Good afternoon, ladies and gentlemen, and welcome to Cathay General Bancorp's fourth quarter and full year 2022 earnings conference call. My name is Sarah, 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 1 at any time during the conference. If assistance is needed at any time during the call, please press star followed by 0, 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.
Thank you, Sarah. 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 look-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 forward-looking statements. Any forward-looking statement speaks only as of the date of which it is made, and except as required by law, we undertake no obligations 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 issue an earnings release outlining its fourth quarter and full year 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 from management today, we will open this call up for questions. I will now turn the call over to our President and Chief Executive Officer, Mr. Chang Liu.
Thank you, Georgia. Good afternoon, everyone. Welcome to our 2022 fourth quarter earnings conference call. This afternoon, we report a net income of $97.6 million for the fourth quarter of 2022, a 29.6% increase as compared to a net income of $75.3 million for the fourth quarter of 2021. Diluted earnings per share increased 35.7% to $1.33 per share for the fourth quarter of 2022, compared to $0.98 per share for the same quarter a year ago. In the fourth quarter of 2022, our gross loans increased $147.2 million or 3.6% annualized.
The increase in loans for the fourth quarter of 2022 was primarily driven by increases of $160 million or 5.3% annualized in commercial real estate loans, $122.3 million or 9.5% annualized in residential mortgage loans. The overall loan growth for 2023 is expected to range between 3%-5%. We continue to monitor our commercial real estate loans. Turning to slide 8 of our earnings presentation, as of December 31st, 2022, the average loans of value for our CRE loans was 51%. As of December 31st, 2022, our retail property loan portfolio, as slide 9, comprises 22% of our total commercial real estate loan portfolio and 11% of our total loan portfolio.
The majority, 89% of the $1.96 billion in retail loans, is secured by retail building, neighborhood, mixed use or strip centers. Only 10% is secured by shopping centers. For the fourth quarter of 2022, we reported net charge-offs of $2.5 million, which included $2 million that were fully reserved as of September 30th, 2022, compared to net charge-offs of $0.6 million in the third quarter of 2022. Our non-accrual loans were 0.38% of total loans as of December 31st, 2022, increased by $3 million to $68.9 million as compared to the end of the third quarter of 2022.
Turning to slide 12, as of December 31, 2022, classified loans increased slightly to $256 million from $240 million as of September 30, 2022. Our special mention loans increased to $321 million from $305 million as of September 30, 2022. We recorded a provision for credit loss of $1.4 million in the fourth quarter of 2022, as compared to a $2 million provision for credit losses in the third quarter of 2022, and $3.5 million provision for credit losses in the fourth quarter of 2021. Total average deposits increased by $387.5 million or 9% annualized during the fourth quarter of 2022.
Average time deposits increased $1.4 billion or 99.2% annualized during the fourth quarter of 2022 compared to the third quarter of 2022. Average money market deposits decreased by $802.8 million or 73.1% annualized, due primarily to a migration back to CDs from money market deposits and deposit runoff. For 2023, the overall deposit growth is expected to range between 3% and 5%. I will now turn the floor over to our Executive Vice President and Chief Financial Officer, Mr. Heng Chen, to discuss the fourth quarter 2022 financial results in more detail.
Thank you, Chang, and good afternoon, everyone. For the fourth quarter of 2022, net income increased by $22.3 million or 29.6% to $97.6 million, compared to the fourth quarter of 2021.
The increase was primarily attributable to net interest margin expansion in the fourth quarter of 2022 compared to the year ago quarter. Our net interest margin was 3.87% in the fourth quarter of 2022 as compared to 3.23% for the fourth quarter of 2021. In the fourth quarter of 2022, interest recoveries and prepayment penalties added 1 basis point to the net interest margin as compared to 3 basis points for the third quarter of 2022 and 6 basis points for the same quarter a year ago. Based on Fed funds target range of between 4.75% and 5%, we have increased our net interest margin expectation for 2023 to be between 3.75%-3.85%.
Our 2023 net interest margin expectations included the impact of a $3.1 million interest recovery from a full repayment of a non-accrual loan last week. Our non-interest income during the fourth quarter of 2022 decreased by $7.7 million to $12.1 million when compared to the fourth quarter of 2021 due to an increase of $3.2 million in loss on equity securities, a decrease of $3.1 million in gain on venture capital investment distributions and a decrease of $1.7 million in derivatives fee income. Non-interest expense increased by $8 million or 11% to $81.1 million in the fourth quarter of 2022 when compared to $73.2 million in the fourth quarter of 2021.
