Good afternoon, ladies and gentlemen, and welcome to the Cathay General Bancorp's Third Quarter 2022 Earnings Conference Call. My name is Matt 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'd 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'd like to turn the call over to Georgia Lo, Investor Relations, Cathay General Bancorp.
Thank you, Matt, 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 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 31st, 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 statements speak 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 an anticipated event. This afternoon, Cathay General Bancorp issued its earnings release outlining its third 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 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 2022 third quarter earnings conference call. This afternoon, we reported net income of $99 million for the third quarter of 2022, a 36.8% increase as compared to a net income of $72.4 million for the third quarter of 2021. Diluted earnings per share increased 45.2% to $1.35 per share for the third quarter of 2022, compared to $0.93 per share for the same quarter a year ago. In the third quarter of 2022, our gross loans increased $318.9 million or 7.8% annualized.
The increase in loans for the third quarter of 2022 was primarily driven by increases of $193.4 million or 26.8% annualized in commercial loans, excluding PPP loans. $114.7 million or 5.6% annualized in commercial real estate loans. $85.3 million or 8.2% annualized in residential mortgage loans. The overall loan growth for 2022 is expected to range between 11%-12.5%, including approximately $646.1 million of loans from the acquisition of certain HSBC West Coast branches in February 2022. Excluding the HSBC acquisition, we project loan growth to be between 7% and 8.5% in 2022. We continue to monitor our commercial real estate loans.
Turning to slide seven of our earnings presentation, as of September 30th, 2022, the average loan-to-value of our CRE loans was 51%. As of September 30th, 2022, our retail property loan portfolio, as shown on slide eight, comprises 22% of our total commercial real estate loan portfolio and 11% of our total loan portfolio. The majority, 89% of the $1.95 billion in retail loans, is secured by retail store buildings, neighborhood, mixed-use or strip centers, and only 10% is secured by shopping centers. For the third quarter of 2022, we reported net charge-offs of $0.6 million compared to net recoveries of $0.2 million in the second quarter of 2022.
Our non-accrual loans were 0.38% of total loans as of September 30th, 2022, increased by $7.5 million to $68.1 million as compared to the end of second quarter of 2022. Turning to slide 11, classified loans decreased slightly during the quarter from $244 million to $240 million as of September 30th, 2022. Our special mention loans increased slightly during the quarter from $295 million to $305 million as of September 30, 2022. We recorded provision for credit loss of $2 million in the third quarter of 2022 as compared to a $2.5 million provision for credit losses in the second quarter of 2022, and $3.1 million provision for credit losses in the third quarter of 2021.
Total deposits increased by $288.4 million or 6.4% annualized during the third quarter of 2022. Time deposits increased $686 million or 49.7% annualized, and interest-bearing demand deposits increased $76 million or 12% annualized during the third quarter of 2022 compared to the second quarter of 2022. Money market deposits decreased by $287 million or 33.6% annualized due primarily to a migration back to CDs from money market deposits and deposit runoff. For 2022, the overall deposit growth is expected to range between 8% and 9.5%, which includes approximately $600 million of low-cost deposits from the HSBC acquisition. In May 2022, the board of directors adopted a $125 million new share repurchasing program.
We repurchased 1.08 million shares of our stock at an average cost of $42.88, totaling $46.3 million in the third quarter of 2022, with $76.9 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 third quarter of 2022 financial results in more detail.
Thank you, Chang, and good afternoon, everyone. For the third quarter of 2022, net income increased by $26.6 million or 36.8% to $99 million compared to the third quarter of 2021. The increase was primarily attributable to net interest margin expansion and continued strong loan growth in the third quarter of 2022. Our net interest margin was 3.83% in the third quarter of 2022 as compared to 3.22% for the third quarter of 2021. In the third quarter of 2022, interest recoveries and prepay penalties added three basis points to the net interest margin as compared to five basis points for the second quarter of 2022 and four basis points for the same quarter a year ago.
Based on the year-end Fed funds target range between 4.5% and 4.75%, we have increased our net interest margin expectation for 2022 to be between 3.6% to 3.7%. Non-interest income during the third quarter of 2022 decreased by $2.3 million to $9.9 million when compared to the third quarter of 2021, primarily due to an equity securities loss of $3.7 million in Q3 2022. Non-interest expense increased by $3.2 million or 4.3% to $75.4 million in the third quarter of 2022, when compared to $72.2 million in the third quarter of 2021.
