twoGood afternoon, and welcome to the Hope Bancorp 2023 fourth quarter earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Angie Yang, Director of Investor Relations. Please go ahead.
Thank you, Daniel. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2023 fourth quarter investor conference call. As usual, we will be using a slide presentation to accompany our discussion this morning, which is available on the Presentations page of our Investor Relations website. Beginning on slide two, let me begin with a brief statement regarding forward-looking remarks. The call today contains forward-looking projections regarding the future financial performance of the company and future events. These statements may differ materially from actual results due to certain risks and uncertainties. In addition, some of the information referenced on this call today are non-GAAP financial measures.
For a more detailed description of the risk factors and a reconciliation of GAAP to non-GAAP financial measures, please refer to the company's filings with the SEC, as well as the safe harbor statements in our press release issued this morning. Hope Bancorp assumes no obligation to revise any forward-looking projections that may be made on today's call. Now, we have allotted one hour for this call. Presenting from the management side today will be Kevin Kim, Hope Bancorp's Chairman, President, and CEO, Julianna Balicka, our Chief Financial Officer, and Peter Koh, our Chief Operating Officer, is also here with us as usual and will be available for the Q&A session. With that, let me turn the call over to Kevin Kim. Kevin?
Thank you, Angie. Good morning, everyone, and thank you for joining us today. Now, let's begin on slide three with a brief overview of the quarter. For the fourth quarter of 2023, we earned net income of $26.5 million or $0.22 per diluted share. Income this quarter included two notable items: the FDIC Special Assessment of $3.1 million after tax, and a restructuring charge of $8.7 million after tax. Excluding these notable items, our net income was $38 million, up 26% quarter-over-quarter, and our earnings per share were $0.32, up 28% quarter-over-quarter. A continued focus on expense management and meaningful improvements in our asset quality were important drivers of our net income growth this quarter.
In October of 2023, we announced a strategic reorganization designed to enhance shareholder value over the long term. We realigned our structure around key lines of business and products, positioning Hope Bancorp to operate more efficiently, support high-quality loan and deposit growth, and deliver improved returns in the years to come. We are making substantial progress on this transformation, focusing management efforts and attention on process and efficiency improvement to empower our frontline to grow their portfolios and expand customer relationships. As part of the reorganization plan, and as previously announced, we will consolidate certain branches in the first quarter, in the first half of 2024, the cost of which was accrued as part of the fourth quarter 2023 restructuring charges. Continuing on to slide four.
We ended the year with a very strong capital position, and all our capital ratios expanded from September 30, 2023. We grew tangible book value 6% quarter-over-quarter and year-over-year. As of December 31, 2023, our total capital ratio was 13.92%, up 69 basis points from September 30th, and our common equity tier one ratio was 12.28%, up 61 basis points quarter-over-quarter. Adjusting for the allowance for credit losses and including hypothetical adjustments for investment security marks, all our capital ratios remain high. Our board of directors declared a quarterly common stock dividend of $0.14 per share, payable on February 23rd to stockholders of record as of February 9th, 2024. Continuing to slide five. At December 31, 2023, our total deposits were $14.8 billion.
Average deposits in the fourth quarter were $15.3 billion, a decrease of less than 3% quarter-over-quarter. During the fourth quarter, we reduced the brokered time deposits by $450 million or 25% from September 30th. Quarter-over-quarter, demand deposits declined, reflecting seasonality in fund flows from commercial customers in the residential mortgage industry. These customers are unrelated to the exit of our residential mortgage warehouse line business. Normally, the seasonal outflow of these funds in the fourth quarter rebuilds in subsequent quarters. Our consumer deposits were stable quarter-over-quarter and represented 37% of total deposits at year-end 2023. Year- over- year, our consumer deposits are up 5%, which is notable given the disruption in the banking industry in the first half of 2023.
This reflects the strength of our deposit franchise in the communities that we serve. Our gross loan-to-deposit ratio was 94% at December 31, 2023. We are targeting operating at a loan-to-deposit ratio below 95%. Moving on to slide six. At December 31, 2023, our loan portfolio totaled $13.9 billion, a decrease of 3% quarter-over-quarter. Average loans for the 2023 fourth quarter totaled $14.1 billion, down 3% linked quarter. During the quarter, we completed the exit of our residential mortgage warehouse line business, which accounted for $65 million of the decline in loan balances. Looking ahead at 2024, following our strategic reorganization, our front line is pivoting and gearing up for growth. Accordingly, we expect to see positive loan growth this year.
