Cathay General Bancorp

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.CafeGeneralBankCorp.com. Now I would like to turn the call over to Georgia Lowe, Investor Relations of Cafe General Bank Corp. 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. Hang 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 a 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. Deluded 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 31st, 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 percent. The increasing loans for the fourth quarter of 2021 was primarily driven by increases of $189.6 million or 29.2 percent annualized in commercial loans excluding PPP loans, $307.7 million or 16.3 percent annualized in commercial real estate loans, and $37.2 million or 0.9 percent annualized in residential mortgage loans, offset by a decrease of $77.2 million or minus 45.4 percent annualized in real estate construction loans. The overall loan growth for 2022 is expected to range between 9 to 11 percent, 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 percent in 2022. During the fourth quarter of 2021, 72.5 million of PPP loans were forgiven. As of December 31st, 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 31st, 2021, the average loan-to-value of our CRE loans was 51 percent. As of December 31st, 2021, Our retail property loan portfolio comprises 23 percent of our total commercial real estate loan portfolio and 11 percent of our total loan portfolio. The majority, 60 percent of the $1.87 billion in retail loans, is secured by neighborhood, mixed-use, or strip centers, and only 10 percent 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 the third quarter of 2021. Our non-accrual loans were 0.4% of total loans as of December 31st, 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 $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 percent annualized during the fourth quarter of 2021. We were especially pleased by the $332.4 million increase or 34.4 percent 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. $700 million. $700 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 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 previous announced acquisition of certain West Coast branches from HSBC is scheduled to close on or around February 4th, 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 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, Peng Cheng, to discuss the fourth quarter of 2021 financial results in more detail.

Thank you, Cheng, 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 pre-payment penalties added six basis points to the net interest margin as compared to foil basis points for the third quarter of 2021. There were 3.1 billion of loans at the floor rate as of December 31 to 2021. Approximately 2 billion of our CDs matured in the first quarter of 2022 with average rates of 0.48%. 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. 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 percent and solar tax credit amortization 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 14.41% from 14.93% as of September 30th, 2021.