Good afternoon, ladies and gentlemen. And welcome to Cathay General Bancorp's Third Quarter 2021 Earnings Conference Call. My name is Sandy and I'll be your coordinator for today. [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 Bancorp.

Georgia Lo - Assistant Secretary and Investor Relations

Thank you, Sandy, 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 statements 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 third quarter 2021 results. To obtain a copy of our earnings release as well as our third quarter 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 M. Liu - President and Chief Executive Officer

Thank you, Georgia. And good afternoon, everyone. Welcome to our 2021 third quarter earnings conference call. This afternoon, we reported net income of $72.4 million for the third quarter of 2021, a 6.2% decrease as compared to a net income of $77.2 million for the second quarter of 2021. Diluted earnings per share increased 31% to $0.93 per share for the third quarter of 2021 compared to $0.71 per share for the same quarter a year ago.

In the third quarter of 2021, our gross loans, excluding PPP loans, increased by $255.6 million to $15.8 billion, which represents an annualized growth rate of 9.1%. The increase in loans for the third quarter of 2021 was primarily driven by increases of $73.8 million or 11.2% annualized in commercial loans, excluding PPP loans, $220.4 million or 11.6% annualized in commercial real estate loans, $23.7 million or 14.3% annualized in real estate construction loans and $41.1 million or 4% annualized in residential mortgage loans.

Our fourth quarter loan growth continues to be strong and will likely exceed that of the third quarter. The overall loan growth for 2021 is expected to be close to 5%. During the third quarter of 2021, $73.9 million of PPP loans were forgiven. As of September 30, 2021, our deferred PPP loan fees were $3.8 million.

We continue to monitor our commercial real estate loans. Turning to Slide 7 of our earnings presentation, as of September 30, 2021, the average loan to value of our CRE loans was 51%. As of September 30, 2021, our retail property loan portfolio comprises 22% of our total commercial real estate loan portfolio and 11% of our total loan portfolio. The majority, 62% of the $1.74 billion in retail loans is secured by neighborhood mixed use or strip centers and only 9% secured by shopping centers. For the third quarter of 2021, we reported net charge-offs of $2.3 million compared to net charge-off of $7.3 million in the second quarter of 2021. Our third quarter charge-offs included a commercial loan charge-off of $1.3 million from our Hong Kong office.

Our non-accrual loans were 0.43% of total loans as of September 30, 2021, increased slightly by $0.9 million to $68.7 million as compared to the end of the second quarter of 2021. We recorded a provision for credit loss of $3.1 million in the third quarter of 2021 as compared to a $9 million reversal of provision for credit losses in the second quarter of 2021. The provision for credit losses of $3.1 million reflected net charge-offs of $2.3 million in provisions for the loan growth during the third 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 12. Total average deposits increased by $517.2 million or 12.6% annualized during the third quarter of 2021. We were especially pleased by the $233 million increase or 25.6% annualized in average demand deposits during the third quarter compared to the second quarter. Average time deposit decreased by $152.6 million or 10.1% annualized due mainly to the run-off of broker CDs. We repurchased 942,613 shares of our stock at an average cost of $39.40, totaling $37.1 million in the third quarter of 2021. There is $98.6 million remaining under our September 2021 $125 million stock buyback program.

We continue to work on the integration and conversion plan for our purchase of the 10 branches in select West Coast loans and deposits from HSBC. This transaction will broaden the reach of our Northern and Southern California branch network, in addition to acquiring $1 billion in low-cost deposits and $800 million in residential mortgages. The transaction is expected to be completed during the first quarter of 2022.

I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Heng Chen, to discuss the third quarter 2021 financial results in more detail.

Heng W. Chen - Executive Vice President, Chief Financial Officer and Treasurer

Thank you, Chang. And good afternoon, everyone. For the third quarter of 2021, net income decreased by $4.8 million or 6.2% to $72.4 million compared to second quarter of 2021. The decrease was primarily attributable to a provision for credit losses of $3 million in the third quarter as compared to $9 million reversal of provision for credit losses in the second quarter.

