Cathay General Bancorp (CATY) Q4 2021 Earnings Call Transcript

Cathay General Bancorp (CATY 3.87%)
Q4 2021 Earnings Call
Jan 27, 2022, 6:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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.

[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. 

Georgia Lo -- Investor Relations

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 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 up for questions. I will now turn the call over to our president and chief executive officer, Mr.

Chang Liu.

Chang Liu -- President and Chief Executive Officer

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 and 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, given a 7.7 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 minus 45.4% annualized in real estate construction loans. The overall loan growth for 2022 is expected to range between 9% to 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% 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 8 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% secured by shopping centers.

For the fourth quarter of 2021, we reported net charge-offs of 200,000, compared to net charge-off of 2.3 million in the third quarter of 2021. Our nonaccrual 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 loss of 2.5 million in the fourth quarter of 2021, as compared to a 2.1 million provision for credit losses in the third quarter of 2021. The provision for credit losses of 2.5 million reflected net charge-offs of 200,000 in provisions for the loan growth during the fourth quarter.

We expect the provision for credit losses in the fourth quarter as a result of the expected loan growth in the fourth quarter. Turning to Slide 13. Total average deposits increased by 245.6 million or 8.1% annualized during the fourth quarter of 2021. We were especially pleased by the 232.4 million increase, or 34.4% annualized in average demand deposits during the fourth quarter compared to the third quarter.

Average time deposit decreased by 278.5 million, or 18.8% annualized due primarily to the runoff of broker 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. 

Heng Chen -- Executive Vice President and Chief Financial Officer

Seven hundred million.

Chang Liu -- President and Chief Executive Officer

Seven hundred million. Excluding the acquired deposits from HSBC, we project deposit growth to be between 5% to 7% in 2022. We repurchased 1,511,038 shares of our stock in an average cost of 43.97, totaling 66.4 million in the fourth quarter of 2021. There's 32.9 million remaining under our September 2021 125 million stock buyback program.

Our previous 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 10 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 in approximately 700 million in residential mortgages.

We look forward to the contribution of the new branches for 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 2021 financial results in more detail.

Heng Chen -- Executive Vice President and Chief Financial Officer

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 with the third quarter of 2021. This increase was primarily attributable to increase in net interest income to the 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 six 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 maturity in the first quarter of 2022 with average rates of 0.40%. We are targeting renewing retail CDs in the 40- to 50-basis-point range.

Based on three rate hikes during 2022, this is June, September, and December, we expect our net charge-off -- net interest margin for 2022 to be between 3.2% to 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. Noninterest 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 1.6 million catch-up adjustment in the third quarter of 2021 for 2020 solar tax credits resulting from the receipt of 2020 tail wins. For 2022, we expect a full year effective tax rate of between 19% and 20%, and solar tax credit analyzation of 5 million a quarter starting in the second quarter of 2022. As of December 31, 2021, our Tier 1 leverage capital ratio decreased to 10.4%, as compared to 10.67% as of September 30, 2021.

Our Tier 1 risk-based capital ratio decreased to 12.8% from 13.29% as of September 30, 2021. And our total risk-based capital ratio decreased to 14.41% from 14.93% as of September 30, 2021.

Chang Liu -- President and Chief Executive Officer

Thank you, Heng. We will now proceed to the question-and-answer portion of the call.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Brandon King from Truist Securities. Your line is now open.

Brandon King -- Truist Securities

Hey, good afternoon. 

Heng Chen -- Executive Vice President and Chief Financial Officer

Hi. 

Chang Liu -- President and Chief Executive Officer

Hi, Brandon.

Brandon King -- Truist Securities

So 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 -- what and could look like on a core basis.

Chang Liu -- President and Chief Executive Officer

For 2022, we're projecting a total loan growth at 9%  to 11%, but that includes the HSBC acquisition. So excluding that number is in the 5% to 10% range. 

Heng Chen -- Executive Vice President and Chief Financial Officer

Five to seven.

Chang Liu -- President and Chief Executive Officer

Five to seven percent range.

Brandon King -- Truist Securities

OK. And 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% to 7% quarter guidance in '22?

Chang Liu -- President and Chief Executive Officer

Sure. At 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 have some a few teams that did significantly well in their relationships and expanding those relationships, so we continue to see positive growth out of that.

For 2022, CRE use number is around 5% to 6%.

Brandon King -- Truist Securities

OK. And lastly, just for CNI, I know there's been a lot of focus on that. What are you expecting as far as utilization rates there, and also in 4Q that should come from new customers or existing customers expanding their utilization?

Chang Liu -- President and Chief Executive Officer

So the CNI 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 numbers that we have is around 55%. We expect that number to stay relatively stable at that number. And we're seeing a continued increase in commitment as well, you know, so we're positive, we're optimistic that the 2022 numbers on CNI will increase as well.

Heng Chen -- Executive Vice President and Chief Financial Officer

Yeah. Our budget has that growing in around 11% to 12% for CNI.

Brandon King -- Truist Securities

OK. Very helpful. Thank you for the answers.

Heng Chen -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. Your next question comes from the line of Chris McGratty from KBW. Your line is now open.

Chris Mcgratty -- Keefe, Bruyette and Woods -- Analyst

Hey, great. I just want to revisit the loan growth comments from -- just making sure I understand. So this quarter, you had about 11% annualized in the organic guide. Excluding the deal is, call it, five to seven.

Is this -- it seems conservative to me. Is this just an intentional remixing, or are you seeing, you know, certain asset costs that might not -- you may not want to grow as fast?

