Good afternoon, ladies and gentlemen, and welcome to the fourth quarter and full year 2023 Cathay General Bancorp earnings conference call. My name is MJ, 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 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.cathaygeneralbancorp.com. Now, I would like to turn the call over to Georgia Lo, Investor Relations of Cathay General Bancorp. Please go ahead.
Thank you, MJ, and good afternoon. Here to discuss the financial results today are Mr. Chang Liu, our President and Chief Executive Officer, and 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, 2022, at Item 1 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 an anticipated event. This afternoon, Cathay General Bancorp issued an earnings release outlining its fourth quarter and full year 2023 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 2023 fourth quarter earnings conference call. This afternoon, we reported net income of $82.5 million for the fourth quarter of 2023, a 0.1% increase as compared to a net income of $82.4 million for the third quarter of 2023. The fourth quarter net income included in $11.3 million or $0.12 per diluted share charged for the one-time FDIC special assessment. Diluted earnings per share was $1.13 per share for the fourth quarter of 2023, same as the third quarter of 2023.
In the fourth quarter of 2023, our gross loans increased $524 million, or 11.5% annualized, primarily driven by increases of $218 million, or 9.9% annualized in commercial real estate loans, $153 million, or 11.6% annualized in residential mortgage loans, and $214 million, or 25.9% annualized in commercial loans, offset by a decrease of $52 million, or 36.9% annualized in construction loans. The overall loan growth for 2024 is expected to range between 4% and 5%. We continue to monitor our commercial real estate loans. Turning to Slide 8 of our earnings presentation. As of December 31, 2023, the average loan-to-value of our CRE loans was 50%.
As of December 31, 2023, our retail property loan portfolio at Slide 9 comprises 23% of our total commercial real estate loan portfolio, or 12% of our total loan portfolio. 89% of the $2.3 billion in retail loans is secured by retail store building, neighborhood, mixed use, or strip centers. Only 10% is secured by shopping centers. At Slide 10, office property loans represent 16% of our total commercial real estate loan portfolio, or 8% of the total loan portfolio. Only 34% of the $1.5 billion in office property loans are collateralized by pure office buildings, and only 3% of office property loans are in central business districts. Another 24% of office property loans are collateralized by office retail stores, office mixed use, and medical offices.
The remaining 28% of office property loans are collateralized by office condos. For the fourth quarter of 2023, we reported net charge-offs of $4.1 million, which included a $4.2 million reserve established during Q3 2023 on an office construction loan, as compared to a net charge-off of $6.6 million in the third quarter of 2023. Our non-accrual loans were 0.34% of total loans as of December 31, 2023, which decreased by $10.6 million to $66.7 million as compared to the end of the third quarter of 2023. Turning to Slide 13.
As of December 31, 2023, classified loans decreased slightly to $200 million from $202 million as of September 30, 2023, and our special mention loans increased to $308 million from $278 million as of September 30, 2023. We recorded a provision for credit loss of $1.7 million in the fourth quarter of 2023, as compared to $7 million in provision for credit losses for the third quarter of 2023. Total average deposits increased by $244.3 million, or 5.2% annualized during the fourth quarter of 2023.
Average total core deposits increased $180.7 million, or 5.9% annualized, and average total time deposits increased $63.6 million, or 4% during the fourth quarter of 2023 due to organic growth and seasonal increases. For 2024, the overall deposit growth is expected to range between 4% and 5%. Total uninsured deposits were $8.7 billion, but excluding $0.8 billion in collateralized deposits, the uninsured and uncollateralized deposits were reduced to $7.9 billion, or 40.9% of total deposits as of December 31, 2023. Our unused borrowing capacity from the Federal Home Loan Bank was $6.6 billion, and unpledged securities was $1.5 billion as of December 31, 2023.
These sources of available liquidity were more than 100% of uninsured and uncollateralized deposits as of December 31, 2023. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Chen, to discuss the fourth quarter of 2023 financial results in more detail.
Thank you, Chang, and good afternoon, everyone. For the fourth quarter of 2023, net income increased by $0.1 million, or 0.1% to $82.5 million, compared to $82.4 million for the third quarter of 2023. Primarily due to a $9 million unrealized gain on equity securities in the fourth quarter of 2023, from $6.2 million unrealized loss on equity securities in the third quarter of 2023. Offset by $11.1 million for the special FDIC assessment and a $3.5 million decrease in net interest income before provision for credit losses in the fourth quarter of 2023. Our net interest margin was 3.27% in the fourth quarter of 2023, as compared to 3.38% for the third quarter of 2023.
