Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's second 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 one one at any time during the conference. 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. 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 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 of 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 an unanticipated event. This afternoon, Cathay General Bancorp issued an earnings release outlining its second quarter 2022 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 this call up 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 2022 second quarter earnings conference call. This afternoon we reported net income of $89 million for the second quarter of 2022, a 15.3% increase as compared to a net income of $77.2 million for the second quarter of 2021. Diluted earnings per share increased 21.6% to $1.18 per share for the second quarter of 2022, compared to $0.97 per share for the same quarter a year ago. In the second quarter of 2022, our gross loans increased $389.5 million, or 9.5% annualized.
The increase in loans for the second quarter of 2022 was primarily driven by increases of $94.6 million, or 13.1% annualized in commercial loans excluding PPP loans, $161.3 million or 7.9% annualized in commercial real estate loans, $210.6 million or 20.1% annualized in residential mortgage loans. The overall loan growth for 2022 is expected to range between 10%-12%, including approximately $646.1 million of loans from the acquisition of certain HSBC West Coast branches. Excluding the HSBC acquisition, we project loan growth to be between 6% and 8% in 2022. During the second quarter of 2022, $25.3 million of PPP loans were forgiven. We continue to monitor our commercial real estate loans.
Turning to slide 8 of our earnings presentation, as of June 30, 2022, the average loan-to-value of our CRE loans was 52%. As of June 30, 2022, our retail property loan portfolio comprises 23% of our total commercial real estate loan portfolio and 9% of our total loan portfolio. The majority, 90% of the $1.94 billion in retail loans, is secured by retail store buildings, neighborhood mixed-use or strip centers, and only 9% is secured by shopping centers. For the second quarter of 2022, we reported net recoveries of $0.2 million, compared to net recoveries of $0.3 million in the first quarter of 2022.
Our non-accrual loans were 0.35% of total loans as of June 30, 2022, decreased by $25.7 million to $60.6 million as compared to the end of first quarter of 2022. Turning to slide 11, classified loans increased slightly during the quarter from $219 million to $244 million as of June 30, 2022. Our special mention loans increased during the quarter from $389 million to $295 million as of June 30, 2022.
We recorded a provision for credit loss of $2.5 million in the second quarter of 2022 as compared to an $8.6 million provision for credit losses in the first quarter of 2022, and a $9 million reversal of provision for credit losses in the second quarter of 2021. Total deposits increased by $227.1 million, or 5% annualized during the second quarter of 2022. On slide twelve, average money market deposits increased $465 million or 38.6% annualized during the second quarter of 2022 compared to the first quarter of 2022. Average time deposits decreased by $408 million, or 30.9% annualized due to migration of CDs to money market deposits and deposit runoff.
For 2022, the overall deposit growth ex-is expected to range between 9% and 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% and 8% in 2022. In May 2022, the board of directors adopted a $125 million new share repurchasing program. We repurchased 750,000 shares of our stock at an average cost of $40.78 per share, following $30.6 million in the second quarter of 2022, with $94.4 million remaining in the May 2022 stock repurchase program. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr.
Heng Chen, to discuss the second quarter 2022 financial results in more detail.
Thank you, Chang, and good afternoon, everyone. For the second quarter of 2022, net income increased by $11.8 million, or 13.3% to $89 million compared to the second quarter of 2021. The increase was primarily attributable to net interest margin expansion and continued strong loan growth in the second quarter of 2022. Our net interest margin was 3.52% in the second quarter of 2022, as compared to 3.24% for the second quarter of 2021. In the second quarter of 2022, interest recoveries and prepay penalties added 2 basis points to the net interest margin, compared to 4 basis points for the first quarter of 2022 and 3 basis points in the same quarter a year ago.
Based on a year-end Fed funds target range between 3.25% and 3.5%, we have increased our net interest margin expectation for full year 2022 to be between 3.5%-3.65%. Non-interest income during the second quarter of 2022 increased by $2 million to $14.6 million when compared to the second quarter of 2021, primarily due to increases of $0.9 million in loan fees. Non-interest expense increased by $4.4 million or 6.3% to $74.1 million in the second quarter of 2022 when compared to $69.7 million in the second quarter of 2021.