On slides seven and nice—I'm sorry, seven and eight, we provide more details on our commercial real estate loans, which are well diversified by property type and are granular in size. The loan to values remain low across the portfolio, with a weighted average of approximately 45% at December 31 of 2023. The vast majority of our commercial real estate loans have full recourse with personal guarantees. Asset quality remains strong, with 99% of the commercial real estate portfolio being pass graded at year-end 2023 and with no signs of any systemic risks. With that, I will ask Julianna to provide additional details on our financial performance for the fourth quarter. Julianna?
Thank you, Kevin, and good morning, everyone. Beginning with slide nine, our net interest income totaled $126 million for the fourth quarter of 2023, a decrease of 7% from the third quarter. The preceding third quarter included $3 million of recovered interest income related to one borrower relationship, which contributed six basis points to net interest margin in the third quarter. Excluding the recovery, net interest income decreased 5% quarter-over-quarter. Net interest margin for the 2023 fourth quarter contracted 13 basis points to 2.70%. Excluding the interest income recovery from the third quarter, the net interest margin contracted seven basis points quarter-over-quarter.
The linked quarter change in net interest income and net interest margin also reflected a higher cost of interest-bearing deposits and a decrease in the average balance of loans, partially offset by a decrease in the average balance of interest-bearing deposits and higher yields on investment securities and other earning assets. At the end of the first quarter of 2024, we plan to pay off our Bank Term Funding Program borrowings of $1.7 billion with interest-earning cash. The positive contribution to net interest income from the BTFP was $4 million in the fourth quarter. When the BTFP comes up for renewal at the end of March and beginning of April, this positive spread opportunity will go away, and we will pay off the borrowings. This will have an impact of reducing our average earning assets and net interest income after the first quarter of 2024.
Moving on to slide 10. Our average loans of $14.1 billion decreased approximately 3% linked-quarter, and the average yield on our loan portfolio declined three basis points to 6.24%. The interest income recovery that I mentioned on the previous slide contributed seven basis points to the loan yield in the preceding third quarter. Excluding the interest income recovery, loan yields expanded in the fourth quarter. There were no material interest income recoveries in the fourth quarter. Average deposits declined less than 3% to $15.3 billion in the quarter, and the average cost of deposits increased to 3.15%, up seventeen basis points quarter-over-quarter. The increase partially reflects the repricing of maturing promotional CDs originated a year ago. Moving on to slide 11.
Our non-interest income was $9 million for the fourth quarter, an increase of 12% from $8 million in the third quarter of 2023. Non-interest income growth was distributed across our various fee income businesses. Similar to last quarter, we did not record any gain on the sale of SBA loans. Current secondary market premiums are approximately 6%, and it is more economic to retain SBA 7(a) production on balance sheet at this time. We plan to return to selling our SBA 7(a) production when the premiums in the secondary markets improve, which we anticipate will happen after the Fed reduces interest rates. Moving on to non-interest expense on slide 12.
Our fourth quarter non-interest expense of $100 million included two notable items. $11 million of pre-tax restructuring charges related to our reorganization and $4 million of pre-tax accrual for the FDIC special assessment. Excluding these notable items, our operating expense was $85 million and decreased 2% quarter-over-quarter. Our fourth quarter salaries and benefits expense was $47 million, a decrease of $4 million or 7% from the third quarter. This reflected the impact of the headcount reduction at the end of October, undertaken as part of our reorganization. Now, moving on to slide 13, I will review our asset quality, which improved meaningfully during the fourth quarter.
Our non-performing assets at December 31st, 2023, decreased 26% quarter-over-quarter to $46 million and represented 24 basis points of total assets, an improvement from 31 basis points as of September 30th, 2023. Our criticized loans decreased 11% from September 30th, 2023, to $322 million. The linked-quarter reduction was in both special mention and substandard loans. Net charge-offs for the 2023 fourth quarter were a very low $1.8 million or only five basis points of average loans annualized. For the fourth quarter, our provision for credit losses was $1.7 million. At December 31st, 2023, our allowance for credit losses was $159 million, representing 115 basis points of loans receivable, which was an increase in coverage of four basis points from the end of the prior quarter. With that, let me turn the call back to Kevin.
