Q3 2021 Hope Bancorp Inc Earnings Call
[music].
Good day and welcome to the hope Bancorp for 2021 third quarter earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please.
Please note. This event is being recorded I would now like to turn the conference over to Angie Yang Director of Investor Relations. Please go ahead.
Thank you Matt.
Every one and thank you for joining us for the Hope Bancorp 2021 third quarter Investor Conference call.
As usual, 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 through the webcast you should be able to view the slides from your computer screen as we progress through the presentation.
Beginning on slide two let me begin with a brief statement regarding forward looking remarks.
Today may contain forward looking projections regarding the future.
Future financial performance of the company and future events. These statements are based on current expectations.
Forecasts projections and management assumptions about the future performance of the company.
Any impact as a result of the COVID-19 pandemic as well, it's 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 U S. 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 the company files periodically with the FCC as well as the safe Harbor statements that are.
<unk> release issued yesterday hope Bancorp assumes no obligation to revise any forward looking projections that may be made on today's call. The company cautions that the complete financial results to be included in the quarterly report on Form 10-Q for the quarter ended September 30, 2021.
One could differ 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 2021 third quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures now we have allotted one hour for this call as usual presenting from.
The management side today will be Kevin Kim Hope Bancorp's, Chairman, President and CEO, and Alex Ko Senior Executive Vice President and Chief Financial Officer, Peter Koh, Our Deputy Chief operating officer is here with us as usual and will be available for the Q&A session.
With that let me turn the call over to Kevin Kim Kevin.
Thank you Angie good morning, everyone and thank you for joining us today.
Let's begin on slide three with a brief overview of our financial results.
We had a very productive quarter with increased profitability record high loan originations.
Further enhance deposit trends and a significant improvement in our asset quality metrics.
We generated net income of $55 $5 million in the third quarter or 45 cents per diluted share up 3% from the preceding quarter.
Pre provision net revenue of 65 foot $65 $4 million represented an increase of one 4% over the preceding second quarter.
And our return on tangible common equity increased 21 basis points to 13 point, 71% quarter over quarter.
New loan production reached a record high and exceeded $1 billion for the first time in our history.
13% quarter over quarter.
Our deposit mix continued to shift favorably to lower cost deposits with noninterest bearing deposits, increasing 7% quarter over quarter and accounting for 40% of total deposits, which is also a record high.
As expected our efforts to derisk the portfolio impacted growth in our total loans. This quarter, although we continued to increase earning assets, which is driving higher net interest income.
Our third quarter results included a 10 million dollar release, although our reserve for loan losses, reflecting the progress we have made in moving higher risk loans, all forward Belden <expletive> and the improved performance. We are seeing in our hotel motel and retail CRE portfolios combined with an <unk>.
Proving economy.
During the third quarter, we sold $29 $6 million of loans and moved to another $131 $6 million of potentially higher risk loans to held for sale at the end of the quarter contributing to the larger decline in substandard loans during the quarter.
At this point, we believe the process of Derisking. The loan portfolio has been largely completed and we are not anticipating a material amount of additional strategic loan sales in the fourth quarter.
Given what has occurred we believe we are well positioned to drive organic loan growth and enhance operational profitability in the quarters ahead.
Moving on to slide four.
As we indicated on our last call we expected to see an acceleration of loan production as we entered the seasonally stronger second half of the year and economic conditions continue to improve.
While the resurgence in Covid, 19 cases, and supply chain disruptions impacted the pace of the economic recovery, we were still able to have an exceptionally productive quarter of business development, leading to a record $1 billion in new loan production in this quarter.
Compared with the prior quarter, our overall loan production increased by 13% with strong performances occurring in all areas of our business and in each segment, we achieved a higher level of production than we had in the preceding second quarter.
In particular commercial loan production increased 14% quarter over quarter to $344 million or corporate banking group continues to gain traction and develop new relationships with larger corporate clients, which is driving the higher level of commercial loan production.
Excluding PPP loans and strategic loan sales and transfers our commercial loans outstanding balance would have grown 6% quarter over quarter.
Over the last year, our corporate banking group has further expanded into telecom and health care with the addition of experienced business development and specialize the credit teams in each of these voting calls.
And we are pleased to see the positive impact. These teams are making to our overall loan production volumes. This production has been a significant driver of the diversification. We have achieved over the last few years and we will continue to Opportunistically add.