The increase was primarily due to $4.5 million in higher salaries and bonuses, due in part to the acquisition of certain HSBC West Coast branches, $1.9 million in higher professional and legal expenses, partially offset by $3.4 million decrease in amortization of solar tax credit investments. The effective tax rate for the second quarter of 2022 was 21.4% as compared to 22.7% for the second quarter of 2021. For the second half of 2022, we expect an effective tax rate of between 21.5% and 22.5%. We expect solar tax credit amortization of $1.5 million in the third quarter of 2022 and $7.5 million in the fourth quarter of 2022.
As of June 30, 2022, our Tier 1 leverage capital ratio increased to 10.15% as compared to 10.11% as of March 31, 2022. Our Tier 1 risk-based capital ratio decreased to 12.18% from 12.37% as of March 31, 2022, and our Total risk-based capital ratio decreased to 13.74% from 13.97% as of March 31, 2022.
Thank you, Heng. We will now proceed to the question and answer portion of the call.
Ladies and gentlemen, if you have a question at this time, please press star one one on your telephone. We ask that you please limit yourself to one question and one follow-up question. You may then return to the queue. To prevent any background noise, we ask that you remain on mute once your question has been stated. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matthew Clark with Piper Sandler. I will now let Matt in.
Hey, good afternoon.
Hi, Matthew.
Maybe first on the fee income, the core fee income, like, and the other non-interest income, can you give us a sense for what drove the increase from last quarter and other non-interest income?
It's very low. It's $900,000 in loan fees. That include, you know, some regular loan fees and, we collected, $350,000 from the Far East National Bank loan, and we booked that in the other income category.
Okay. I'm just making sure 'cause I thought the comparison was from a year ago. Okay.
Matthew, you're comparing it to the last year or the first quarter?
The first quarter.
Oh, yeah. We also had a BOLI death benefit here in the second quarter. Yeah, I'm sorry. That was on a linked quarter basis. That was about $1.5 million.
Okay, great. I guess a similar question in expenses linked quarter, the increase in other operating expense again from last quarter.
Yeah. We had a few one-time items. Our marketing expense was a little bit higher, so that was higher by about $800,000. It gets lumpy between the quarters. We also had in all other, we have an annual director fee retainer, which for the director group. That's about $700,000-$800,000.
Okay, great. Sounds good. Oh, also within expenses, you gave the guidance on solar tax credit amortization. Can you just fine-tune what you expect for low-income housing in the third and fourth quarter?
We keep on making new investments, so probably $7.5 million per quarter would be good for low-income housing.
Okay, great. Do you happen to have the spot rate on interest-bearing deposits at the end of, as of June 30?
It's not precise. I did a quick calculation because so many people seem to be asking for it. Hold on. Let me try to find that piece of paper. Once again, we normally don't produce this. I just got this out of the GL, but it's, well, I think it was about 46 basis points.
Okay. Last one for me on the buyback, your appetite to continue repurchasing stock and potentially re-up another program, just given the increased uncertainty in the economy?
We still intend to do about the same amount in the third quarter. You know, our authorization goes into the first quarter of 2023, and we have $94 million left, so you can probably figure it's maybe $35 million a quarter about.
Okay, great. Thank you.
Thank you.
Thank you. Our next question comes from the line of Brandon King with Truist Securities.
Hey, good afternoon.
Hi.
Hey. I wanted to touch on deposits. You were able to generate deposit growth in the quarter, and I noticed you didn't change your guidance for the year, which expanded out relative to peers. I just wanted to get a sense of what gives you the confidence of generating deposits along with loan growth, with that happening.
Well, first, we think our loan growth in the second quarter, second half of the year, you know, it's in our guidance or it's implied in our guidance, will probably drop to, you know, 5% annualized in the second half. Then we would match deposit growth to that, including using brokered CDs, as needed. Brandon?
Hello? Oh, sorry. Since they're using the brokered CDs to kind of fund that growth, and that's included, I guess that's incorporated in the NIM guidance as well. I guess
Yes.