In the fourth quarter of 2023, interest recoveries and prepayment penalties added 1 basis point to the net interest margin as compared to 6 basis points for the third quarter of 2023. We estimate our net interest margin for 2024 to be between 3.15%-3.25% based on expectations for 3 rate cuts in 2024. Non-interest income during the fourth quarter of 2023 increased by $15.3 million to $23.1 million, when compared to $7.8 million in the third quarter of 2023. That increase was primarily due to a $13.2 million increase in unrealized gains on equity securities when compared to the third quarter of 2023.
Noninterest expense increased by $16.5 million, or 17.6% to $110.5 million in the fourth quarter of 2023, when compared to $94 million in the third quarter of 2023. The increase was primarily due to $11.3 million from the FDIC special assessment, $0.7 million in restructuring costs, $1.3 million in higher salaries and benefits, and $3 million in higher amortization of solar tax credit investments. We expect core noninterest expense, excluding tax credit and core deposit intangible amortization, and FDIC special assessment, to increase between 3%-3.5% from 2023 to 2024. The effective tax rate for the fourth quarter of 2023 was 11.28% as compared to 10.95% for the third quarter of 2023.
For 2024, we expect an effective tax rate of between 20% and 21%. We expect total 2024 solar tax credit investment amortization of $6.5 million, with $6 million for Q1 and $0.5 million for Q2 of 2024. As of December 31, 2023, our Tier 1 l everage capital ratio increased to 10.55% as compared to 10.44% as of September 30, 2023. Our Tier 1 risk-based capital ratio increased to 12.83% from 12.7% as of September 30, 2023, and our Total risk-based capital ratio increased to 14.3% from 14.21% as of September 30, 2023.
Thank you, Heng. We will now proceed to the question and answer portion of the call.
Thank you very much. Ladies and gentlemen, if you have a question at this time, please press the star key, then one on your telephone keypad. 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, you may press star, then two. To prevent any background noise, we ask that you please place yourself on mute once your question has been stated. Your first question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Thanks. Good afternoon.
Gary.
I notice I know this has been asked certainly on past calls in terms of kind of capital and buyback, but just, you know, kind of looking at your metrics at year-end, you know, and seems like you'd probably be accreting some more capital. So just wondering, kind of your updated thoughts or how... If you're closer to kind of, you know, trying to get that approval to reengage in a buyback.
Yeah, we plan on discussions with the Fed during the first quarter. There's a process. You know, there's some projections and performance and all that, so it takes some time to put together. Those are standard, but, you know, we'll be doing that.
Okay. So is that something, Heng, that theoretically can be completed to where you could be active this quarter, or would be a second quarter type event?
I think, you know, between the, application process and the blackout period, which starts in, in early March, it's probably about... the earliest would be in Q2. But, you know, the capital's there, Gary, so we'll, if we don't, buy it, you know, we can always buy it later in the year. That's my point.
Right. Okay. And just as it relates to the NIM guidance, can you tell us what the rate outlook is or what rate assumptions you've got embedded in that guidance?
Yeah, we're assuming three Fed rate cuts. We think it's probably May for the first rate cut followed by two more. And one of the things that we're doing is to prepare for Fed rate cuts, is to shorten the term of our CDs. So you may have seen our Chinese New Year promotion on our website. And we're paying a similar rate as East West, a higher rate for six months versus a lower rate for one year. Plus, you know, the depositor gets a nice piggyback and so it's going very well. But the important thing is, if we shorten the duration of CDs, we'll better match, you know, the Fed's rate cuts.
Got it. Yeah, I did see that. I appreciate the color, Heng. Thank you.
Yeah. Thank you, Gary.
Thank you. The next question is from Brandon King with Truist Securities. Please go ahead.
Hey, good evening.
Hi, Brandon.
So with your NIM guidance, how are you thinking about the pace of, or the trajectory of the net interest margin in 2024? Are you expecting to maybe hit a trough sometime mid-2024 in stabilization, or do you see sequential decreases through the end of 2024?
Well, we think mid, you know, maybe Q3. We look at our interest rate forecast all the time, and so a back-of-the-envelope picture is about two-thirds of our loans are fixed. This is counting about $500 million of swaps, basis, pay fixed receive floating. And then about two-thirds of our... In our looking at things, about two-thirds of our deposits are floating. So at some point, you know, if the deposits, the deposits costs are gonna go down, and then plus we probably will originate $2.5 billion of new loans during the year, and most of that is fixed.
So at some point, our NIM will improve just from the fact that the deposit pressure will fade and actually help us, because we have more fixed rate loans than DDA.
Got it. Got it. And would you say at this point, like if the forward curve plays out, would net interest margin potentially be a little bit better, just given the comments you just said? Or could you end up in the, like, kind of in the same place, just as more of a timing thing?
