Q4 2019 Earnings Call
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Hello and welcome to the Hope Bancorp Q4 2019 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please speak to a conference pass by pressing the star key followed by zero.
after today
His presentation there will be an opportunity to ask questions to ask a question. You may press the * then 1 and your telephone keypad to try your question, please press * then two, please note this event is being recorded. And now let's turn the conference over to Angie Yang director of investor relations, please go ahead.
Thank you, Keith. Good morning everyone and thank you for joining us for the whole Bancorp 2019 fourth-quarter investor conference call as usual. We will begin we will be using a slide presentation to accompany our discussion this morning. If you have not done so already, please visit the presentations page of our investor relations website to download a copy of the presentation or if you are listening in to the webcast you should be able to view the slides from your computer screen as we progress through the presentation.
Beginning on slide to I'd like to begin with a brief statement regarding forward-looking remarks the call today may contain forward-looking projections regarding the future of financial performance of the company and future events. These statements are based on current expectations estimates or projections and management assumptions about the future performance of the company as well as the businesses and markets in which the company does and is expected to operate these statements constitute forward-looking statements within the meaning of the private Securities litigation Reform Act of 1995. These statements are not guarantees of future performance actual outcomes and results May differ materially from what is expressed or forecasted in such forward-looking statements. We refer you to the documents of the company files periodically with the Dead.
As well as the Safe Harbor.
Your 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 the bank any cautions that the complete Financial results to be included in the quarterly report on Form 10-K for the year ended December Thirty One two thousand and Nineteen Eighty-Four materially from the financial results being reported today in addition some of the information referenced on this call today are non-GAAP Financial measures. Please refer to our 2019 fourth quarter earnings release for the reconciliation of gaap to non-GAAP financial measures. Now, we have allotted one hour for this call presenting from the management side today will be Kevin King hoping corpse chairman president and CEO and Alex KO our Executive Vice President and Chief Financial Officer Chief credit officer.
this repeater KO is
Also here with this today and will participate in the Q&A session with that. Let me turn the call over to Kevin and Kim Kevin. Thank you Angie. Good morning everyone and thank you for joining us today. Let's begin with sliced free. Our fourth-quarter results capped a successful Europe consistent execution on our strategic priorities practicing the value of the bank of Hope franchise. We continue to deliver a high level of profitability generating forty-three million dollars and net income or 34 cents per diluted share in the fourth quarter of 2019. This reflects a slight improvement over the forty two point six million dollars or $0.34 a month in the preceding third-quarter taking a step back and looking at the full year. You may recall on our fourth quarter earnings for last January . We discussed a number of key prion. Yep.
is for the year, I'm
Very pleased to report that we have made excellent progress on these initiatives first and most notably over the course of 2019. We dramatically improve our core deposits particularly at the branch level where we are having a great deal of success in attracting retail depositors to our lower-cost deposit accounts wage 2019. We increased our money market and now deposit balances by 31% our savings deposit by 21% and our non-interest birth deposit by 2% this strong growth in court deposits enabled us to significantly reduce our dependence on higher cost and time deposits off a result at the end of 2019 time deposits had declined to 41.2% of our total deposit down from 48.3% at the age.
the prior-year
The success we had in executing on our core deposit Gathering initiatives proved critical in helping us to better manage our deposit costs which plateaued during the third quarter of 2019 and then declined significantly during the fourth quarter second. Another key priority was tightly managing our non-interest expensive to a consistent focus on enhancing efficiencies throughout our organization. We were able to reduce our non-interest expense as a percentage of average assets to 1.86% for the year down from 1.8% in 2018. We were able to achieve this Improvement despite the ongoing Investments and continued spending on projects including the implementation of Cecil and 3rd, which is always a priority for whole Bancorp was offensive.
Capital Management
Through our stock repurchase program and attractive dividend. We return eighty four point seven million dollars of capital to shareholders in 2019 while maintaining a capital ratios to support future growth moving on to slide or in addition to the success. We have had in gathering lower-cost deposit. Am I able to be more active in our lawn production as a result? We generated a record level of loan originations in the fourth quarter. We had eight hundred forty eight million dollars in new loan originations funded in the fourth quarter up from $694 in the preceding third quarter.
We also slow a record level of payoffs which totaled $486 in the fourth quarter off from 461 million in the prior quarter off a Greengate payoffs and pay Downs totaled $668 in the fourth quarter versus 633 million dollars in the preceding quarter. We continue to the larger mainstream Banks targeting small lending opportunities than they have in the past and offering very aggressive pricing to win deals.
however
Without a record level of loan originations are total loans increased 171 million dollars or 1.4% from the end of The Prestige order this equates to 5.7% on an annualized basis looking at the breakdown of our Loan Production by Major category. We continue to have a well-balanced mix of new loan originations commercial real estate loans comprise 61% of total production in the quarter.