I should see kind of a smaller benefit to increases in interest rates going forward. Is that the trajectory of that?
Yeah. I mean, we had a very good increase from Q1 to Q2, and that only has, you know, half a month of the June 75 basis points. That momentum, you know, will continue in the second half. It's you know, these very rapid interest rate increases are unprecedented in recent history. We do think our NIM for the full year is gonna be better than our prior guidance.
Okay. Do you happen to have on hand what the net interest margin was in the month of June?
Yeah. Some of it is affected by the. Sorry, that was me. I think it was 3.66.
Just lastly on loan growth, as you're anticipating slower loan growth in the back half of the year, are there any categories that should see slower growth relative to others that you're anticipating?
I mean, if anything, the residential mortgage might kind of slow down a little bit, given where rates are. I think we've booked the first half all the applications that were in the pipeline, as a result of the sales activities. I think now the interest rate impact will kinda slow down that segment a little bit going forward.
Okay. Thanks for all the answers.
Thank you.
Thank you. Our next question comes from Terrell with Stephens.
Hey, good afternoon.
Hi.
Hey, just wanted to follow up on the last point. I was curious on whether you've seen kind of a similar slowdown in commercial real estate volumes as we've worked into the third quarter of this year.
We're seeing slower refinance activities, of course, because of the higher rates. There are still people who, for example, are kind of flipping from a fixed to float that they don't wanna see the floating rates, so they're worried about that given where the short-term rates are. There is still some activity. It's not completely dead. Purchase activity has slowed as well, given where the rates are, particularly on some of the apartment acquisitions. We're still seeing a fairly healthy pipeline, and we're being selective about, you know, careful about our current relationships and our current clients. I think we're definitely more careful going forward about kind of what kind of commercial real estate deals that we're doing.
Okay. Got it. I wanted to ask on just the deposit growth that we saw this quarter. I didn't see it anywhere in the release, but I was curious, was any of the money market growth brokered?
Yes. It was $100 million out of that total growth.
Okay.
That's period end to period end.
Yep. Okay. Got it. Thank you. One last one for me. I think last quarter, we talked a little bit about a $14 million commercial credit that was placed on non-accrual. I was just curious, any kind of status update that you can share on this one?
We don't like to talk about specific customers, but I understand it's public knowledge. There's been a receiver appointed, so we feel we have better control of that credit. Ultimately, you know, we will get some collection from the assets of the business and then the rest will come from the house on the west side that's securing it. Then we have also reserved for the loan for a reasonable amount.
Okay. Understood. Well, I appreciate you taking my questions.
Yeah. Thank you.
Thank you. Our next question comes from the line of Christopher McGratty with KBW.
Oh, great. Good afternoon. Heng Chen, last quarter, you talked about a, I think, a 30% through the cycle beta. Do you feel any different about this given the speed at which the Fed is now moving? Is that number moving higher?
We don't know. We still think it's 30%. In the second quarter, it was much less than that, in part because we had a shift in our deposit mix, where our customers are also uncertain as to whether they should renew for, you know, one-year CDs, which is a traditional term, versus staying in money market. We did get, Chang Liu, it was about 90% re-
Retention.
Retention of maturing CDs. Chang, I thought I heard it was the one-year CD renewal rate was around 1% somewhere. That is much better than. You know, our deposit beta of that 30%, we assume for CDs, the beta would be 100%. You know, it's this rate hike is very unusual. We're doing better than our deposit betas.
Um-
We'll keep our fingers crossed.
Yeah, for sure. Just on the expense, I just wanna make sure I fully understand the expense guide, which hasn't changed. Can you just provide what the starting level of expenses are for 2021? Is that your reported expenses? Is that reported ex-amortization? Just so I wanna make sure I get it right.
Yeah. It's reported full year 2021 ex-amortization.
Great. Thank you.
Thank you.
Thank you. Final order. To ask a question, you will need to press star one one on your telephone. Once again, to ask a question, you will need to press star one one. Our next question comes from the line of Tanner with D.A. Davidson.