Thank you, Julianna. Moving on to slide 14. The 2023 fourth quarter was a key quarter for Bank of Hope as we laid the foundation to build a stronger and more efficient regional bank that is highly focused on broadening and deepening client relationships. On slide 15, we provide our outlook. We are presenting our expectations for the fourth quarter of 2024, compared with the fourth quarter of 2023, which we feel will provide a better sense of the direction in which we are building our company as we go through the transformation process. Fourth quarter to fourth quarter, we expect average loans to grow at a percentage rate in the low single digits, up from $14.05 billion in the fourth quarter of 2023.
We have finished exiting non-core businesses, and we anticipate paydowns in the loan portfolio to moderate in 2024. We project growth to be weighted to the second half of the year and plan to maintain an average loan-to-deposit ratio below 95%. In terms of net interest income, fourth quarter to fourth quarter, we expect net interest income to decline at a percentage rate in the low single digits from $126 million in the fourth quarter of 2023. This includes the net impact of our planned payoff of the Bank Term Funding Program, which, as Julianna mentioned, contributed a positive $4 million to our net interest income in the fourth quarter of 2023.
Excluding the impact of the BTFP, we would expect our fourth quarter 2024 net interest income to be up modestly compared with the fourth quarter of 2023, benefiting from loan growth and an improved cost of funds. In our outlook, we are assuming five Fed Funds rate cuts, beginning with May of this year, for a year-end Fed Funds upper target rate of 4.25%. In 2024, we expect to return to selling SBA loans when the gain on sale premiums improve, which we expect should occur by the fourth quarter of 2024. In our outlook for operating expenses, excluding notable items, fourth quarter to fourth quarter, we expect our operating expenses to decrease by more than 5% from $85 million in the fourth quarter of 2023.
Cost savings from our restructuring will be partially offset by merit increases, planned hiring to support revenue generation and business development, as well as continued technology investments to improve operational efficiency and the consumer customer user experience. A portion of the cost savings from our restructuring was realized in the fourth quarter of 2023 expense run rate, and in our outlook, we anticipate that our operating expenses will continue to decrease further. Our outlook translates into positive operating leverage when comparing the fourth quarter of 2024 with the fourth quarter of 2023, with the decrease in expenses expected to exceed the headwinds to net interest income. SBA gains in the fourth quarter of 2024 would be incrementally additive to the positive operating leverage. Finally, in our 2024 outlook, we assume a stable coverage ratio of allowance for credit losses to loans.
Based upon the current economic outlook, we believe our allowance provides sufficient coverage for future credit risk, and we currently do not see any emerging systemic concerns in our loan portfolio. Moving on to slide 16. 2024 will be a building year as we continue to make progress on our reorganization and begin to realize its benefits. We believe our efforts will generate better results, and we now have a clearer view of the bank's medium-term potential post-reorganization. We are sharing with you some of our medium-term targets that we are driving toward. We would note that the assumptions underpinning our targets are based on the current implied forward curve, a constructive macroeconomic backdrop, and continued modest economic growth over the medium term.
Using these assumptions, and with the realization of benefits from our strategic reorganization over the medium term, we expect, first, diversified loan growth in the high single-digit percentage range while maintaining a loan-to-deposit ratio below 95%. Second, annual revenue growth outpacing loan growth, which translates to revenue growth of greater than 10% in the medium term, supported by loan growth, accelerated fee income growth, and an expanding net interest margin. We expect the net interest margin to expand not only because of interest rate changes, but because of a stronger deposit base. Our reorganization is focused on generating core deposit growth and expanding customer wallet share. Third, on operating efficiency ratio under 50%, driven by strengthened revenue growth, continued expense management discipline, and operational process improvement.
Finally, we expect these drivers will, in aggregate, enable us to deliver an attractive level of returns with a return on average assets greater than 1.2%. In summary, as we sit here today, we are excited about the medium-term growth prospects for Bank of Hope, and we believe the path to improved profitability is firmly within our reach. With renewed energy from our strategic transformation initiative that is well underway, our team is excited to move forward together to build a stronger, better, and more efficient regional bank, enhancing the value of our franchise for all stakeholders for the long term. I look forward to keeping you apprised of our ongoing progress as we continue to strengthen our position as one of the leading Asian American banks in the United States. With that, operator, please open up the call.