Commercial loans the county for thirty 1% and Consumer loans comprised primarily of Residential Mortgage Loans accounted for 8% off originated 513 million dollars in cre loans for the quarter up from $349 million dollars in the preceding third-quarter with the lower interest rate. We saw a modest increase in the demand for loans, and we capitalized on some attractive opportunities in a number of areas including Hospitality wage use facilities and warehouses.
we have
I don't know this from quarter of cni loan originations refunded $266 million dollars in new cni production in the fourth quarter in addition to the expansion of our corporate banking group targeting Landing opportunities with middle-market mainstream entities. We have also been focused on building on our relationships with existing seasoned operators of top-tier franchises, which has been contributing to our cni Loan Production turning to our SV a business. We originated sixty-two million dollars in SG loans, which reflects an increase from 55 million dollars in the preceding third quarter. And since we are retaining this production, which is booked at higher rate than our overall average loans, we continue to see the positive impact. This strategy is having on our average loan yield.
With that as an overview of our business development efforts, I will ask Alex to provide additional details on our financial performance for the first quarter Alex. Can I get a caravan wage is I review I will Financial result. I will limit my discussion to just some of the more significant items in the quarter.
Do you hear me?
By 5 I will start with our interest income which totaled hundred thirteen point five million dollars compared with hundred sixteen point three million dead end up resenting third-quarter.
This decrease was mainly due to lower interest income on loans due to the impact of the interest rate Cuts in September and October .
I want that interest margin declined by 9 basis points to 3.16%
excluding purchase accounting adjustment our net interest margin declined by ten basis points
This was relatively in line with our expectations given the impact of both the September and October rain cuts on our earnings asset.
I work for a Christian income declined 24 basis points from the preceding third quarter.
Was the Reason by the pricing on our variable rate loans following the September and October rate cuts the payoffs of higher-yielding loss and the lower rate on the origination in the lower interest rate environment.
This was partially offset by a substantial decline in our cost of deposits due to the mix funding mix that can be discussed.
Our cost of deposits declined 13 basis points from the prior quarter to 1.49% and I would load that. This is the first quarter of the quarter decreased and deposit cost and three years.
The last time you pause it cost decline was in the fourth quarter of 2016 when the total cost of deposits decreased by one basis point.
As regarded last quarter. Our total cost of the deposits has continued its downward Trend since the pic in July 2019.
What a month-by-month basis, I will cost of the deposit was 1.54% in October 1.49% in November and 1.44% off in December 2019 with a full quarter impact of October rate cut.
And assuming no further changes in the FED funds rate. We expect to see a decline in our interest margin excluding a Christian income of approximately 223 basis points in the first quarter of 2020.
No moving on to slide six.
Our non-interest income was $13 essentially unchanged from the preceding third quarter.
The primary variance from the preceding quarter was a 1.1 million dollar increase in the net gain on sale of other loans.
During the quarter total sales of mortgage loans amounting to 32.5 million dollars compared with Thirty point nine million in the preceding quarter.
In addition we completed no sale of an aggregate twenty-six million dollars of loans, which had been transferred to Los Altos Ale House at the End of the 2019 third-quarter.
Yes increasing gain on sale of other laws was partially offset by a $900,000 decline in income took all the quarter to reduce our other income and fees.
moving expenses on slide seven
Our large expanse was seven point four million dollars up modestly from the preceding third quarter in terms of CNS can variances our salaries and employee benefit expenses declined by 1.8 million dollars due to lower levels of retirement benefit expense as well as lower self-funded wage insurance cost each quarter based on the volume of insurance claims in a given quarter.
This declines were offset by an increase in our FDIC assessment fees for which we reported no expense in the 3rd, 2019. We utilize the remainder of our small Bank assessment credit to offset some but not all of our expenses this quarter and now we also have an increase in credit related expenses and the lower amount of who are you off to income driven by fluctuation in oreo fair value adjustment?
For the quarter. Our non-interest expense to average asset ratio was 1.85% unchanged from last quarter.
Which reflects our continued success and expense management?
Now moving on to slide eight. I will discuss some of our keys deposit trends.
Howard total deposit increase by approximately 2.4% from the end of the prior quarter with all of the growth coming in our lower cost.
How long does not interest bearing deposits increased 2.5% in the quarter while money market and now deposit used and savings account balance has increased by 6.2% and 5.7% respectively?
