Hope Bancorp Inc

NASDAQ:HOPE

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon and good morning, and welcome to the Hope Bancorp First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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.

[Angie Yang, Director, Investor Relations]

Thank you, Gary. Good morning everyone and thank you for joining us for the Hope Bancorp 2023 first 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 2, let me begin with a brief statement regarding forward-looking remarks. The call today may contain 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 yesterday. 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; and David Malone, who stepped in as our Interim Chief Financial Officer earlier this year. Peter Koh, our Chief Operating Officer is here with us as usual and will be available for the Q&A session. And we also have here with us our new Chief Financial Officer, Julianna Balicka.

With that, let me turn the call over to Kevin Kim. Kevin?

[Kevin Kim, Chairman, President & Chief Executive Officer]

Thank you, Angie. Good morning everyone and thank you for joining us today. Before I begin my presentation, I would just like to say a few words about how pleased we are to have Julianna on Board as our new CFO. We have known Julianna since her days as a research analyst covering our predecessor banks. And while we have certainly undergone a transformation as Bank of Hope today, she is fitting right in and is up and running already.

Now let's begin on Slide 3 with a brief overview of our quarter. For the first quarter of 2023, our total deposits of $15.8 billion increased 1% quarter-over-quarter and 9% year-over-year. Bank of Hope ended the quarter with a strong balance sheet with high levels of capital and available liquidity. The company's total risk-based capital ratio increased to 12.25% at March 31, 2023, up 28 basis points quarter-over-quarter.

In response to the banking industry disruption in mid-March, we substantially increased our cash and cash equivalents to $2.2 billion at March 31 of 2023, up from $507 million in December 31, 2022. This increase in on-balance sheet liquidity reflects Bank of Hope's conservative approach to risk management and was substantially funded through the use of the bank term funding program at a cost of 4.49%. The use of the bank term funding program is a positive contributor to net interest income. For the first quarter of 2023, our net income was $39.1 million and our diluted earnings per share were $0.33. Our return on average tangible equity was 9.9%.

Now moving on to slide 4 for a review of our capital position. We continue to maintain robust capital ratios. All of our regulatory capital ratios are meaningfully above requirements for well-capitalized financial institutions. At March 31 of 2023, our common equity Tier 1 ratio was 10.75%, up 20 basis points from year-end. At quarter end, our company total risk-based capital ratio was 12.25% and our bank level total risk-based capital ratio was 12.06%.

A lot of attention has been paid this quarter to pro forma capital. For us after adjusting for allowance to credit losses and including hypothetical adjustments for investment security marks, all of our capital ratios remain very strong. I would also like to announce that our Board of Directors has declared a quarterly common stock dividend of $0.14 per share.

Moving on to slide 5. We closed the quarter with a significantly higher than usual level of cash and cash equivalents on our balance sheet and we believe this was prudent in light of the heightened financial sector volatility. At March 31, our cash and cash equivalents were $2.2 billion, up from $0.5 billion as of December 31 of 2022.

At the end of the first quarter, our available borrowing capacity together with cash and cash equivalents and unpledged investment securities was $8 billion equivalent to 50% of our total deposits and well-exceeding our uninsured deposit balances.

During the first quarter, we repurchased $11 million of our convertible senior notes. We expect to pay off the remaining balance of $207 million in May with our excess cash. Our liquidity and capital positions will continue to remain strong following the payoff.

Continuing to slide 6. Bank of Hope has a granular deposit base with an average commercial account size of approximately $300,000 and an average consumer account size of approximately $50,000. Over one-third of our balances are consumer deposits. Many of our depositors have had long time relationships with Bank of Hope or its predecessor banks. At March 31, the bank's uninsured deposit ratio improved to 38%, down from 41% at December 31 of 2022.

Now moving on to slide 7. In the first quarter, we funded $569 million in new loans, which is lower than the preceding quarters and reflect changing customer demand in a higher interest rate environment. In the first quarter, we had $350 million of commercial and industrial loan production, which represented 61% of our total loan production. The average rate on our new loan production was 7.53% in the first quarter, up 82 basis points quarter-over-quarter and up 399 basis points year-over-year.

Moving on to Slide 8. As of March 31, our loan portfolio was $15.1 billion, a decrease of 2% quarter-over-quarter. New loan production in the first quarter was offset by early loan pay-offs, maturing commercial real estate loans as well as a decline in the utilization of warehouse lines of credit. Year-over-year, total loans increased 7%.