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question comes from Chris McGratty from KBW. Please go ahead.
Hi, this is Dick Mutafikazan for Chris.
Hi.
Maybe just starting with the NII. Your guide has a low single-digit decline. How does the NII outlook change if we get less rate cuts this year?
If we get fewer rate cuts this year, then our outlook will probably get a little bit worse, but not substantially so, because on one hand, so the drivers behind our interest rate are net interest income outlook are as follows. A return to loan growth, which is irrespective of the interest rate outlook. Of course, where our cost of funds is, having five interest rate cuts in the coming year will allow us to start to realize the beta on the downward repricing of deposit costs. However, in the beginning, we are lagging our beta assumptions, so we're really not picking up deposit cost improvement until the latter half of the year. So I'm not sure it'll be a substantially material impact if the rate cuts, you know, if you end up with three versus, say, five.
And the third driver of our improved net interest—of net interest margin improvement will come—I mean, not interest margin, excuse me, net interest income improvement will come from deposit growth focused on expanding customer wallet share and getting more operational deposit accounts. But the part between 4Q 2023 and 4Q 2024 that is going to occur, regardless of cuts, is going to be the decrease to our NII from the net impact from the BTFP, which because of the spread you're able to earn on the earning cash contributed $4 million to the fourth quarter net interest income. Right? So that is going to be in there regardless of the cuts.
Then if we get slower cuts, then we're not going to experience downward repricing of the loan portfolio as quickly, where on the variable rate loans, that's 100% beta right away up front. So I don't think that the, you know, whether we're getting three, four, or five cuts is going to make a substantial change to our interest income outlook.
You know, if the cuts are delayed from the current projections that we have, I think the impact on the 2024 earnings would be more moderate, but we would see more of the benefits in 2025 and beyond. So in the midterm horizon, I think our projection that we are sharing today would stand.
Great. Thank you. And if I could just ask one more, maybe on a potential capital return, just given CET1 north of 12% and stock below book, you know, any discussions around a buyback in 2024 or 2025? Thanks.
Yes. But you know, as we mentioned, we have a strong capital base, and with our strategic reorganization, we are well positioned to take advantage of growth opportunities in 2024. This means that we do not have noticeable change from our position three months ago in terms of our, the share repurchase plan.
Okay. Thank you for taking my questions.
As a reminder, if you have a question, please press star one. The next question comes from Gary Tenner of D.A. Davidson. Please go ahead.
Thanks. Good morning, everybody. I had a question about the expense guide for the year. You know, the year-over-year or fourth quarter to fourth quarter, obviously down greater than 5%. As you think about the any remaining cost saves from the restructuring that could benefit the first half of the year versus, you know, the typical seasonal increase from payroll, et cetera, is the first quarter or second quarter a little bit above fourth quarter and then a kind of more of a back half of the year decline? Just thinking about the kind of quarter-by-quarter trajectory there.
Hi, Gary. Thank you. No, actually, because of the cost savings that are rolling through and because the cost savings already in our fourth quarter runway only started after the RIF happened in October, you're not going to see that year-over-year usual... That first quarter bump up is going to be offset by cost saves.
Okay. Thank you. And then, follow-up on the net interest income guide, what deposit beta assumptions are you assuming, you know, relative to the five cuts potentially this year that you've got in your guide?
Sorry, what kind of beta assumptions are we assuming relative to what?
To the five cuts you've got in your NII guide, what kind of deposit?
Yeah. So, for example, just to put some context around this, our total deposit beta on the upcycle, that we are assuming is going to be by the time it's fully realized, before the rates start to cut, because you still have a little bit of more repricing going on to market of the back book, it's going to be, over 60%, right? But on the beginning of the rate cuts, we're assuming, a total deposit beta of under 30%, and we're still kind of, trailing in that 30% handle into the fourth quarter. So we really don't assume the beta on the downward side to really kind of start to flow into our numbers until 2025.
Great. Thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks.
Thank you. Once again, thank you all for joining us today, and, we look forward to speaking with you again, three months. Thank you. So long, everyone.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.