As a result of the improvement in our deposit mix on time deposits increased to 58.8% of our total deposits, where the 57.6% at the end of the prior quarter.
We also continue to see positive trans into the pricing gap on Prime deposit renews or the Delta between a CVS expiring rate off the renewal rate the fourth quarter.
Renewed CDs were issues that are weighted average rate. That was 59 basis points lower than the weighted average rate on those CDs that mature off.
As a result the average cost of our time deposits declined four basis points from the preceding quarter.
Now moving on to slide 9. I will review as a quality football asset quality remains healthy and we continue to see positive trend.
our total crystallized lungs declined by another seven point seven billion dollars and now at our lowest level since our m o e in 2016
However, our non-performing loans increased by Twenty point seven million dollars from the end of the prior quarter.
Approximately half of the increase was attributable to a $10 construction loan that matured before the completion of the project.
We choose not to extend the maturity date of the loan and stop funding advances, which is dictated that replaced a long on non-accrual status.
The project is about 85% complete and accurate appraisal data shows that we are very well secured and no impairment exists. This is another example of our effort to proactively identify and manage potentially problematic credit.
We are currently in a workout with a borrower with an expectation that the loan will be refinanced by another lender.
The remainder of the increase in non-performing loans is quarter primarily related to temporarily delays in the renewal process.
Which also impacted the analysis of our 90 plus the link own laws on a cruise status? We have a work through this divorce most part already and we expect to see this lost my great back to Performance status by the end of the month.
Our loss experience continues to be very low. We had a just $738,000 of that charge off in the quarter or two basis points off of average long on an annualized basis.
For the 4-year our net charge-offs mounted to just four basis points of average loan.
Given the low level of that charge off and the lake of improvement in the new inflow into non-performing loans this quarter. We had a modest home loan loss provision requirement of 1 million dollars.
With that, let me turn the call back to Kevin.
Thank you, Alex. Let's move on to slide ten. I will conclude with a few comments about our priorities and expectations for 2026 last year. We will be highly focused on deposit Gathering and controlling expenses. And we expect to see a continuation of the positive Trends. We have faith in both areas. We anticipate that environment for loan growth will continue to be challenging as we expect that transaction activity in CRM will remain sluggish. However, we expect to be more active in new Loan Production in 2020. We are also focusing on better defending existing portfolio from the high level of payoffs. We have seen in recent quarters.
but importantly
Our Focus will continue to be on generating profitable growth. We will continue to be very disciplined in the loans. We originated to ensure that we met our targeted levels of profitability over the last year. We have made considerable investments in expanding our lending capacity beyond our traditional core Market wage.
Our corporate banking group is focused on originating cni loans and Gathering corporate deposits from the Middle Market customer base. The experience of our expanded team of Bankers has been Diversified Beyond financial services, and now includes broader industry expertise. In other areas. We believe we have established a highly scalable business model and can continue to originate loans and gather deposits without the need to hire substantially more Personnel. We are also optimistic about the growth opportunities in our Residential Mortgage and Warehouse line business. We believe that we can add a number of new clients for our warehouse line over the course of the year, which should result in higher funding volumes that will generate interest income and in terms of our retail Mortgage business. We are working to better
leverage our entire bread
Network to generate more referrals from our existing customer base to date we have had most of our Residential Mortgage originations coming from our mortgage loan production offices which Target the mainstream customer base more recently we have been focusing on growing our referrals that come through our Southern California branches off and we are pleased to see growing origination volumes from these business units. We believe that with some additional focus and training in our other Geographic mom, we can increase the referrals generated from our branches in other parts of the country, which will have the positive impact of generating higher levels of non-interest income from the gain on sale of other loans.
Collectively with the contributions from our corporate banking group and our warehouse line of credit business unit supplementing our traditional business line that we believe we can generate a higher level of loan growth this year than we did in 2019 for 2004 2020. We are package or organic loan growth the range in the low to mid-single digits. And as always we remain committed to strong Capital Management that in a strong shareholder returns while maintaining strong Capital ratios that support our continued growth. We have an attractive dividend that currently yields approximately 4 per month and we plan to remain active with our system million dollars a share repurchase program currently in place.
To wrap up. We end it 2019 or a strong note, and we have a lot of momentum on our key initiatives as we start 2020. I believe we are well-positioned to deliver another good year for our shareholders and further enhance the value of our franchise with that. Let's open up the call to age or any questions you may have operator. Please open up the call. Yes. Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 and your telephone key. If you're using a speaker phone, please pick up your handset before pressing the keys to try your question, please press star the two at this time. We will pause momentarily to assemble the roster.