<unk> teams to supplement our growth.
Our SBA loan production totaled $115 million in the third quarter, which is a record level of non P. P. P production, excluding the impact of the P. P Pes and strategic loan sales and transfers SBA loans in our portfolio would have increased 11%.
Quarter over quarter.
Our CRE loan production increased 14% quarter over quarter.
As we have mentioned previously we are looking to create a more diversified lower risk profile commercial real estate portfolio.
And have been increasing our focus on multifamily loan origination over the last year the stronger CRE loan production. This quarter is largely attributable to the success. We are having with this effort new multifamily loans more than doubled quarter over quarter and accounted for approximately.
12% of our total loan originations in the third quarter. This resulted in 20% growth in this portfolio from the end of the prior quarter.
As part of our efforts to increase this loan segment. We recently recruited a highly experienced multifamily team led by an executive who joined us from a large money Center bank.
This is an attractive product that complements our existing portfolio.
And the improved diversification and lower level of risk associated with this lending segment.
Are in line with our longer term strategic initiatives of the enhancing franchise value.
Overall, excluding PPP loans and the impact of the loan sales and transfers we would have had total loan growth of 3% quarter over quarter or 12% on an annualized basis.
This level of loan production is more reflective of the stronger business development capabilities of our franchise.
In terms of our loan modification program granted under the cares Act, we continue to see a steady decrease in the balances of our active loan modifications at September 30th modified loans decreased to below 1% of total loans down from two 4% as of June <unk>.
Oh, a 2021.
Our COVID-19 modifications have been maturing as scheduled and we expect they will wind down to nearly zero by the end of the year.
Now I will ask Alex to provide additional details on our financial performance for the third quarter.
Alex.
Thank you Kevin.
Beginning with slide five I will start our <unk>.
Net interest income, which totaled $133 million for the third quarter of 2021.
An increase of 3% from $126.6 million.
Preceding second quarter.
This increase was due to 2% increase in interest income and 8% decrease in interest expense.
During the third quarter of 2021.
$236 million with PPP loans were forgiven versus.
$64 million in the preceding second quarter.
So net fees realized from PPP forgiveness was $3 $2 million in the third quarter versus $1.8 million in the second quarter of 2021.
Our net interest margin decreased four basis points quarter over quarter to 3.07%.
The increase in our net interest margin reflects an eight basis point negative net interest margin impact from the excess cash as a result of our strong deposit growth.
If not for the access to liquidity, we would have had a margin expansion this quarter given the reduction in our cost of deposits.
And increase in average yield on investment securities.
Together had a net positive impact of six basis points to our net interest margin.
Looking ahead to the fourth quarter.
Expect our net interest margin to remain fairly stable, where the relative stability in both loan yields and deposit costs.
So at this point, we are not expecting to see much margin pressure in the fourth quarter.
Moving on to slide six.
From a longer term perspective.
And looking at the potential for higher interest rates next year.
We are well positioned to benefit from higher interest rate environment.
Variable rate loss as a percentage of the total laws have been trending higher.
Our increase in commercial lending.
And accounted for 41% of our portfolio as of September 32021.
Together with a higher trending noninterest bearing demand deposits.
We have steadily become more asset sensitive each quarter of this year.
Now moving on to slide seven.
Our noninterest income was $10 $6 million for the 2021 third quarter down from $11 $1 million and the <unk>.
Preceding second quarter.
Looking at our customer related fee income and net gain on sale of loans.
Noninterest income decreased by $300000.
The primary drivers of the decrease included lower lower service fees as a result of the higher level of SBA seven loan pay offs.
And a lower level of net gain on sale of mortgage loans.
Do you have a lower volume of loans sold in the quarter.
Moving on to noninterest expense on slide eight.
Our noninterest expense was $75.5 million, representing an increase of 3% from the preceding second quarter.
The largest factor contributing to this increase was $4 $7 million increase in salaries and employee benefit expense.
This was caused by a number of factors including.
The increase of head count.
And the associated increase in base salary.
This largely reflects a new frontline hires.
Including the multifamily chain that Kevin mentioned as well as wage increases that were necessary to retain existing employees.
Second higher group insurance expense and finally.
The increase in the bonus accrual for the year to reflect the higher than expected financial performance.
Yeah.
