Hope Bancorp Q1 2023 Earnings Call Transcript

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April 25, 2023

Key Takeaways

  • Hope Bancorp grew deposits 1% quarter-over-quarter and 9% year-over-year to $15.8 billion, boosting cash and equivalents to $2.2 billion and total liquidity to $8 billion, partly funded by the Bank Term Funding Program at 4.49%.
  • For Q1, the bank reported net income of $39.1 million, diluted EPS of $0.33 and a return on average tangible equity of 9.9%, with net interest income of $134 million and a net interest margin of 3.02%.
  • Hope ended the quarter with robust capital, featuring a common equity Tier 1 ratio of 10.75% and a total risk-based capital ratio of 12.25%, both well above “well‐capitalized” requirements, and declared a $0.14 per share quarterly dividend.
  • The bank funded $569 million in new loans at an average rate of 7.53%, while total loans fell 2% sequentially to $15.1 billion (up 7% Y/Y), maintaining a balanced portfolio and a low average CRE loan-to-value of 53.3%.
  • Asset quality remains strong with an allowance coverage ratio of 1.09%, minimal net charge-offs and nonperforming assets at 39 basis points of total assets, and management expects low single-digit loan growth, a Q2 NII decline then stabilization, and ongoing efficiency improvements.
AI Generated. May Contain Errors.
Earnings Conference Call
Hope Bancorp Q1 2023
00:00 / 00:00

There are 10 speakers on the call.

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. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Angie Yang, Director of Investor Relations.

Operator

Please go ahead.

Speaker 1

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 in the Presentations page of our Investor Relations We'll start. 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.

Speaker 1

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 1 hour for this call.

Speaker 1

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

Speaker 2

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 Juliana on board as our new CFO. We have known Juliana 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.

Speaker 2

Now let's begin on Slide 3 with a brief overview of our quarter. For the Q1 of 2023, Our total deposits of $15,800,000,000 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 percent 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 $2,200,000,000 at March 31, 2023, up from $507,000,000 in December 31, 2022.

Speaker 2

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 percent, the use of the Bantam funding program is a positive contributor To net interest income, for the Q1 of 2023, our net income was $39,100,000 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, 2023, our common equity Tier 1 ratio was 10.75%, up 20 basis points from year end.

Speaker 2

At quarter end, our company total risk based capital ratio was 12.25 percent And our bank level total risk based capital ratio was 12.06%. A lot of attention has been paid This quarter to pro form a 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.

Speaker 2

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 $2,200,000,000 up From $500,000,000 as of December 31, 2022, at the end of the Q1, our available borrowing capacity Together with cash and cash equivalents and unpledged investment securities was $8,000,000,000 Equivalent to 50% of our total deposits and well exceeding our non our uninsured deposit balances. During the Q1, we repurchased $11,000,000 of our convertible senior notes. We expect to 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 a third of our balances are consumer deposits.

Speaker 2

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, 2022. Now moving on to Slide 7. In the Q1, we funded $569,000,000 in new loans, which is lower than the preceding quarters and reflects changing customer demand in a higher interest rate environment. In the Q1, we had $350,000,000 of commercial and industrial loan production, which represented 61% of our total loan production.

Speaker 2

The average rate on our new loan production was 7.53% in the 1st 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 $15,100,000,000 A decrease of 2% quarter over quarter. New loan production in the Q1 was offset by early loan payoffs, 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%.

Speaker 2

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 Slides 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 of our commercial real estate portfolio It's 53.3%. 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 $465,000,000 representing 3% of total loans and with no central business district exposure. Our average commercial real estate loan size is $1,900,000 and as you can see in the chart on Slide 10, We have only 8 loans over $30,000,000 in size. You can also see that the low loan to value ratios are 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 Q1. David?

Speaker 3

Thank you, Kevin, and good morning, everyone. Beginning with Slide 11, I will start with our net interest income, Which totaled $134,000,000 for the Q1 of 2023, representing a decrease of 11% From the preceding 4th quarter, net interest margin was 3.02% In the Q1, 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 point $2,000,000,000 decreased 1% linked quarter and the average yield on our loan portfolio increased to 5 point 75%, up 39 basis points quarter over quarter.

Speaker 3

In Slide 13, you can see that our average deposits of $18,800,000,000 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 $11,000,000 for the 1st quarter, A decrease of 9% from the preceding 4th 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.

Speaker 3

Our non interest expense was $90,000,000 in the first quarter, An increase of 7% from the preceding 4th quarter. This was largely driven by compensation expense, which is typically higher in the Q1 due to payroll taxes and other items. In March 2023, we executed a staffing rationalization, which is estimated to result in $12,000,000 of annualized cost savings. Related to this, we incurred $1,700,000 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%.

Speaker 3

For the Q1 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 $164,000,000 at March 31, representing a coverage ratio of 1.09%. Overall, our loss experience remains minimal. We had only $108,000 in net charge offs during the Q1, which annualized to a net charge off ratio of less than one basis Total non performing assets at March 31 were 39 basis points Total assets compared with 36 basis points at December 31, 2022.