And the first question comes from Christmas Valley with KBW.
Great. Thanks. Good afternoon.
Kevin maybe we could start or Alex on the margin obviously the environments got a little bit tougher for the banks. But but you have this the ability to to bring down deposit costs wage talked about in your prepared remarks appreciating the guidance for the first quarter. But if if the rate Outlook remains steady, how do we think about like ultimates in the floor in the margin, you know where and and kind of win?
Sure. Sure.
As I indicated if we're expecting to have continued compression next quarter given the rate cost that we have experienced, you know special October record, it will continue next quarter but as we indicated our practice deposit initiative as well as very often it's a plan pricing on the deposit, even though we have a very competitive cable competition on the loan rate is very still severe. We would expect to be stabilized in the second quarter of 2020 that is margin and then second half of the year, we would expect to start to increase
Okay, great. And as rates have come down maybe kind of a a strategic question Kevin with the what the SBA business any any thoughts on potentially going back to the the originating cell model maybe comments on where you thought, you know think premiums might be today.
Escuela okay.
Yeah, because the average rate on SBA Loans the considerably higher than the other loans, you know, we have stopped selling the loans much more than a year ago. And obviously keeping these higher rate loans in our portfolio is an important element of our overall profitable growth strategy off. So it is Our intention to to continue the retention policy for the time being but as always, you know, we have been a a very religiously monitoring Demarcus situation and the current premiums in the secondary Market is becoming better. So we will continue to evaluate but at this time and for the time being Our intention is to continue to retain them on our books. Okay, great. Thank you.
Thank you. And the next question comes from Gary Tanner with d a Davidson.
Hi, good morning. This is actually Jake Stern on for Gary. How's it going today?
Good. So first question is the 10:00 be 51 trading program you announced in early December only runs through the end of January . Is it reasonable to expect you would you to fill out the reservation by then or are one Q BuyBacks likely closer to forty levels? Well, as we noted in our earnings release, we were fairly active Faith quarter in buying back our own shares and we will continue to remain active in the first quarter, you know, when whether we will be able to complete that fifty million dollar program by the end of the first quarter will depend upon the overall Market activity.
Okay, and how are you thinking about buy back? Once the current authorization is fully fully used. We do not have any additional plan in place at this time. But uh, uh as in the past, we will continue to monitor our Capital situation and uh, I would not be surprised depending upon the market situation and and our our Capital situation the board will consider another program that later this year.
Okay.
Thanks for answering that just to clarify Jake February is not a blackout. So.
Can be 51 program in January and our blackout which is when our blackout period ends. Okay. I appreciate you answering the question. Just another one to follow it up off the quarterly CD maturity schedule and protected repricing Gap looking like for 2020.
Sure CD we have let's say starting with the first quarter 2017 Total about one point nine billion dollars that are average rate of 2.17% of the expected to ensure and the second quarter of 2020 about 1 billion dollars a better rate of 2.33% and Q3. It's about 1.2 billion dollars at a rate of 2.3% And the last quarter was Q age of 2020 nine hundred sixty million dollars, but rate of 1.9% So if I just aggregate all the 2020 maturity that is about a 2.18% total of 5.2 billion dollars.
I appreciate the color on that and just one more to and then I'll step out here. So it looks like your expensive average assets has been at the 185 level for the for three of the wage for quarters. Are there opportunities to lower that level further or is that the level you are comfortable operating at?
I feel comfortable operating it but I would expect to you know, have some improvement. And the reason for its Improvement is we will continue to grow with a profitable growth. So as the average assets continues to grow and our very disciplined no expense monitoring, especially with you know, there was a some professional fees. They were a real monitoring very closely and also no more need such as a Cecil they did have a sizable amount of investment in 2019, but we do not expect that happen or substantially decline in 2020, but there's a some offsetting the increase is a m i c s s e and some other so even assuming, you know similar level of a total non-interest expenses. Let's say seventy or seventy 1 million dead.
I would expect to
See the nine inches expense over average asset ratio slightly below that 1.85%
Wonderful. I appreciate you guys answering my questions.
Thank you. Thank you. And once again, please press * then 1 if you would like to ask you a question.
And the next question comes from a Silverado with a cap Security Management afternoon. Everyone just a couple of questions what percentage of your loans for the past quarter were fixed versus variable wage. Do you see that trending during the next twelve months? And also what yields are you participate? Are you anticipating from the loan portfolio going forward lower or higher from the dead 5.04?