Our portfolio is well balanced among the major loan types of commercial real estate, commercial and industrial, owner-occupied commercial real estate and consumer loans which are predominantly residential mortgage loans. Our commercial and industrial loan portfolio is well diversified by industry.

Moving on to Slide 9 and 10 for an overview of our commercial real estate portfolio. Our commercial real estate loans are granular, well diversified by property type and have low loan-to-values across all segments. The weighted average loan-to-value ratio, although our commercial real estate portfolio is 53.3%. The vast majority of our commercial real estate loans are full recourse with personal guarantees.

Office commercial real estate is a small segment of $465 million, representing 3% of total loans and with no central business district exposure. Our average commercial real estate loan size is $1.9 million and as you can see in the chart on Slide 10, we have only eight loans over $30 million in size. You can also see that the low loan-to-value ratios that consistent across size segments. Only 1% of our commercial real estate loans have a loan-to-value ratio of over 75%.

With that I will ask David to provide additional details on our financial performance for the first quarter. David?

[David Malone, Interim Chief Financial Officer]

Thank you, Kevin and good morning, everyone. Beginning with Slide 11, I will start with our net interest income, which totaled $134 million for the first quarter of 2023, representing a decrease of 11% from the preceding fourth quarter. Net interest margin was 3.02% in the first quarter, down 34 basis points quarter-over-quarter. This was primarily attributable to an increase in our average cost of interest-bearing deposits, which reflected customer preferences for more yield and a higher interest rate environment, partially offset by expanding earning asset yields.

Moving on to Slide 12. Our average loans of $15.2 billion, decreased 1% linked quarter and the average yield on our loan portfolio increased to 5.75%, up 39 basis points quarter-over-quarter.

On Slide 13, you can see that our average deposits of $15.8 billion, grew 2% quarter-over-quarter. The average cost of deposits increased to 2.41% reflecting the rapid pace of Fed fund rate hikes, consumer preferences and the banking industry disruption in mid-March.

On slide 14, you can see that our non-interest income was $11 million for the first quarter, a decrease of 9% from the preceding fourth quarter. Quarter-over-quarter deposit service fees and net gains on SBA loan sales increased, offset by decreases in other income and fees.

Moving on to non-interest expense on slide 15. Our non-interest expense was $90 million in the first quarter, an increase of 7% from the preceding fourth quarter. This was largely driven by compensation expense, which is typically higher in the first quarter due to payroll taxes and other items.

In March 2023, we executed a staffing rationalization, which is estimated to result in $12 million of annualized cost savings. Related to this we incurred $1.7 million of severance charges.

Excluding this item, salaries and employee benefits expense would have increased 5% quarter-over-quarter and our total non-interest expense would also have been up by 5%. For the first quarter of 2023, our efficiency ratio was 62%.

Now, moving on to slide 16. I will review our asset quality, which continues to be healthy. We built our allowance for credit losses to $164 million at March 31st, representing a coverage ratio of 1.09%. Overall, our loss experience remains minimal. We had only $108,000 in net charge-offs during the first quarter, which annualized to a net charge-off ratio of less than one basis point.

Total non-performing assets at March 31st were 39 basis points of total assets compared with 36 basis points at December 31st 2022. Non-accrual loans were $79 million at March 31 2023 compared with $50 million at December 31st.

The linked quarter change was primarily due to $18.5 [ph] million fully secured commercial loan. Based on our current workout plans, we anticipate solving this loan by midyear with minimal risk of loss. Looking at the entire portfolio, we are not seeing any broader systemic issues of concern and our asset quality metrics remain healthy.

With that, let me turn the call back to Kevin for a discussion of our outlook.

[Kevin Kim, Chairman, President & Chief Executive Officer]

Thank you, David. Moving on to slide 17, I will wrap-up with a few comments about our outlook. We currently expect full year loan growth in the low single-digit range. This reflects lower customer demand for commercial real estate loans in a higher interest rate environment.

Given our cost of funds at the end of the first quarter, we expect that our net interest income will decline in the second quarter. Thereafter, we expect that to stabilize and begin to modestly increase in the second half of the year supported by loan growth.

In terms of non-interest income, we expect to see modest quarterly growth for the rest of the year. Importantly, we are focused on improving the profitability and efficiency of our organization. We expect to see quarterly improvements in our efficiency ratio driven in part by the cost savings from the first quarter staffing rationalization. Taken together, we expect to see pretax pre-provision revenue growth in the second half of the year.