The increase was primarily due to $1.2 million in higher salaries and bonuses, $3.8 million in higher amortization of low-income housing and solar tax credit investments, which included a $1.3 million catch-up adjustment in the first quarter, $1 million in higher amortization of core deposit intangibles, which included approximately $900,000 in accelerated write-downs and $1.1 million in higher professional and marketing expenses. Special items in the fourth quarter of 2022, once again included a $1.3 million catch-up adjustment for impairment of low-income housing investments and $0.9 million additional CDI amortization. We expect core non-interest expense excluding tax credit and core deposit intangibles amortization and HSBC integration expenses to increase 3.5% from 2022 to 2023.
The effective tax rate for the fourth quarter of 2022 was 25.7% as compared to 23.66% for the fourth quarter of 2021. For 2023, we expect an effective tax rate of between 17.5% and 18.5%. We expect 2023 solar tax credit investment amortization of $30 million, which is $10 million in each of the first three quarters of 2023. As of December 31, 2022, our Tier 1 leverage capital ratio increased to 10.08% as compared to 10.02% as of September 30th, 2022.
Our Tier 1 risk-based capital ratio increased to 12.19% from 12.06% as of September 30th, 2022, and our total risk-based capital ratio increased to 13.771% from 13.59% as of September 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 1 question and 1 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. Your first question comes from Chris McGratty with KBW. Please go ahead.
Oh, great. Good evening. Hang, I wanna make sure I understand the expenses, just make sure I'm buttoned up on the expenses. The 3.5% growth, is that off the... It looks like the $255, and then I'm adding on top of that $30 on solar. Is that right?
Yes. Yes. You gotta add, $40 million in low-income housing amortization. It's roughly $10 million a quarter now.
Okay. solar is 30 and low income is how much? I missed that.
40.
Okay. it's $70 in total amortization. Okay.
Yes.
Great.
That's why the tax rate is lower, projected to be lower in 2023.
Okay, great. Maybe on the margin guide, you had a pretty decent mix shift this quarter, I'm interested in I guess what further remixing you might be forecasting in the CD portfolio. How much more do you have that increasing proportionally to get to that 3.75%-3.85% margin? Thank you.
Yeah. We pre-COVID, we used to do Chinese New Year promotions and so we're in the third week of our Chinese New Year promotion. The average rate is, we have two tiers, but the average rate is probably about 4.20%. And we were very pleased with the results of that. We think we'll get net new funds into the bank of at least $600 million. In terms of context, one year broker CDs will be at 4.85, so our rate is 4.20. We're borrowing from a Federal Home Loan Bank. We're borrowing them short-term, so that rate was about 4.8. You know, it'll go up to-
Mm-hmm.
5% in February when the Fed increase changes. We think that's gonna help, for lack of a better word, you know, deliver a good margin in Q1, plus that $3.1 million interest recovery will add 6 basis points to that. Once again, we had one quarter... On our slide 15, it shows the average Fed funds versus the cost of interest-bearing deposits. For 2022, our deposit beta was 34%, and it jumped up to 61% in the fourth quarter. Once again, we think the first quarter, the deposit beta will not be 61%. We have 2 prime rate increases in Q1, our loan beta is 44% and that should continue.
once again, it, you know, that's why we think we'll be in the range where we're gonna be.
Okay. Okay. If I could just make sure I'm totally buttoned up. The interest recovery, is that in the 375 full year guide? 385?
Yes. Yes.
Okay. Okay. The mix of deposits, right? CDs are 38%. I think pre-COVID it was north of 40. I mean, the expectation is that we're perhaps approaching 50% by the time the Fed's done. Is that reasonable or is that too far?
Oh, I think that's too far. you know-
Okay.
If the Fed's not done, it's gonna help us NIM-wise and net interest income-wise in 2023. We're gonna be focusing on 2024 when we have to reprice these CDs downward, which we think we can.
Got it. Thanks, Heng. Appreciate it. I'll let go.
Sure.
The next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Hey, good afternoon.
Good afternoon.
How you doing? Just wanna round out the NIM discussion a bit here. Do you have the spot rate on interest-bearing deposits at the end of the year to give us some visibility going into Q1?
Yeah. Let me find it. Hold on. I have it as 1.97.
Okay. Makes sense. Okay. It sounded like the, you know, the expectation is the overall NIM kinda hangs in there in the current range. I don't need necessarily a monthly NIM, but if you have the December monthly NIM, I'll take it.
Yeah. Yeah. It's, it was down slightly from the full quarter NIM. It's. The December NIM, that's a 31-day month, so that was 3.81%.
Okay. Thank you. Got it. Just on the overall reserve, you know, dipping down a little bit here, 80 basis points. Can you give us a sense for, you know, what you considered in terms of macro factors? You know, what's your overall unemployment rate outlook for this year, and how you might be weighing the baseline versus adverse scenarios?