Our net interest margin was 3.22% in the third quarter of 2021 as compared to 3.24% in the second quarter of 2021. In the third quarter of 2021, interest recoveries and prepayment penalties added 4 basis points to the net interest margin as compared to 3 basis points for the second quarter of 2021. There were $3.1 billion of loans at the floor rate as of September 30, 2021, approximately $1.4 billion of our CDs mature during the fourth quarter 2021, with a average rate of 0.68%. We are targeting renewing retail CDs in the 40 to 50 basis point range.

Given the results of the third quarter of 2021, we continue to expect our net interest margin for 2021 to be between 3.2% to 3.3%. Non-interest income during the third quarter of 2021 decreased by $360,000 to $12.2 million when compared to the second quarter of 2021, primarily due to a one-time BOLI income of $1.2 million in the second quarter.

Non-interest expense increased by $2.5 million or 3.6% to $72.2 million in the third quarter of 2021 when compared to $69.7 million in the second quarter of 2021. The increase was primarily due to an increase of $1.7 million in amortization in low-income housing and solar tax credit funds. Including a $3.2 million catch-up adjustment, for 2020, low-income housing losses [Phonetic] resulting from the receipt of 2020 Tier 1s and an increase of $0.7 million in salary and employee benefits, mainly from higher bonus accruals.

The effective tax rate for the third quarter of 2021 was 19.1% as compared to 22.7% for the second quarter of 2021. The decrease in the effective tax rate resulted from a $1.7 million catch-up adjustment recorded in the third quarter of 2021 for 2020 solar tax credits. For higher 2020 solar tax credits resulting from the receipt of 2020 tail wins, we expect the full year 2021 effective tax rate to be between 21.5% and 22%.

Solar tax credit amortization was $1.4 million in third quarter of 2021 and is expected to be $1.5 million in the fourth quarter of 2021. As of September 30, 2021, our Tier 1 leverage capital ratio decreased to 10.67% as compared to 10.35% as of June 30, 2021, our Tier 1 risk-based capital ratio decreased to 13.29% from 13.77% as of September 30, 2021 and our total risk-based capital ratio decreased to 14.93% from 15.47% as of June 30, 2021.

Georgia Lo - Assistant Secretary and Investor Relations

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

Question & Answers

Operator

[Operator Instructions] For our first question, we have Brandon King from Truist Securities. Brandon, your line is open.

Brandon King - Truist Securities - Analyst

Hey. Good afternoon.

Chang M. Liu - President and Chief Executive Officer

Hi, Brandon.

Brandon King - Truist Securities - Analyst

Hey. So, loan growth was pretty strong in the quarter, kind of ahead of guidance of 3% to 5%. How do you think that will shake out going into 2022? When do you think you're kind of on a sustainable trajectory when it comes on loan growth, especially on the commercial side?

Chang M. Liu - President and Chief Executive Officer

So far, we're looking at fourth quarter pipelines and fourth quarter pipelines are pretty strong. So, I think, we're kind of staying on our sort of the target growth range in the 5% range for 2021. As far as 2022, I think it really comes down to - a lot has to do with sort of the economic recovery, some of the shipping and freight delay costs and what's going on at the ports.

I think our commercial growth - C&I growth on the third quarter was pretty strong at $73 million range. We're - in talking to some of our clients, we believe that 2022 will hopefully show a strong growth as well. But not completely certain where some of that growth will come from and in which segment, whether that's C&I side or the commercial real estate side.

Heng W. Chen - Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Well, Brandon, we'll give formal guidance in January when we report the fourth quarter earnings. But I want to also add that, we think in 2022, the residential mortgage loan portfolio will start to increase faster because with higher interest rates we think the prepayments on that portfolio will be much lower, so it will have a higher growth rate in 2022. But once again, we'll update in January.