Finally as David discussed, our asset quality remains healthy. Given that backdrop, we expect to continue to modestly build our allowance for credit losses for the remainder of the year. Over the past several years, we have significantly strengthened our franchise with our strong balance sheet, capital and liquidity, our financial institution serves as a source of strength and stability for our customers through all economic and interest rate cycles.

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. [Operator Instructions] Our first question comes from Matthew Clark with Piper Sandler. Please go ahead.

[Matthew Clark, Piper Sandler]

Good morning, everyone.

[Kevin Kim, Chairman, President & Chief Executive Officer]

Good morning, Matthew.

[Matthew Clark, Piper Sandler]

First one for me just around the margin trying to gauge where it might shake out in the upcoming quarters. Can you just give us the spot rate on deposits either interest-bearing the total and then the average margin in the month of March?

[Kevin Kim, Chairman, President & Chief Executive Officer]

Yes. The spot rate at the end of the quarter for the interest-bearing deposits it was 69 basis points. Total deposits -- I'm sorry, interest-bearing deposits at 3.81% and total deposits of 2.73%. And you also asked for the NIM projection for the remainder of the quarter.

[Matthew Clark, Piper Sandler]

Or just in the month of March? Yes.

[Kevin Kim, Chairman, President & Chief Executive Officer]

For the month of March?

[David Malone, Interim Chief Financial Officer]

2.87%.

[Kevin Kim, Chairman, President & Chief Executive Officer]

The NIM for the third quarter -- third month of the quarter, yes.

[Matthew Clark, Piper Sandler]

Okay. Great. And then what's the plan for the borrowings you put on to fund cash? $2.1 billion of that borrowings. Is the plan to just hold on to that for a while, or should we expect you to – cash paydown.

[Kevin Kim, Chairman, President & Chief Executive Officer]

Yes, for the near-term. Yes. Yes. For the near term we expect to hold an elevated amount of cash compared with historical levels because usage of term -- bank term funding program is not a drag on our profitability. So we think it is prudent to hold and use as cash through the time being.

[Matthew Clark, Piper Sandler]

Okay. And then just shifting to credit. You mentioned the commercial loan that was added to non-accrual. What type of commercial loan was at? And what's the -- I guess what's the situation there? And then separately the uptick in criticized what drove the increase in criticized this quarter?

[Peter Koh, Chief Operating Officer]

Sure, Matthew. This is Peter. So the non-accrual loan that you mentioned there that was a C&I credit. It is actually -- a I would say sort of a gas industry-related to credit. Right now it's kind of a unique circumstance with the management there. So we are in a workout situation. And as we stated, we do feel like there is very minimal loss there on that one.

And on the criticized side of things, we do have a little bit of an uptick. We're still at about 2% or so of criticized loans, which we feel is a very -- still like very low and manageable level. And as you look at the relationships that are contributing to the increase in credit size loans, we are looking at somewhat unique circumstances for each of the individual credits, we believe that they are well secured with minimal loss potential. And in general, I just -- we look at the last many quarters we have actually reduced our level of criticized assets I think quarterly basis for the last -- over a year in a sense, so slight uptick here. But again we feel asset quality is still very healthy.

[Matthew Clark, Piper Sandler]

Okay. Thank you.

[Kevin Kim, Chairman, President & Chief Executive Officer]

Thank you.

[Operator]

The next question is from Gary Tenner with D.A. Davidson. Please go ahead.

[Gary Tenner, D.A. Davidson]

Thanks. A couple of questions on the deposit side. In terms of the nearly $2 billion of growth in time deposits in the quarter, how much if any of that was broker deposits? And what was the timing of the adds of those broker deposits if it is so?

[David Malone, Interim Chief Financial Officer]

Yeah. We added approximately $2 billion of broker deposits during the quarter.

[Gary Tenner, D.A. Davidson]

And was that weighted in terms of when it occurred?

[David Malone, Interim Chief Financial Officer]

Towards the end of the quarter.

[Gary Tenner, D.A. Davidson]

And then regarding your guidance on NII stabilization in the back half of the year what is that -- what assumptions do you have embedded there in terms of deposit migration? Does it assume that things stabilize from here? Are you modeling to a certain percentage of time deposit versus non-interest-bearing within that guidance?

[Julianna Balicka, Chief Financial Officer]

Gary this is Julianna. When we're looking at our forward projections and our modeling and our outlook in terms of where we are with the financials. As you well know what happened in March caused a lot of banks to have a shift in their deposit mix quarter-to-date we are seeing positive trends from our core relationship customers and funds coming back.

