5 million or 18.8% annualized, due primarily to the runoff of brokered CDs. For 2022, the overall deposit growth is expected to range between 9% and 10%, which includes approximately $700,000 of low-cost deposits from the HSBC acquisition.
$700 million.
$700 million. Excluding the acquired deposits from HSBC, we project deposit growth to be between 5%-7% in 2022. We repurchased 1,511,038 shares of our stock at an average cost of $43.97, totaling $66.4 million in the fourth quarter of 2021. There is $32.9 million remaining under our September 2021 $125 million stock buyback program. Our previously announced acquisition of certain West Coast branches from HSBC is scheduled to close on or around February 4, 2022. We are pleased with the progress of the integration and conversion. We would like to welcome the new customers and the HSBC team members in the ten branches.
This transaction will broaden the reach of our northern and southern California branch network, in addition to acquiring approximately $700 million in low-cost deposits and approximately $700 million in residential mortgages. We look forward to the contribution of the new branches to our bank's future growth. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Heng Chen, to discuss the fourth quarter of 2021 financial results in more detail.
Thank you, Chang, and good afternoon, everyone. For the fourth quarter of 2021, net income increased by $2.9 million or 4% to $75.3 million, compared to the third quarter of 2021. This increase was primarily attributable to increase in net interest income due to strong loan growth in the fourth quarter. Our net interest margin was 3.23% in the fourth quarter of 2021, as compared to 3.22% for the third quarter of 2021. In the fourth quarter of 2021, interest recoveries and prepayment penalties added 6 basis points to the net interest margin, as compared to four basis points for the third quarter of 2021. There were $3.1 billion of loans at the floor rate as of December 31, 2021.
Approximately $2 billion of our CDs matured during the first quarter of 2022, with average rates of 0.48%. We are targeting renewing retail CDs in the 40-50 basis point range. Based on three rate hikes during 2022, this is June, September, and December, we expect our net interest margin for 2022 to be between 3.2%-3.3%. Net interest income during the fourth quarter of 2021 increased by $7.6 million to $19.8 million when compared to the third quarter of 2021, primarily due to a venture capital distribution income of $3.7 million, an increase of $1.3 million in swap income, and an increase of $2.2 million in mark-to-market gains on equity securities in the fourth quarter.
Non-interest expense increased by $983,000 or 1.4% to $73.2 million in the fourth quarter of 2021, when compared to $73.2 million in the third quarter of 2021. The increase was primarily due to an increase of $0.5 million in acquisition and conversion costs and $0.4 million in higher salaries and bonus accruals. The effective tax rate for the fourth quarter of 2021 was 23.6%, as compared to 19.1% for the third quarter of 2021. The increase in the effective tax rate resulted from a $1.6 million catch-up adjustment in the third quarter of 2021 for 2020 solar tax credits resulting from the receipt of 2020 K-1s.
For 2022, we expect a full year effective tax rate of between 19% and 20% and solar tax credit amortization of $5 million a quarter, starting in the second quarter of 2022. As of December 31, 2021, our Tier one leverage ratio decreased to 10.4% as compared to 10.67% as of September 30, 2021. Our Tier one risk-based capital ratio decreased to 12.8% from 13.29% as of September 30, 2021. Our total risk-based capital ratio decreased to 14.41% from 14.93% as of September 30, 2021.
Thank you, Heng. We will now proceed to the question and answers portion of the call.
Ladies and gentlemen, if you have a question at this time, please press the star then one key on your touchtone 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. Your first question comes from the line of Brandon King from Truist Securities. Your line is now open.
Hey, good afternoon.
Hi.
Hi, Brandon.
I first wanted to talk about loan growth. It was pretty strong in the quarter, but I wanted to get a sense of your expectations for 2022 and what that would and could look like on a core basis.
For 2022, we're projecting a total loan growth at 9%-11%, but that includes the HSBC acquisition. Excluding that number is in the 5%-10% range.
Five to seven.
5%-7%. It's 5%-10% range.
Okay. Also, I saw that CRE was pretty strong in the quarter. Could you just talk about what drove that and what are your expectations for the CRE book, as well within that 5%-7% core guidance in 2022?
Sure. On CRE, most of the businesses were multifamily driven, and that comes from sort of the acquisition and renovation as well as some of the stabilized properties increases. I think we had a few teams that did significantly well in their relationships and expanding those relationships. We continue to see positive growth out of that. For 2022, CRE number is around 5%-6%.
Okay. Lastly, just for C&I know there's been a lot of focus on that. What are you expecting as far as utilization rates there? Also in 4Q, did that strength come from new customers or existing customers expanding their utilization?
