Hope Bancorp Q2 2023 Earnings Call Transcript

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July 24, 2023

There are 8 speakers on the call.

Operator

Morning, and welcome to the Hope Bancorp 2023 Second Quarter Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would like now to turn the conference over to Angie Yang, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, Alan. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2023 Second Quarter Investor Conference Call. As usual, we will begin we will be using a slide presentation to accompany our discussion this morning, which is available in the Presentations page of our IR website. Beginning on Slide 2, Let me begin with a brief statement regarding forward looking remarks. The call today may contain forward looking projections regarding Future financial performance of the company and future events.

Speaker 1

These statements may differ materially from the 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 As well as the Safe Harbor statements In our press release issued earlier today, Hope Bancorp assumes no obligation to revise any forward looking projections that may be made on today's call. Now we have allotted 1 hour for this call. Presenting from the management side today will be Kevin Kim, Holt Bancorp's Chairman, President and CEO and Giuliana Beliska, our Chief Financial Officer Peter Koh, our Chief Operating Officer With that, let me turn the call over to Kevin Kennedy.

Speaker 2

Thank you, Angie, and good morning, everyone, and thank you for joining us today. Now let's begin on Slide 3 with a brief overview of the quarter. For the Q2 of 2023, our net income was $38,000,000 And our diluted earnings per share were $0.32 Our pre provision net revenue was $6,000,000 an increase of 11% from the Q1. Our asset quality remains healthy and we recorded net recoveries of 5 $2,000 in the second quarter. The operating environment for regional banks continues to be challenging and we are focused on prudent risk management, maintaining high liquidity levels and building strong capital.

Speaker 2

Our tangible common equity ratio increased to 8.04% at June 30, 2023, up 13 basis points from March 31. Quarter over quarter, Our risk based capital grew and ratios expanded. Continuing on Slide 4 for a more detailed review of our Our company's total capital was $2,100,000,000 at June 30, 2023, Growing 2% quarter over quarter. At June 30, our common equity Tier 1 ratio was 11.06%, Up 31 basis points from March 31, and our total capital ratio was 12.64%, up 39 basis points quarter over quarter. Adjusting for the allowance for credit losses and including hypothetical adjustments For investment security marks, all of our capital ratios remain high.

Speaker 2

Given the strength of our capital, Our Board of Directors declared a quarterly common stock dividend of $0.14 per share payable on August 17 To the stockholders of record as of August 3rd. Moving on to Slide 5. During the Q2, we continued to maintain a higher than usual level of cash and cash equivalents on our balance sheet, And we believe this is prudent in the current banking environment. At June 30, 2023, Our cash and cash equivalents were $2,300,000,000 compared with $2,200,000,000 at March 31. At the end of the second quarter, our available borrowing capacity, together with cash and cash equivalents And unpledged investment securities was $7,750,000,000 equivalent to 50% of our total deposits and well exceeding our uninsured deposit balances.

Speaker 2

In May, we paid off $197,000,000 of our convertible notes with existing cash. Now continuing to Slide 6. At June 30, 2023, our total deposits We're $15,600,000,000 down modestly 1% quarter over quarter and up 4% year over year. In navigating this cycle, Bank of Hope has benefited from the granularity of our deposits. Our average commercial account size is approximately $300,000 and the average consumer account size is approximately $50,000 Over a third of our balances are consumer deposits, which are up 3% year to date and 13% year over year.

Speaker 2

We believe this is reflective of the strength and longevity of our relationships with our depositors. At June 30, 2023, the bank's uninsured deposit ratio was 36% compared with 38% at March 31. Across the organization, we are focused on strengthening our deposit franchise and expanding our relationships with our clients. We have been steadily investing in our treasury management products and services, And the efforts of our team have been generating a steady pace of growth in the number of new TMS relationships, increasing the stickiness of our demand deposits. Now moving on to Slide 7.

Speaker 2

In the 2nd quarter, we funded $491,000,000 in new loans, including $332,000,000 in commercial and industrial loan production. The decrease in loan production reflects current market dynamics, including declining customer demand in a high Interest rate environment as well as our disciplined pricing and conservative underwriting. The average rate on our new loan production was 8.37% in the 2nd quarter, up 84 basis points from the 1st quarter. Moving on to Slide 8. At June 30, 2023, our loans receivable were $14,900,000,000 A decrease of 1% quarter over quarter and up 2% year over year.