You know, it's hard to predict, you know, particularly if the additional rate cuts are late in the year. It'll have very low impact on NII for 2024.
Okay. Then on loan growth, what categories are you expecting to be the drivers of loan growth for 2024?
Brandon, based on 2023 results, we saw about 9% increase on the residential mortgage. It's quite interesting for that year because that was a record booking year for us. 90% of that business was from purchases, and yet we saw a headline that, you know, purchase activities were the lowest in 28 years. So, you know, I think because our buyers are a lot less rate sensitive, so we continue to see activity there. So I think residential mortgage is certainly one driver for 2024. And then the commercial mortgage, we also saw about a 10% increase in 2023. I don't think we expect it to be as high as that, but I think we'll see some modest growth there as well, particularly if the rate cuts become a reality.
Then I think, more people will sort of jump back in from the, from the sidelines, and, and we'll see some more activity there as well.
Got it. All right. Thanks for all the answers, and I'll hop back in the queue.
Yeah. Thank you.
Thank you. As a reminder, to ask a question, you may press Star, then One. The next question comes from Andrew Terrell with Stephens. Please go ahead.
Hey, good afternoon.
Hi, Andrew.
A couple of questions. If I could just start on the margin. Can you talk us through just within the NIM guidance that you provided, the 3.15%-3.25% for 2024, what you assume for non-interest-bearing deposit balances? Does that predicate kind of stable balances, or would you expect continued decline within that forecast?
We think it's been relatively stable, so we're looking at the DDA to be about the same in 2024.
Okay. Got it. And then I wanna maybe better understand from the time deposit portfolio, some of the near-term repricing dynamics. I know you had a lot of success in your Lunar New Year campaign early in 2023. And I appreciate the color around the cost or the rate and the term for the special this year. But can you remind us how much in terms of CDs you have repricing in the first quarter of 2024?
Yeah, that's our highest renewal quarter, you know, because of we had the Chinese New Year deposit promotion last Q1. So it's $3.8 billion. The average yield is 4.16%. So, it'll flex up a little bit with this year's promotion. And then Q2, it drops to $2 billion, and the rate there is 4.53%. Q3's $1.1 billion, the rate is 4.41%, and then Q4 is $2 billion, and the rate is 4.54%. So, the latter three quarters, there is already a fair amount of CD pricing in that rate in existing base.
Yeah. Okay. So 1 , definitely kind of the heaviest quarter from a repricing standpoint?
Right. Yes.
Okay. And then also wanted to ask on just the full year 2024 guide, do you have an expectation for the Low-Income Housing Tax Credit amortization?
Yeah, it's. It'll be slightly higher than this year. I think the amortization will be maybe $5 million higher than this year's number. Let me, I'll email you back.
Okay, perfect. I would appreciate that. That's it for me. I appreciate you all taking the questions.
Thank you.
Thank you. The next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Hey, good afternoon.
Hi.
Wanted to just touch a couple more questions around the NIM, the margin. Do you happen to have the spot rate, I guess, at your end on deposits, either interest bearing or total, and then the average NIM in the month of December?
Yeah, let me, let me find that. So, the total interest-bearing deposits is at year-end, 12/31/2023, it's $3.54, and the December NIM is 3.19%.
Okay. Thank you. And then any material prepay fees in the margin this quarter? I think it was $2 million last quarter.
Yeah, it's less. This, it was only one basis point this quarter.
Okay. Got it. Thank you.
It was 6 in, 6 in Q3.
Yep. Okay. Thank you. And then, the step-up in C&I reserves this quarter looked like it was up about $11 million, and I think your special mention was up. I mean, could you speak to what drove the increase in C&I reserves this quarter and whether or not that was related to the special mention increase or not, or if there's something else going on?
Oh, yeah. We had one loan that it went on non-accrual in Q3. So, we put a fairly heavy reserve on that one loan in Q4. But I think the rest of the portfolio is, yeah, we didn't have to add reserves for that, because most of the increase in C&I loans in the fourth quarter came from that same borrower that came in in Q2. It's very, it's a tech company. Yeah. So, with very good credit. It's a public tech company. So that it didn't need much reserve.
Got it. Okay, great. And then the Low-Income Housing Tax Credit amortization sounds like you'll confirm that. Maybe just send that around, I guess, to everyone, if you don't mind. But it seems like would that be evenly spread throughout the year? Is that a fair assumption?
Yes.
Assuming it's $5 million higher from last year. Okay. Okay. Thank you.
Yeah. I'll send it around. Yes. Okay.
Okay. Thanks for your help.
Yeah.
Thank you for your participation. I will now turn the call over to Cathay General Bancorp's management for closing remarks.
I want to 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 and have a great day.