The C&I increase is really a result of some of the new relationships we've acquired through some of the new relationship managers and teams that we've acquired during 2020 and 2021. The utilization rate for 2021, the number that we have is around 55%. We expect that number to stay relatively stable at that number, and we're seeing continued increase in commitment as well. You know, we're positive. We're optimistic that the 2022 numbers on C&I will increase as well.
Yeah. Our budget has that growing in around 11%-12% for C&I.
Okay. Very helpful. Thank you for the answers.
Yeah. Thank you.
Thank you. Your next question comes from the line of Chris McGratty from KBW. Your line is now open.
Hey, great. I just want to revisit the loan growth comments. Just to make sure I understand. This quarter you had about 11% annualized, and the organic guide excluding the deal is call it 5%-7%. It seems conservative to me. Is this just an intentional remixing, or are you seeing, you know, certain asset classes that might not, you might not want to grow as fast?
Well, the 11% is the quarter-over-quarter comparison, right? If you look at the year-over-year, that number is actually about 4.5%. I think the organic guidance of 5%-7% is still a increase over the actual 2021 year-over-year comparison.
Okay. That's helpful.
Yeah. We're also being conservative, Chris. You know, we'll update that guidance each quarter as we go into 2022.
Understood. Okay, great. The expenses, could you help us with the trajectory in expenses? We're hearing a lot from banks about inflation and just wanna make sure I got the expenses and also if you had the low-income amortization expectations too.
First, we're gonna break it out in two parts. One for core Cathay, excluding HSBC acquisition and one-time conversion expenses, we expect expenses to be about 3.5% next year. The HSBC is about $10 million core. That's about 4.2% increase from our 2021. We see low-income housing about flat to 2021. We had some catch-up adjustments in 2021, so that's flat. Solar would be up about $3 million. I think
Okay.
Yeah, he can talk about why we think we can hold at 3.5%.
For us, you know, the focus is important to keep the expenses down. You know, our team members are the most critical assets of the bank. Obviously, given where the labor market is today, and we need to make sure that we're retaining and attracting the right talent. Outside of that, we're looking at other core areas of expense control where we can be able to save some cost.
On the core systems, we were able to save some costs on the contract negotiation extension there, in addition to other just kind of looking at overall locations and other physical costs expense-wise, that we're looking to offset any potential increases on that side of the income statement.
Okay. Just a clarification. That $10 million on HSBC, that's an annual number, assuming an early February close. Then the gain-
That's right.
Yep. Then the gain, the venture gain, is that an addition or is that included within the securities gain line? It looks like it's in other income.
That's in other income. Right.
Okay. All right. Thanks, Heng.
Okay, thank you.
As a reminder, to ask a question, you will need to press star one on your telephone. Our next question comes to the line of Matthew Clark from Piper Sandler. Your line is now open.
Hey, good afternoon.
Hi, Matthew.
Just wanna start on the deposit growth, pretty significant this quarter. Any concentrations or any part of that growth that might be unsustainable? Just trying to get a sense for where it came from.
Yeah. First, you know, we like to measure it based on average quarterly balance growth. That was still pretty good, especially in money market and DDA. We had a couple of deposit customers that made deposits late in the year. It's $200 million in DDA and $400 million in MM. Those deposits have left the bank as of today.
Matthew, going forward, we're really focusing on growing our low-cost deposits. We wanna shift our liability mix so that we continue to push to drive down the cost of funds.
Got it. Okay. The uptick in special mention this quarter, it looked like you added some reserves to C&I as well. I know part of that's loan growth, but can you just give us a sense for what drove the increase in special mention and your expectations there?
Yeah. Yeah. That's. I got a list from our chief credit officer. You know, that's more of a monitoring category for us. There's a couple of construction. There's some COVID-type impact where properties, their lease rates are a little bit weaker. There's a couple of C&I loans where due to supply chain disruption maybe their profits went down, so we put them into special mention. It's nothing that would be concerning to us.
Okay. Yeah.
And then it's-
issue.
Yeah. Then on sub, you know, we have two credits that we feel pretty good about those. Those are kind of one-off issues. We don't see them going on now.
Cool. Okay. Just given the delay in, I think, the solar amortization, you know, starting the second quarter in the tax rate of 19% or 19%-20%, how should we think about the kind of the tax rate, at least in the first quarter relative to the second before things kinda smooth out?
That should be the full year effective tax rate. We expect to close that deal. We're shooting to close that deal before the end of March. It'll be in our full year effective tax rate.
Okay. See. Okay. Got it. 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 the call, and we look forward to speaking with you in our next quarterly earnings release call.