So in our outlook we do expect a replacement of some of the broker deposits that we've brought on with relationship-based branch-based deposits. And when we are looking at our projections going forward, we have a couple of things within the concept of the margin assumptions. The big increase in the cost of deposits happened in March, i.e., with the spot rate. So at this point in time the deposit mix between the DDA and interest-bearing is stabilizing.

So our projections still incorporate that and have some conservative assumptions around continued kind of DDA behaviors, but are also informed by trends quarter-to-date from our customers and also informed by some of our branch-based strategies that we will have our retail strategies for strengthening the deposit base.

[Gary Tenner, D.A. Davidson]

Great. Very helpful. Thank you.

[Operator]

[Operator Instructions] The next question is from Chris McGratty with KBW. Please go ahead.

[Chris McGratty, KBW]

Hi. Great. Thanks. I wanted to ask about the net interest income guide, the decline in Q2. Can you -- I get the back half off there a little bit of growth stability. How should we think about the rate of change Q2 from Q1? Obviously, there's a decent step down this quarter because of the events we talked about, but how much more pressure on dollars of NII before you start to see the inflection.

[Julianna Balicka, Chief Financial Officer]

Well, I think, if you look at the exit cost of funds that was quoted on this call a minute ago by Mr. Malone. I'll give you an idea of how to model where the kind of interest-bearing deposit costs will go in the quarter and that should give you a framework to work with for your NII outlook.

[Chris McGratty, KBW]

And then, in terms of the assumptions on rates in your guide, do you guys assume rate cuts, I guess, are you using the forward curve to get to the NII?

[Julianna Balicka, Chief Financial Officer]

We are using the forward rate curve, but in terms of getting any lift or benefit from rate cuts, as you know, deposit pricing at this point in time we are not assuming a lift just from rate counts.

I think the first couple of cuts in Fed funds are not going to give banks the pricing power to reduce deposit cost appreciably. So we are not baking that in order to -- we're not giving ourselves a benefit at this point in time.

[Chris McGratty, KBW]

Okay. Thanks, Julianna. And then last one, Kevin on the convert. I think in prior quarters you said, maybe, cash on hand and potentially replacing it. Is it now because of all the cash on the balance sheet, the $200 million just simply goes away in May, without a replacement?

[Kevin Kim, Chairman, President & Chief Executive Officer]

Yes. I think we will be okay without raising funds to replace the 2% convertible notes. We have enough liquidity to cover that. And in terms of our capital ratios, senior debt is not capital. It is just borrowing. So our capital ratios at the holding company level will not be affected.

[Chris McGratty, KBW]

Thank you.

[Operator]

[Operator Instructions] I'm showing no further questions. This concludes our question-and-answer session. Excuse me, we do have a question from Tim Coffey with Janney. Please go ahead.

[Tim Coffey, Janney]

Great. I got it in. How are you doing?

[Kevin Kim, Chairman, President & Chief Executive Officer]

Good morning Tim.

[Tim Coffey, Janney]

Kevin, I just had a question about, what kind of sense you have for this air pocket that you're seeing among your borrowers, especially commercial real estate borrowers. How long do you think that might last?

[Peter Koh, Chief Operating Officer]

Can you elaborate on what you mean by air pocket?

[Tim Coffey, Janney]

Well, the originations as for the last two quarters you've made comments about the higher interest rate environment not being conducive for additional demand for credit from your customers. I'm wondering, if you see a light at the end of the tunnel in terms of that regard.

[Kevin Kim, Chairman, President & Chief Executive Officer]

Well, Tim, we expect our loan growth to be in the low single-digit range in 2023. So, we really do not see much of a drastic change in terms of the loan demand or our projected loan production in the CRE area. Although, that 2% growth will be across the board coming from every business unit of our organization, we do not see much of a change at least in 2023.

[Tim Coffey, Janney]

Okay. So, you're not seeing much of an inflection point then near term? Is this going to be steady across the balance of the year then? Is that right?

[Kevin Kim, Chairman, President & Chief Executive Officer]

Yes, I think, that's generally correct.

[Tim Coffey, Janney]

Okay. All right. Great. Those are my questions. Thank you for the time.

[Kevin Kim, Chairman, President & Chief Executive Officer]

Thank you, Tim. Operator, do we have any other questions?

[Operator]

There are no more questions in the queue. I'd like to turn the conference back over to management for any closing remarks.

[Kevin Kim, Chairman, President & Chief Executive Officer]

Okay. Once again, thank you for joining us today and we look forward to speaking with you again in three months. So, long everyone.

[Operator]

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