Speaker 3

Non accrual loans were $79,000,000 at March 31, 2023 compared with $50,000,000 at December 31. The linked quarter change was primarily due to $118,500,000 fully secured commercial loan. Based on our current workout plans, we anticipate resolving this loan by mid year 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.

Speaker 2

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 Q1, we expect that our net interest income will decline in the 2nd quarter.

Speaker 2

Thereafter, we expect it 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 Q1 staffing rationalization. Taken together, we expect to see pretax, pre provision revenue growth in the second half of the year.

Speaker 2

Finally, as David discussed, our asset quality remains healthy. Given that backdrop, we Back 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 throughout all economic and interest rate cycles. With that, we would be happy to take your questions and add any additional color as requested.

Speaker 2

Operator, please open up the call.

Operator

We will now begin the question and answer session. Our first question comes from Matthew Clark with Piper Sandler. Please go ahead.

Speaker 4

Hey, good morning, everyone.

Speaker 2

Good morning, Matthew.

Speaker 4

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

Speaker 2

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

Speaker 4

Just in the month of March, yes.

Speaker 2

For the month of March?

Speaker 3

Yes. 2.87%.

Speaker 2

Oh, yes. NIM for the 3rd quarter 3rd month of the quarter, yes.

Speaker 5

Okay, great.

Speaker 4

And then what's the plan for the borrowings you put on to fund cash, I mean, dollars 2,100,000,000 of said Borrowings, is the plan to just hold on to that for a while? Or should we expect you to reach

Speaker 2

Yes. For the near term, please. Yes, yes. For the near term, we expect to hold elevated amount of cash compared with historical levels, Because usage of term bank term funding program It's not a drag on our profitability, so we think it is prudent to hold and use as cash for the time being.

Speaker 4

Okay. And then just shifting to credit, you mentioned the commercial loan that was added to non accrual. What type of commercial loan was that? And I don't know, what's the I guess, what's the situation there? And then Separately, the uptick in criticize, what drove the increase in criticize this quarter?

Speaker 5

Sure, Matthew. This is Peter. So the non accrual loan that you mentioned there that was a C and I credit, it is actually a, I would say, sort of a gas Industry related 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 that we do have a little bit of an uptick.

Speaker 5

We're still at about 2% or so of criticized loans, Which we feel is a very still a very low and manageable level. And as we look at the relationships that are contributing to the Increasing criticized loans, we are looking at somewhat unique circumstances for each of the individual credits. We believe that they are well secured with a bit of a loss potential. And in general, I just If you look through 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. Okay.

Speaker 5

Thank you. Thank you.

Operator

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

Speaker 6

Thanks. A couple of questions on the deposit side. In terms of the nearly $2,000,000,000 of growth in time deposits in the quarter, How much, if any, of that was brokered deposits? And what was the timing of the adds for those brokered deposits, if so?

Speaker 3

Yes. We added approximately $2,000,000,000 of broken deposits during the quarter.

Speaker 6

And was that weighted in terms of when it occurred?

Speaker 3

Towards the end of the quarter.

Speaker 6

And then regarding the 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 ton deposit versus non interest bearing within that guidance?

Speaker 7

Gary, this is Juliana. 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 kind of going forward, We have a couple of things.

Speaker 7

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 do 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

Operator

The next question is from Chris McGratty with KBW. Please go ahead.

Speaker 8

Okay. Thanks. I wanted to ask about the net interest income guide, the decline in Q2. Can you I get the back half off of there, a little bit of growth stability. How should we think about the rate of change Q2 from Q1?

Speaker 8

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?

Speaker 7

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.

Speaker 8

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?

Speaker 7

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 cuts, I think the first couple 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 cut we're not giving ourselves that benefit at this point in time.

Speaker 8

Okay. Thanks, Joanna. 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 $200,000,000 just simply goes away in May without a replacement?

Speaker 2

Yes. I think we will be okay without raising funds to replace the 2% convertible No. 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.

Speaker 5

Thank you.

Operator

Showing no further questions. This concludes our question and answer session. I will excuse me, we do have a question from Tim Coffey with Janney. Please go ahead.

Speaker 5

Great. I got it in.

Speaker 9

Hi, guys. How are you doing this morning?

Speaker 5

Good morning, Tim.

Speaker 2

Good morning, Tim.

Speaker 9

Hey, Kevin, I just had a question What kind of sense do 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?

Speaker 5

Can you elaborate on what you mean by air pocket?

Speaker 9

While 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. Well, team,

Speaker 2

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 This is unit of our organization. We do not see much of a change at least in 2023.

Speaker 9

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

Speaker 2

Yes, I think that's generally correct. Okay. All right. Great.

Speaker 9

Those are my questions. Thank you for the time.

Speaker 2

Operator, do we have any other questions?

Operator

There are no more questions in the queue.

Speaker 2

I'd like to

Operator

turn the conference back over to management for any closing remarks.

Speaker 2

Okay. Once again, thank you for joining us today, and we look forward to speaking with you again In 3 months. So long everyone.

Operator

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

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