The increase was primarily due to $1.2 million in higher salaries and bonuses and $0.8 million in higher occupancy expenses, due in part to the acquisition of certain HSBC West Coast branches and $1.1 million in higher marketing expenses. The effective tax rate for the third quarter of 2022 was 23.8%, as compared to 19.1% in the third quarter of 2021, which included a $1.2 million true-up adjustment to for 2021 K-1. For the fourth quarter of 2022, we expect an effective tax rate between 22.5% and 23%. We expect solar tax credit amortization of $7.5 million in the fourth quarter of 2022.
As of September 30th, 2022, our Tier 1 leverage ratio decreased to 10.02% as compared to 10.5% as of June 30th, 2022. Our Tier 1 risk-based capital ratio decreased to 12.06% from 12.18% as of June 30th, 2022. Our total risk-based capital ratio decreased to 13.59% from 13.74% as of June 30th, 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 the star then one key on your touch tone telephone. We ask that you please limit yourself to one question and one follow-up. You may then return to the queue. If your question has been answered or you wish to remove yourself from the queue, please press star then two. To prevent any background noise, we ask that you please place yourself on mute once your question has been stated. Our first question will come from Brandon King with Truist Securities. Please go ahead.
Thank you. Good afternoon.
Hi, Brandon.
Hey. So first question, I appreciate the NIM guidance for a full year, but wanted to get a sense of what your NIM outlook is beyond this year and into next. Do you potentially see NIM topping out next year? Kinda like, what is the trajectory you see the NIM going to beyond this year?
Well, we think our NIM will still gradually increase in the fourth quarter, and then it's hard to tell as to 2023 yet. If our NIM's at 4% for the full year of 2023, we feel pretty good about it.
Okay. For the fourth quarter this year, are you expecting a similar increase in the interest margin as it was in Q3? Or do you see that kinda slowing down a bit based off of where rates stand today?
It should be a little bit less, primarily from the mix of deposits. We're seeing a lot of customers going into CDs now that rates are more attractive compared to the past.
Okay. Then my last question, before I step back in the queue. I just wanna understand the deposit guidance, the growth guidance. Backing into it seems like the fourth quarter you're expecting a pretty much decent sized growth, outsized growth in deposit balances. I wanna just make sure I'm interpreting that correctly. If so, what gives you the confidence that you can achieve that sort of deposit growth, in this current environment?
Well, Brandon, I think it could be in the rounding as we get to the end of the year, but we are targeting deposit growth to match loan growth. To the extent we expect loan growth to be slower in Q4 than in Q3, mainly because the higher interest rates will dampen loan growth.
Okay.
They will just match loan growth.
Okay. Got it. All right. Well, thanks for taking my question, and I'll step back in the queue.
Great.
Our next question will come from Gary Tenner with D.A. Davidson. Please go ahead.
Thanks. Good afternoon. Wanted to follow up on actually that deposit question, Heng. You know, you're talking about 8%-9.5% full year deposit growth of a $18.1 billion base. That would, even at the low end of that growth range, which is just about $19.5 billion at year-end, which is almost a billion dollar over the September 30 number. You know, obviously well above, I think, where most would project your loan growth in the fourth quarter. Just again, you know, I know the question's been asked, but I'm still a bit confused by the guidance in the slide deck versus, I guess, your previous answer.
I think, you know, I looked at it seemed fine, but we expect about $300 million of deposit growth in the fourth quarter.
Okay. Okay, great. Thank you. On the deposits at quarter end, can you give us the spot rate at September thirty for interest-bearing deposit costs or total deposit costs?
Yes. This is total interest-bearing deposits, so it doesn't count DDA. It's 1.06%.
Okay, thank you. Then final question for me. In terms of loan growth, I know you're not giving guidance for 2023 at this point. Well, we have an idea what the fourth quarter might look like of course. As you're thinking about the segments of growth or headwinds in 2023, reasonable to expect you know continued sort of runoff in the construction and equity lines of business and slower growth in commercial mortgage. Is that generally how you would think about 2023?
Yes. Yes.
Yeah. Thank you.
Thank you.
Our next question will come from Andrew Terrell with Stephens. Please go ahead.
Hey, good afternoon.
Hi.