Thanks. Good afternoon. Heng, I just wanted to kinda go back over that loan and deposit guide. You kinda mentioned in your answer to a question that you were looking to sort of match loan growth with deposit growth. Even at the low end of that deposit guide of 9%, it would suggest, I think, second half of the year deposit growth that far outstrips the projected loan growth based on your guidance. Is that accurate or am I misunderstanding something in your comments?
Yeah. We try to keep the. You'll see our loan-to-deposit ratio was 96% for the last 2 quarters. We're trying to maintain that at quarter end. If we have to, we'll go to the wholesale brokered CD or brokered money market to maintain that. What our intention is to keep up with the loan growth for the rest of the year, in fact, and try to keep that loan-to-deposit ratio right around 96. It might drift up a little bit, but hopefully not too much.
Okay. All right, thank you. In terms of just overall balance sheet management, you're down to, I don't know, $1 billion or so, you know, of liquidity versus $2.5 billion at the end of 2021. You know, is that a level that you'd like to maintain from a balance sheet liquidity perspective? Would you run it tighter than that and you know, and deploy some of that cash to loans or securities at this point?
It should be right around $1 billion. We have about $120 million treasuries, which are less than the final maturity is less than one year. Those count as cash equivalents for the regulatory ratios. We may if that $1 billion cash that drops is because we deploy some into treasury. Overall, we're maintaining. We're not gonna run that balance down much lower.
You're gonna run the short-term investment balance then that's $1 billion?
No, no.
I thought you said that's where you
No.
You're not going to. You're gonna keep it there.
Yes, sir.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from David Chiaverini.
Hi. Thanks. I wanted to follow up on the brokered CD topic. I was curious, what's the rate on the brokered CDs versus your core CD portfolio rate?
We just got some this month. It's for 3-month brokered CDs. That's about 2.25%-2.375%. You know, this is June, the rate on our core time deposits for June was about 45 basis points.
Can you talk about the competitiveness in the market for core CDs? Are you seeing some competitors push that up? Do you guys plan on doing any kind of specials? Because it seems like you'll get a better sorta deal with your core CDs versus the brokered CDs. Can you talk about that a bit?
Yeah. Well, one, we don't think we need to do any sorta CD specials. We don't see anybody in the marketplace doing that because banks in general still have a lot of excess liquidity. In terms of earlier in the second quarter, you know, we lost some larger deposit customers. They were leaving for deposits in the low twos. That was, I could say, early June. Today, if those same customers came to us and said they would want 2% for 1-year CD, we would take that. But it's very.
We have a service that looks for the published rates for all of our Southern California peers, and it's nobody has raised any rates in any product since the Fed increase. My assumption is everybody is customizing for the larger depositors the rate that they wanna offer.
Got it. Thanks for that. Shifting to credit quality. Can you talk about, you know, the health of your borrowers? Clearly, your LTVs are very, very low. I'm curious about the health of your borrowers. Related to that, can you talk about what you're seeing based on talking to customers, the economic outlook, and if you're seeing anything recessionary in your outlook?
David, I'll take that first. On the CRE side, we've done a deeper dive into not just the LTV side, but into the cash flow side and the debt service side, assuming higher interest rates and higher debt service payments, what the portfolio will look like from a debt coverage standpoint. We've done a pretty significant review of that and we feel pretty good, pretty comfortable about those. On sort of the economic and recession side, you know, I mean, that's that's, it's I think it's the GDP numbers I think later in the week will kinda tell us a little bit more, but the unemployment numbers are still very low.
I think the last hiring report was something about 400,000 and was a total of 1.1 million over 3 quarters. Those are all strong numbers that I think we've seen. In addition to that, our C&I customers, I think we're also looking at them and kinda looking at their balance sheet and their aging more carefully, kinda looking at some of their inventory just to make sure that their numbers are strong. We don't have any concerns there at this point. If there is one, it's probably a mild one. I think there was a report in the Wall Street Journal about how there was an expectation for Fed cuts that may come as quickly as the next 12 months.
Great. Thanks very much.
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 at our next quarterly earnings release call.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.