Chang Liu -- President and Chief Executive Officer

Well, the 11% is the quarter-over-quarter comparison, right, but if you look at the year over year, that number is actually about 4.5%. So I think your organic guidance of 5% to 7% is still a increase over the actual 2021 year-over-year comparison. 

Chris Mcgratty -- Keefe, Bruyette and Woods -- Analyst

OK. That's helpful.

Heng Chen -- Executive Vice President and Chief Financial Officer

Yeah. We're also being conservative, Chris. You know, we'll update that guidance each quarter as we go into 2022.

Chris Mcgratty -- Keefe, Bruyette and Woods -- Analyst

Understood. OK. Great. And then the expenses, could you help us with the trajectory in expenses.

We're hearing a lot from banks about inflation, and I just want to make sure I got the expenses. And also if you had the low-income amortization expectations, too.

Heng Chen -- Executive Vice President and Chief Financial Officer

Yeah, we're -- first, we're going to break it out in two parts. One for core Cathay, excluding HSBC acquisition, we expect -- and one-time conversion expenses, we expect expenses to be about 3.5% next year. The HSBC, it's about -- it's around 10 million core. That's about 4.2% increase from our 2021.

And then we see low-income housing about flat to 2021. We had some catch-up adjustment in 2021, so that's flat, and then solo will be up about 3 million. And then I think Chang --

Chris Mcgratty -- Keefe, Bruyette and Woods -- Analyst

OK, thank --

Heng Chen -- Executive Vice President and Chief Financial Officer

He can talk about why we think we can hold it 3.5%.

Chang Liu -- President and Chief Executive Officer

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, we need to make sure that we're retaining and attracting the right talents. So 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 cost expense wise, we're looking to offset that any potential increases on that side of the income statement.

Chris Mcgratty -- Keefe, Bruyette and Woods -- Analyst

OK. And just a clarification, that 10 million on HSBC, that's an annual number assuming an early Feb close?

Heng Chen -- Executive Vice President and Chief Financial Officer

That's right.

Chris Mcgratty -- Keefe, Bruyette and Woods -- Analyst

Yup. And then the gain -- the venture gain, that's an -- is that an addition or is that included within the security game line? It looks like it's another income.

Heng Chen -- Executive Vice President and Chief Financial Officer

That's in other income, right.

Chris Mcgratty -- Keefe, Bruyette and Woods -- Analyst

OK. All right. Thanks, Heng.

Heng Chen -- Executive Vice President and Chief Financial Officer

OK. Thank you.

Operator

[Operator instructions] Our next question comes from the line of Matthew Clark from Piper Sandler. Your line is now open.

Matthew Clark -- Piper Sandler -- Analyst

Hi, good afternoon

Heng Chen -- Executive Vice President and Chief Financial Officer

Hi, Matthew.

Chang Liu -- President and Chief Executive Officer

Good afternoon.

Matthew Clark -- Piper Sandler -- Analyst

Just want to 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.

Heng Chen -- Executive Vice President and Chief Financial Officer

Yeah. First, you know, we like to measure it based on average quarterly balance growth. And that was still pretty good, especially in money market and DDA. We had a couple of deposit customers that may deposit late in the year.

It's 200 million in DDA and 400 million now, and those deposits have left the bank as of today. So --

Chang Liu -- President and Chief Executive Officer

And Matthew, going forward, we're really focusing on growing our low-cost deposits. We want to shift our liability mix so that we have -- we continue to push to drive down the cost of funds.

Matthew Clark -- Piper Sandler -- Analyst

Got it. OK. And then the uptick in special mention this quarter, it looked like you added some reserves to CNI as well. I know part of that is loan growth, but can you just give us a sense for what drove the increase in special mention in your expectations there?

Heng Chen -- Executive Vice President and Chief Financial Officer

Yeah, that's I got a list from our chief credit officer. There -- you know, we're -- that's more of a monitoring category for us, so there's a couple of construction. There's -- yeah, there's some COVID-type impact where properties are -- their lease rates are a little bit weaker. There is a couple of CNI loans were due to supply chain disruption.

Maybe the profits went down, so we put them into special mention. It's nothing that would be concerning to us. 

Matthew Clark -- Piper Sandler -- Analyst

OK. Yeah [Inaudible] issue.

Heng Chen -- Executive Vice President and Chief Financial Officer

Yeah, and then sub -- you know, we have two credits, we feel pretty good about those, and those are kind of one-off issues we don't see them going through.

Matthew Clark -- Piper Sandler -- Analyst

OK. And then just given the delay in, I think, the solar amortization, you know, starting in the second quarter in the tax rate of '19 or '19 to '20. How should we think about kind of the tax rate, at least, in the first quarter relative to the second before everything is smoothed out?

Heng Chen -- Executive Vice President and Chief Financial Officer

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, so it'll be in our full year effective tax rate.

Matthew Clark -- Piper Sandler -- Analyst

OK. Got it. Thank you.

Operator

Thank you for your participation. I will now turn the call back over to Cathay General Bancorp's management for closing remarks.

Chang Liu -- President and Chief Executive Officer

I want to thank everyone for joining us on the call, and we look forward to speaking with you in our next quarterly earnings release call.

Operator

[Operator signoff]

Duration: 24 minutes

Call participants:

Georgia Lo -- Investor Relations

Chang Liu -- President and Chief Executive Officer

Heng Chen -- Executive Vice President and Chief Financial Officer

Brandon King -- Truist Securities

Chris Mcgratty -- Keefe, Bruyette and Woods -- Analyst

Matthew Clark -- Piper Sandler -- Analyst

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