Yeah. Matthew, I might have mentioned in the past, we use a blended rate, you know, for... Until the fourth quarter, we were at this 30/40/30 Moody's weighting, where the 30% is the S1, the Moody's S1, which is the most favorable forecast. The base is their base. Moody's, in their December base forecast, shows no recession in the next 8 quarters. The S3, the Moody's S3, has a decline. That's their, basically their, modest recession forecast. That has 3 quarters of negative GDP. The maximum decline is 3.6% in Q2 this year. Unemployment goes up to 7.8% in Q1 2024 and declines to 7.3% in Q4 2024.
What we did is, since we adopted CECL, we were at this 30/40/40. Sorry. 30/40/30. This quarter, we changed that to where the moderate recession is now 55% of our CECL calculation, and the base is 35, and the optimistic is 10%. We think, for 2023, you know, we're expecting 3%-5% loan growth, primarily single family residential, which requires very little reserving, about 30 basis points for us, that our provision for 2023 would be basically net charge-offs, you know, plus a modest amount for loan growth.
Okay, great. That's good color. Thank you.
Yeah.
Again, if you'd like to ask a question, please press star then one at this time. Our next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Thanks. Good afternoon.
Hi, Gary.
A couple of follow-up questions. In terms of the CD specialty running for the Chinese New Year, $600 million of new funds, as you mentioned, Hang, should we assume that that is, that you largely paid down the FHLB borrowings as, you know, that you had as of 12/31?
Yes, correct.
In terms of the NIM, again, I think you said it includes 75 basis points of tightening?
No. We, I think it might have been poorly worded, but we're assuming 25 basis points on February 1, 25 basis points in mid-March. We're not sure. There might be something in December in terms of a rate cut, but that would have a, you know, very minor impact.
Okay. No, that's fine. I thought I heard you say 75, so I may have misheard. If you combine, you know, the ability to pay down FHLB, you know, the benefit of the hikes in the first quarter and the interest recovery, it would seem to suggest that the first quarter is peak NIM, and then you maybe stay in that range for the full year but trend lower from there. Do you? Is that the way?
Yes. Yes.
you would expect the year set up?
Yes. Yes, Gary.
Okay. I saw you took the loss on sale of securities. Did you reinvest that? If so, what was the yield pickup and, well, the yield pickup of those, that reinvestment?
Actually we've had no losses. That was a mark-to-market for equity securities. In the fourth quarter, we had pretty light investing. I think we bought $75 million of corporates. They were in the 5.5% range, the callable corporates. Then we bought some MBS. They were in the high fours.
Okay. Thanks for that clarification, Heng. I must have misread that in your press release. And then last question I had in terms of capital, and you read through the where capital is at year-end. You did buy some stock back, but, you know, less than you did in the third quarter. Just thoughts about, you know, buyback in 2023, is there any element of, you know, economic uncertainty that might keep you on the sidelines or, you know, would you still be a buyer of your stock in 2023?
Yeah. We still have about $15 million, $60 million left in our current buyback authorization. We would use that up in the first quarter, then our plan is to get Fed approval, apply for approval for another $125 million. Given the relatively weak loan growth, we might, you know, subject to economic conditions, we might try to use up most of that in 2023.
Thanks very much.
Yes. Thank you.
Our next question comes from Andrew Terrell with Stephens. Please go ahead.
Hi. Good afternoon.
Hi.
If I could maybe start on just the expenses, the guidance for 3.5% expense growth in 2023. It feels like that might be a bit light versus what we're hearing across the industry just given inflationary impacts. I was hoping you could speak to maybe just some of the puts and takes, as we think about expenses, through 2023 and the progression of the quarterly expense base.
Andrew, we've gone through, already, half, probably significantly more than half of our population during last October's review process. That's why you saw some of the core non-interest expense increase in the salary section, at the Q4 numbers. We have a second round of the officers and higher reviews that will come up in March, and our objective is to hold that number to the 3.5% range.
Understood. Okay. Maybe if I could go back to the margin. Just thinking about the spot. I know you had the spot rate on the deposit cost at the end of the quarter. Do you happen to have the spot yield on the securities portfolio at the end of the quarter?
Not on the securities. We have it on the loans if you want it. On the securities, I have the December securities. It's at 2.72.
Okay. Okay, that works. I think I just wanna make sure I heard it correctly. It sounds like the new offering rate on CDs is around that low 4% territory, 4.2% or so. I guess just thinking about the duration of the CD book, should we expect CD costs to over the next 12 months, so throughout 2023, kinda fully reprice to that low 4% territory?
Hopefully not. I mean, you know, this is a promotional rate program, part of it is, you have to bring, if it's a $100,000 CD, you have to bring half, at least half of it. It has to be non-CIF funds. outside of a normal promotion environment, I think we'll be in the mid 3s for CD renewals for retail depositors. for large corporate depositors, you know, we're higher than 4.2, but that's the market. we've been doing that in the fourth quarter.
Okay. Got it. Thank you for taking the questions. I appreciate it.
Thank you.
There are no further questions at this time. 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.