Maybe just to circle back on the funding. Looks like you brought on some FHLB advances during the quarter. Just curious whether those were term advances or just overnight funding. I guess, just given kind of what you're expecting for loan deposit growth in the fourth quarter, should we expect those borrowings to remain relatively kind of stable from here? Do you have any flexibility to pay the FHLB down?
Yeah, we expect that to go down. It was just a timing of how deposits came in at quarter end. Right now, those FHLB borrowings, they're down to about $150 million.
Okay. On the CD side, can you just remind us how much in CD deposits you have maturing in the fourth quarter? Do you have what the costs are rolling off at and what kind of the going-in rate for a new CD is at Cathay right now? Of that kind of $300 million of deposit growth that you referenced, what kind of portion of that do you expect to be represented by CD deposits?
Well, okay. I'll get back to you on the CD roll-off, Andrew. I left that schedule in my office. Your second part of the question was?
You referenced kinda $300 million or so of anticipated deposit growth in the fourth quarter. Just how much of that you expected to be represented by CD deposits as opposed to money market or IB checking or non-interest bearing?
We would expect most of it to be CDs.
Okay.
I mean, it's hard to predict, you know. Some new depositors, they prefer money market because they're not locked into a rate for the next year. If they still think that the Fed is gonna continue to increase into 2023, they'll wanna stay in money market. My expectation is that most of that fourth quarter deposit growth will be in CDs.
Okay. Great. I appreciate it. I'll hop back in the queue. Thanks for the time.
Our next question will come from Matthew Clark with Piper Sandler. Please go ahead.
Hey, good afternoon. Maybe just on the outlook around your deposit beta, you know, through the cycle, what are you assuming for, you know, your cumulative deposit beta, assuming we get to, you know, 4.50%-4.75% Fed funds?
Well, Matthew, it was according to our slides that deposit beta in Q3 was 23%. That's on page 15. You know, I'm basing that on average Fed funds. We think the over a cycle deposit beta should be about 30%. It might be a little bit higher. Thirty would-
Okay.
Would be good enough for us.
Okay, great. The lower comp expense this quarter, can you give us a sense for what drove that, you know, relative to last quarter, and how sustainable is that run rate?
In the second quarter. Well, there's value route by the million of the quarter-to-quarter swing is vacation. People going on vacation in the summer, and we had some commission expense in the second quarter. I think a good rate for Q4, you should just add a million to our Q2 or Q3 rate for those reasons.
Okay, great. Your guidance on low-income housing tax credit amortization for the fourth quarter, I know you gave us solar.
Yeah. It's probably gonna be $8 million. We've been adding investments, so as they season, the amortization increases.
Okay. Thank you.
Thank you.
Again, if you have a question, please press star then one. Our next question will come from Chris McGratty with KBW. Please go ahead.
Great. Thanks for the question. A lot of the attention this quarter has been on TCE ratios for the industry, given OCI moves. You obviously don't have a big bond portfolio, so you've been largely immune to that. I'm interested in kind of the outlook for capital return, given where your capital levels stand and the growth outlook.
Yeah. We still have, you know, a portion left in our current buyback authorization. We would expect to, you know, given the pace of our capital generation, and the fact that loan growth is gonna be slower, we are thinking of buying back a million shares in the fourth quarter. We're likely to have a new buyback authorization in the first quarter.
Okay.
Of 2023.
Okay, great. Then maybe to follow up on Matt's question more broadly on expenses. The inflationary pressures that are out there, you know, your core expenses are up 5% year-over-year. How should we think about kind of the incremental headwinds to run the business as we go into 2023?
Well, let me start. Chang can add some more, but one, you know, we closed several branches in 2022, some because of the HSBC branch acquisition where we have branches that are close to theirs and their location is better located. We should save a small amount from that. We're just starting our 2023 budget process, so we don't wanna give guidance until the January earnings call. Chang, do you want to add any?
I mean, the only other thing I'll add to that is, you know, Chris, we're very mindful of, you know, kind of the talent that we need and the people we need to retain to build the relationships. You know, we gotta, you know, compete with the marketplace in terms of what they can get out there. We're selectively looking at people and their performance and kind of year to date and doing what we need to retain them while at the same time managing our costs as carefully as we can.
Okay. That's great. Thank you.
At this time, there are no questions in the queue. Again, to ask a question, please press star then one. 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.