Sure, let me start with a mix of the fixed and variable-rate Loan, but we have a mortgage loan. So let me break into fixing a hybrid and variable. So hybrid what I mean is it is hybrid. But if it is at a fixed rate, let's say first five years fix and then variable is called hybrid. But if it is within the fixed we call it as a a face. So total of 6% as fixed rate is a 24% at a rate of about 4.6% off and the hybrid is a 37% and the variable is a 39% and that 39% or four point eight billion dollars of a variable rate loan consisted of mainly Prime based and also libor-based. So out of Step entire variable rate law about 55% of laws are based on the price.
And the remaining is based on the line.
And some other indexes, but the other index is very minor.
So that's the kind of composition of the fixed and the variable and I think it you did it ask the second question about pricing or the 1000 with new sealed off. So they're going forward, you know, who knows how the interest rate will be in the next 12 months or so, but the competition understanding side is a seal very competitive. So I don't think in the rules the increase on our loan year more realistically, we will see a small fraction on our own meals and final question for me you have what is your dividend policy going forward because you haven't raised a dividend in six quarters off. But what would your criteria for potential dividend increases going forward?
we we have factored into a lot of considerations when we
Determine the the dividend rate and as I mentioned in the script, you know, our current dividend yield is around 4% off which is pretty good to compare it to other compared with other players in the market. And we also uh-uh. Look at our office Capital, uh position and dividend is one way of returning, uh, a returns to our shareholders, but there will be other methods and currently off the the Fourteen cents, uh pre recorder is uh, the the, uh, good level of dividend payout that we believe so unless there is a dramatic change in the in the
Martha situation where our Capital position I think that will continue for the time being so the dividend payout ratio is the 41% which will be Thursday if that's a very healthy and also just add, you know, we have active share repurchase programs and as a mr. Can indicate, you know as needed and we'll continue with maximize our level of capital through either dividend or share repurchase and so forth. Okay. Thank you very much. I appreciate it.
Thank you.
And the next question comes from 10 coffee with Jenny.
Thank you, Martin. Everybody looking at the decline the gas station and car wash loans down about $135 and $3 billion last year. What are some of the Dynamics that are bringing a balance is down.
You know, we we are looking at different marketplaces and you know, depending on the industry and things we are trying to tighten up in certain areas. We do see some risk we have not made any proactive efforts in strategically to bring down some of those balances but we are also, you know just looking at the industry. We're also looking at the competition terms of how aggressive they're getting and I think you're seeing some of that competitiveness show up in terms of our balance is there but you know, we don't see in terms of the overall Market Thursday we have concerns as we stated before in terms of where we are in the overall cycle, but in terms of the general markets and the industry is we don't see any big concerns in the those balances. I think it's more of a reflection of the competition.
and if if I may
The competition that you know is I guess driving that market right now are those local banks are more National Banks?
You know, we're in a position where we see the competition from from various places, so we are seeing some of the large Banks competing for space, but we also have the smaller Banks. So, we do see a variety of of of all sides things. Okay, great. Thank you. The rest of my questions have been answered. Thank you. Thank you. Thank you. Once again, please press star and then one if you would like to ask you a question.
And the next president customer Matthew Clark with Piper Sandler.
Good morning. This is actually Bob showing on for Matthew. How you guys doing? Hi, I just was wondering if you guys had a Cecil update for us and any implementation guidance.
Sure, you know we we did kind of disclose in the past and we had a good shade in terms of the progress cuz we are doing the second Barrel run testing and wage is not much changes from the previous our expectation, which says about you know, the Lawns for long lost my increase on day one thing about thirty to forty percent increase is subject to change and the capital impact from the Cecil is a relatively minor. So I don't think there was any major changes from previous conversation and I do not expect a major changes going forward as well.
Okay. Thanks and if I can sneak one more.
Regarding the strength of your customers. Have you seen positive Trends in the cash flow ratios and loaned values of your customers or how is that trended over the past couple of quarters, you know, we we see in certain areas of a much stronger accounts working things. I think it's hospitalities. They disability. It's been a very good industry so far.
And so I think you know generally speaking. I think they've been pretty stable. I think we are seeing some industries that are showing improvements as Hospitality as I as I mentioned before but we haven't we are not seeing any like major changes, I guess if that's the question you're asking I think basically we're seeing positive or stupid Trends across Industries.
All right. Thanks. I'll start back.
Thank you, and that does conclude our question-and-answer session. So would like to return the floor back over to management free closing comments.
Okay. Thank you. Once once again everyone. Thank you for joining us today, and we look forward to speaking with you again in three months off so long everyone.
Thank you. He conference has now concluded. Thank you for attending today's presentation, you know disconnect your lines.