Speaker 2

2nd quarter payoffs and paydowns Of $647,000,000 exceeded the volume of new loan originations. Our portfolio is well balanced Between the major loan types of commercial real estate, including owner occupied commercial real estate and multifamily mortgage, Commercial and Industrial and Residential Mortgage Loans. Our commercial and industrial loan portfolio Moving on to Slides 910 For an overview of our commercial real estate portfolio, our commercial real estate loans are well diversified by property type and have low loan to value ratios across all segments. Less than 3% of the portfolio Has a loan to value ratio over 70%. The vast majority of our commercial real estate loans are full recourse with personal guarantees.

Speaker 2

Office Commercial Real Estate is a small segment of $464,000,000 representing 3% of total loans And with no Central Business District exposure, at June 30, 2023, 99% of our office portfolio Our commercial real estate portfolio is very granular with very few loans over $30,000,000 in size. We are well diversified geographically across the submarkets in our footprint with very small exposure to markets such as San Francisco or Manhattan, and no exposure to the Central Business District in Downtown Los Angeles. With that, I will ask Julianna to provide additional details on our financial performance for the Q2. Julianna?

Speaker 3

Thank you, Kevin, and good morning, everyone. Beginning with Slide 11, our net interest income totaled 131,000,000 For the Q2 of 2023, representing a decrease of 2% from the Q1, our 2nd quarter net interest margin was 2.70 percent, down 32 basis points quarter over quarter. This reflects a higher cost of funds and an increase in average borrowings, partially offset by expanding loan yields and growth in average interest earning cash and equivalents. The increase in average interest earning cash and equivalents Reflects our conservative approach to navigating current market volatility. Funded through borrowings, the elevated level of cash was a positive contributor to net interest income.

Speaker 3

Moving on to Slide 12. Our 2023 second quarter average loans of $15,100,000,000 Decreased 1% linked quarter and the average yield on our portfolio increased to 5.99%, up 24 basis points quarter over quarter. On Slide 13, you can see that our average deposits were essentially stable at $15,800,000,000 in the 2nd quarter. The average cost of deposits increased to 2.79 percent, up 42 basis points quarter over quarter. On Slide 14, Our non interest income was $17,000,000 in the 2023 Q2, up from $11,000,000 in the 1st quarter.

Speaker 3

2nd quarter income included a $5,800,000 cash distribution from a gain on an investment in an affordable housing partnership. Quarter over quarter service fees on deposit accounts grew and customer swap fee income increased. Moving on to the non interest expense on Slide 15. Our non interest expense was $87,000,000 in the Q2 of 2023, a decrease of 3% quarter over quarter. This reflected lower salary and benefits expense, partially offset by an industry wide increase and the FDIC annual base assessment rate of 2 basis points.

Speaker 3

Our efficiency ratio in the 2023 second quarter improved 325 basis points to 59.1 percent, down from 62.4% in the 1st quarter. Now moving on to Slide 16. I'll review our asset quality, which continues to be healthy. We recorded a provision for credit losses of $8,900,000 for the 2023 Q2, building our allowance for credit losses to $173,000,000 at June 30, 2023. Our coverage ratio increased to 1.16%, up from 1.09% at the end of the prior quarter.

Speaker 3

In the Q2, we recorded net recoveries of $552,000 equivalent to 1 basis point of average loans annualized. Total non performing assets at June 30 were 77,000,000 A decrease of 3% quarter over quarter and equivalent to 38 basis points of total assets. Year over year, our non performing assets were down 30%. At the end of the Q2, our criticized loans ratio was 2.3%, up quarter over quarter and down year over year. Our criticized loans were $345,000,000 on June 30, 2023, up from $305,000,000 at March 31.

Speaker 3

Quarter over quarter, substandard loans decreased and our special mention loans increased. Looking at our special mention loans, we note that the borrower's financial performance Generally improving and or we have takeouts for the loans in place. Overall, we are not seeing any broader systemic issues of concern within the loan portfolio. With that, let me turn the call back to Kevin for a discussion of our outlook.