Brandon King - Truist Securities - Analyst

Okay. Thanks for that. And then, on the liabilities side, with deposit repricing, could you tell us or give us an update on running off those broker deposits and what do you expect from the ceding pricing picture in 4Q and potentially early 1Q '22?

Heng W. Chen - Executive Vice President, Chief Financial Officer and Treasurer

Yeah. We have probably $200 million of wholesale deposits that we will be running off in the fourth quarter. Of that, $100 million will be fairly [Phonetic] late - it will be in late December, so we won't see the full quarter effect. And in Q1 2022, we'll probably have another $150 million of brokerage CD run-off. But as we get into 2022, if our loan growth resumes to be stronger than it has been in 2021, we may even start to have to renew some brokered CDs. And then, lastly, as interest rates are increasing, we are buying more securities, given that the yields are more attractive. So, I know those are some of the background on how we're thinking there.

Brandon King - Truist Securities - Analyst

Okay. And for those broker deposits, if you do renew those, what would be the delta in the cost based off of what they are today and what you will renew?

Heng W. Chen - Executive Vice President, Chief Financial Officer and Treasurer

I'm telling you this from memory. I think that probably about 50 basis points and then we have a brokered money market deposit that's only 1 basis point. I talked about that in the past. So that's going to mature in December.

Brandon King - Truist Securities - Analyst

Okay. Thanks for answering all my questions.

Heng W. Chen - Executive Vice President, Chief Financial Officer and Treasurer

Yeah, thank you.

Operator

For our next question, we have David Chiaverini from Wedbush Securities. David, your line is open.

David Chiaverini - Wedbush Securities - Analyst

Thanks for taking the questions. The first one is on deposit growth. How are you guys thinking about deposit flows here? It's been pretty decent.

Chang M. Liu - President and Chief Executive Officer

For us, we're seeing accumulation of deposit balances from our customers. We're also kind of making a shift away from CDs and focusing more on business operating accounts as much as we can. Some of that CD balances may have transitioned over to money market balances as we've seen that in our quarter-over-quarter results. But for the most part, we're driving towards lower cost of deposits and lower cost of funds.

David Chiaverini - Wedbush Securities - Analyst

Great. Thanks for that. And you mentioned about roughly $100 million remaining on your buyback authorization. I was curious about your appetite for additional purchases from here?

Heng W. Chen - Executive Vice President, Chief Financial Officer and Treasurer

I think we'll still be in the market. Compared to our peers, our price to tangible book is somewhat lower and our capital levels are pretty strong. So, we'll - we won't be in the market. But at some point, we may taper back on that depending on the stock price.

David Chiaverini - Wedbush Securities - Analyst

Yes, that makes sense. Thanks very much.

Chang M. Liu - President and Chief Executive Officer

Yeah. Thank you.

Operator

For our next question, we have Chris McGratty from KBW. Chris, your line is open.

Chris McGratty - KBW - Analyst

Hey, good afternoon. Heng, I was wondering if you could repeat the numbers for the branches. I think you said $1 billion of deposits, $850 million of loans, I'm wondering associated expenses from that transaction and also just kind of help with the expense guide on your transaction?

Heng W. Chen - Executive Vice President, Chief Financial Officer and Treasurer

Chris, I think, this - we said it, the HSBC deals got 2% accretive. In terms of expenses, it's roughly slightly over $10 million and the revenues are the low $20 million, but we're waiting to get, all of this information is as of March 2021, and we're waiting for HSBC to give us updated balances. And then when we announced in January, we'll probably - we'll update that.

Chris McGratty - KBW - Analyst

Okay. So those are annual numbers, the $10 million and $20 million, okay.

Heng W. Chen - Executive Vice President, Chief Financial Officer and Treasurer

Yeah. And then, for your modelling, there is going to be one-time expenses, maybe in $3.8 million [Phonetic]. I don't know how finally you do there, as probably $2 million to $3 million. And then we have the day one CECL charge for those acquired loans, you might want to use 50 basis points on quite loan balance it is. Ultimately, we still think it's going to be 2% accretive.

Chris McGratty - KBW - Analyst

Okay. That's great. And then, maybe if I could, my follow-up. The little bit of tax on the solar and low-income, I think, you said $1.5 million for the solar. What was the low-income that we should be modeling for next quarter?

Heng W. Chen - Executive Vice President, Chief Financial Officer and Treasurer

Probably $7 million. Yeah, in Q3 we had this catch-up adjustment, as I mentioned, of $3.2 million, but in Q4, it's going to be $7 million.

Chris McGratty - KBW - Analyst

Great. Thank you.

Heng W. Chen - Executive Vice President, Chief Financial Officer and Treasurer

Yeah. Thank you.

Operator

[Operator Instructions] For our next question, we have Gerry Tenner from D.A. Davidson. Jerry, your line is open.

Gerry Tenner - D.A. Davidson - Analyst

Hi, good afternoon. Just wanted to actually clarify on the catch-up adjustment. You said it was $3.2 million or, I thought I heard $2.2 million? And then what was the associated tax impact on that catch-up adjustment?

Heng W. Chen - Executive Vice President, Chief Financial Officer and Treasurer

Can you repeat the question, Jerry? Are you talking about the low-income housing?

Gerry Tenner - D.A. Davidson - Analyst

Yeah. The catch-up adjustment on the amortization. I had written down $2.2 million, was it $3.2 million or $2.2 million?

Heng W. Chen - Executive Vice President, Chief Financial Officer and Treasurer

It was $3.2 million on the low-income housing.

Gerry Tenner - D.A. Davidson - Analyst

Okay. And then, the associated tax impact because of the catch-up?

Heng W. Chen - Executive Vice President, Chief Financial Officer and Treasurer

There was none.

Gerry Tenner - D.A. Davidson - Analyst

There was none? Okay.

Heng W. Chen - Executive Vice President, Chief Financial Officer and Treasurer

And we have a $1.6 million tax benefit from the solar catch-up.

Gerry Tenner - D.A. Davidson - Analyst

Okay. Okay, great. And then, just follow-up, in terms of the core loan yields, by my math, down about 12 basis points to 4% or 4.01%, simply just the kind of pull-down effect of new production yields being below portfolio yields. I think you'd highlighted the prepayment benefit, which is really unchanged versus last quarter?

Heng W. Chen - Executive Vice President, Chief Financial Officer and Treasurer

Yeah. We –you want to cover that?

Chang M. Liu - President and Chief Executive Officer

You're asking about the origination yields versus the portfolio yields?

Heng W. Chen - Executive Vice President, Chief Financial Officer and Treasurer

Yeah.

Chang M. Liu - President and Chief Executive Officer

Gerry?

Gerry Tenner - D.A. Davidson - Analyst

Yeah, effectively. Yes.

Chang M. Liu - President and Chief Executive Officer

Yeah. So, for the residential mortgage originations, third quarter, we're probably around 3.82% compared to the weighted average portfolio of about 4.03%. On the commercial real estate Q3 origination, we're at about 3.57% compared to the weighted average portfolio at about 4.23%. And on the new C&I loans, our current originations are close to 5% versus the weighted Q3 portfolio you had about 3.61%.

Gerry Tenner - D.A. Davidson - Analyst

Great. Thank you.

Chang M. Liu - President and Chief Executive Officer

Of course.

Operator

At this time, there are no questions in the queue. Thank you for your participation. I will now turn back the call over to Cathay General Bancorp's management for closing remarks.

Chang M. Liu - President and Chief Executive Officer

I want to thank everyone for joining us on our call today. We look forward to speaking with you at our next quarterly earnings release call.

Operator

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Q3 2021

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