Speaker 2

Thank you, Juliana. Moving on to Slide 17, I will wrap up with a few comments about our outlook for the second half of twenty twenty three. Given the lower level of loan demand from our customers, competitive market pricing and an elevated pace of pay downs and payoffs In a high interest rate environment, we now expect that our total loans will be generally stable in the second half of the year relative to June 30. With the expectation of higher for longer interest rates in the second half of the year, We anticipate that our net interest income will modestly pressure through the balance of the year. We expect our non interest income to be essentially stable on a quarterly basis relative to the 2nd quarter And excluding the affordable housing gain, we will continue to tightly manage our expenses and expect Non interest expenses to be essentially stable on a quarterly basis relative to the Q2, excluding earned interest credit, which are wholly subject to interest rate changes, and we expect our asset quality to continue to be healthy.

Speaker 2

The current operating environment presents challenges, but with our conservative approach to balance sheet management, We are well positioned to capitalize on the opportunities afforded to Bank of Hope as the largest and strongest Korean American bank in the nation. With that, we would be happy to take your questions and add any additional color as requested. Operator, please open up the call.

Operator

We will now begin the question and answer session. The first question comes from Chris McGratty of KBW. Go ahead.

Speaker 4

Great. Good morning. Maybe Julianna, to start with you. The net interest income guidance, I'm interested in a few of the assumptions. I guess terminal betas, any migration you see further in the deposit mix?

Speaker 4

And then also I'm interested in the CD growth. Like what's the maturity schedule look like for your CDs? Thanks.

Speaker 3

Hi, Chris. Our terminal deposit beta assumptions are for total deposits approximately 60%. The mix shift has started to stabilize, the rate of change has started to stabilize in between the DEA and the interest bearing accounts. And for our CDs, we have they're Predominantly 12 month CDs, that's the most popular product, although we are actively originating shorter duration CDs at this point in time. And that maturity schedule, there is an elevated level of maturities in the second half of the year, in response to The maturities related to the promotions that were done last year, but other than that, they are more well evenly distributed.

Speaker 4

Okay. Thank you. That's 68% was the number right on the total bidder?

Operator

I heard that 60%.

Speaker 3

No, I said approximately 60%.

Speaker 4

Oh, 60, 60. Okay, got it. Yes. Maybe a follow-up on the margin. How do we think about given your comments about the mix getting a little bit more stable?

Speaker 4

Like do you have the margin for the month of June that you could share?

Speaker 3

Yes. The June margin was 2.70 percent. 2.70 percent? Yes. And our month to date Change in our cost of deposits is less than 10 basis points.

Speaker 5

Okay. So So

Speaker 3

it was Less than 10 on interest bearing.

Speaker 4

So 2.78 for June, 2.70 for the quarter.

Speaker 6

I mean, I know you

Speaker 3

have a question. $270,000,000 And our total deposits, spot rate through July 20 It's up 3 basis points from June spot rates.

Speaker 4

Okay. Got it. And then maybe one more if Jump back out. The ECR, the new line for that, can you just remind us how much of your non interest bearing deposits have ECRs and How we should think about that line if the Fed moves this week for Q3?

Speaker 3

So that line cost will go up if the Fed moves this week. Yes. The mid-three 63,000,000 or so.

Speaker 4

Okay. Thanks a lot.

Operator

Our next question comes from Matthew Clark of Piper Sandler. Go ahead.

Speaker 6

Hey, Juliana. Thank you, Paul. Juliana,

Speaker 3

can you

Speaker 6

clarify the spot rate? Do you have the Can you give us the rate? I'm just not sure if we're comparing to the month or the quarter. Can you just give us the spot rate on deposits at the end of July, October 20, whatever number you want to give us?

Speaker 3

Yes. No, good question. Thanks. Our total deposit Cost spot rate as of June 30th was 2.97% and as of July 20th is 3%.

Speaker 6

Got it. Thank you. So

Speaker 3

change 3 bps.

Speaker 6

Yes. Okay.

Speaker 3

And just for context, We're nearly through the whole month now, but last quarter, the spot change was 24 bps. So the rate of change is stabilizing or slowing.

Speaker 6

Yes. Got it. Okay. And then on The reserve build, can you give us a sense for what drove a lot of that? There was a decent step up this quarter.

Speaker 6

We haven't seen that elsewhere as much. And then what underlying businesses or industries drove the increase in special mention?

Speaker 3

So for special mention, the change was through a variety of C and I loans, but not a particular industry concentration. And the reserve increase quarter over quarter was an outcome of our CECL model, which as you know has Changes related to qualitative, quantitative factors and specific reserves and the macroeconomic forecast. So That whole mix enabled us to build our reserve, which we think is a prudent way to manage reserves At this point in the economic cycle.

Speaker 6

Okay, great. And then just last one from me. On your kind of outlook on for deposits embedded in your assumptions, It sounds like there's less of a mix change going forward, but do balances do you assume balances stabilize from here?

Speaker 3

I think that, well, we definitely have Some deposit goals and initiatives and programs in place to grow our balances, but what I can tell you is that month to date, Relative to June 30, our balances are up close to $200,000,000 So we are certainly having Positive trends in our deposits that are going on as kind of the volatility that happened in the banking industry earlier in the year

Operator

Our next question comes from Gary Tenner of D. A. Davidson. Go ahead.

Speaker 7

Thanks. Good morning. Just a follow-up on the Question about CD maturities. Juliana, could you tell us what the rate is on those CDs that are maturing back half of this year?

Speaker 3

One second. So the average rate on the CDs maturing in the 3rd quarter will be 4.13% And in the Q4, it will be 4.39%.

Speaker 7

Okay. Thank you. And then just given where the stock is trading still 75% of tangible book, any thoughts on Buyback or utilizing the buyback?

Speaker 2

Our capital ratios are all strong and we like the growth We saw this quarter, but at this time, I don't think we are anticipating So repurchases anytime

Speaker 7

soon. Great. And then last question. In terms of the multi tenant retail, just because it's the largest of your commercial real estate segments, can you talk about kind of what amount Those loans are scheduled to reprice and mature back half of this year in 2024?

Speaker 3

Well, we don't have the very specifics by property type handy with us right now, but we can follow-up with you offline on the very specifics of that one particular property segment.

Speaker 7

Okay. Well, and then maybe Juliana, just in general, as you think about commercial real estate and repricing And maturing over a similar time period, how far out are you going in terms of kind of stressing and Analyzing the credits, are you going out into 2024 at this point or really just back half of this year in terms of kind of getting a better sense of where Those borrowers lie with their ability to service at higher rates, etcetera.

Speaker 5

Yes. This is Peter. Maybe I'll take that one. So I think overall CRE portfolio is performing pretty good up to now. I think as we're looking at sort of that refi risk that to stress that portfolio in terms of higher interest rates and things.

Speaker 5

And I think at this point, we feel pretty confident right now that the majority of our customers are able to Refinance, I think partly due to just the lower LTVs and improving cash flows that we have seen post pandemic That gives them ability to refinance with us even at the higher rates. So there are one off cases where there are Potential workouts and things, but for the majority vast majority of our customers, we're seeing that that refi risk is pretty low.

Speaker 3

And Gary, just to add to the maturities of CREs that are coming up, you specifically asked about multi tenant retail and of those In the remainder of 2023, it's about $72,000,000 and then another $127,000,000 in 2024, but our total CRE maturities In 2023, it will be for $470,000,000 and then in 2024, dollars 742,000,000

Speaker 4

Thank

Operator

Our next question comes from Chris McGratty of KBW. Go ahead.

Speaker 6

Thanks for

Speaker 4

the follow-up. In terms of the balance sheet size, can you just remind us What level of cash is coming off the bond portfolio monthly or quarterly? And then, Kevin, you alluded to just the excess cash Just being held. Do you see this being the right amount of cash for the foreseeable future? Do you think you'll work that down?

Speaker 4

Is that part of the margin kind of stability narrative that you're hearing?

Speaker 2

Yes. Deposit outflows in response to the bank failures earlier this year Have been stabilized and we are starting to see some of those deposits actually coming back to the bank. And we also have product Campaigns in place and when deposit growth accelerates and the deposit situation normalizes, we Think we will return to more normalized levels of liquidity. But for the time being, we think an elevated level of cash is prudent and I think that's the case industry wide. So we will hold the higher level of Cash for the time being, that will gradually decrease as our deposit situations improve.

Speaker 3

And to your other question, the average cash flow coming off our bond book is about $15,000,000 to $20,000,000 a month, and we're targeting purchasing $20,000,000 to 30,000,000 of investments with that cash flow. So replacing our investment securities, but also building that book up by about $10,000,000 per month. So for a longer term kind of larger size investment securities book in terms of our optimal balance sheet mix kind of post This banking industry reception.

Speaker 4

Okay. That's helpful. Thanks a lot.

Operator

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Speaker 2

Once again, thank you all for joining us today, and we look forward to speaking with you again next quarter.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now

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Earnings Conference Call
Hope Bancorp Q2 2023
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