Increases in employee costs were partially offset by a lower level of professional fees, primarily resulting from a decline in legal fees.
Along with the non recurring software.
Impairment charge in the preceding quarter.
Yeah.
Looking into the fourth quarter.
Expect noninterest expense will trend downward from the third quarter to our more normalized range of $72 million to $74 million.
Now moving on to slide nine.
I will discuss our deposit trends.
We continue to run off higher costing time deposits and replace them with lower cost deposits through our business development efforts.
During the third quarter, our noninterest bearing deposits increased 7% from the end of the prior year quarter.
While our time deposits decreased 4%.
The increase in our noninterest bearing deposits exceeded runoff in time deposits.
Resulting in a 2% increase in total deposits quarter over quarter.
The cost of our interest bearing deposits declined six basis points quarter over quarter.
And our total cost of deposits.
Decreased four basis points.
This decrease is represents our eight consecutive quarters of declining.
<unk> cost.
Now moving on to Slide 10, I will review our asset quality.
Non accrual loans as a standout loss decreased significantly by 51%.
And 36% respectively from the prior quarter.
Nonaccrual loans decreased by $57 million quarter over quarter.
Due to three primary factors.
First we charge it off a large relationship.
That had moved to nonaccrual status in the first quarter of this year.
Second we had a couple of large pay offs.
Of non accrual loans this quarter.
And finally.
The transfer of the laws to held for sale also contributed to the decrease in nonaccrual loans.
Sub standard loss decreased by $137 million quarter over quarter.
As a result of the long sales and transfers as.
As well as the charge off and they'll pay offs mentioned the belt.
Yeah.
So charge it off of relationship combined with the laws that we sold and transferred two laws held for sale resulted in a.
Elevated level of charge offs in the third quarter of 2021.
Totaling $42 $7 million.
As previously discussed during our first quarter conference call this year.
The relationship that was charged off this quarter is a unique situation, where the borrower being involved in a legal dispute.
With regard to the loss transferred to held for sale in the third quarter as of today.
We have completed the sales all of the $69 million of DSA, along since the quarter end.
And anticipate that the remaining loss transferred to held for sale or will it be sold during the fourth quarter.
So loss transferred to held for sale were already contracted for sales at quarter end.
Therefore, the impact of this future sales have already been reflected in our financial result for the third quarter of 2021.
Now moving on to slide 11.
We recorded a credit for credit losses of $10 million.
In the third quarter.
This reflects our significantly improved asset quality combined with improving economic forecast.
The allowance for credit losses as of September 32021 was 1.05%, excluding PPP loans compared with 1.47%.
As of June 32021.
The decrease in our ACL coverage ratio, mainly reflects an improved macroeconomic forecast.
Asset quality improvement.
And a meaningful reduction of problem loans.
Our coverage ratio as of September 32021 was slightly higher in comparison with our seasonal they want coverage ratio of.
Nine 8%.
January 2020, notwithstanding the meaningful shift to a lower risk loan portfolio.
On the other hand, our allowance for credit losses, as a percentage of nonaccrual loans.
Nonperforming assets and nonperforming.
S S all increased significantly quarter over quarter.
Now moving on to slide 12.
We provide an update on our capital position and returns.
As of September 32021, we've continued to maintain a meaningful amount of access capital to be utilized for future growth.
Tangible common equity per share increased 23 basis points from the quarter prior quarter, and 63 basis point year over a year.
Based on our strong capital and liquidity positions, we maintained our quarterly dividend at <unk> per share.
With the continued strength of our financial performance and capital position as well as the significantly reduced credit risk in our loan portfolio.
We resumed stock buybacks and repurchased $47 million of our common stock during the third quarter.
This will reduce.
Our shares.
Oh, sorry.
Uh huh.
I'll just have reduced.
Total common stock outstanding by approximately three 5 million shares.
With that I'll stop fire quarter with that let me turn the call back to Kevin.
Thank you Alex now moving onto Slide 13, let me provide a few comments about our outlook.
Our loan pipeline remains robust and we expect to maintain a higher level of production, particularly as many of the new bankers. We have added this year continued to gain traction. We also have a good pipeline of new banking talent and we expect to continue making additions on a consistent basis.
That will further strengthen our commercial banking capabilities and expertise in new areas and contribute to the further diversification of our loan portfolio in the coming years with more of our energy is focused on growth and business development. We are also investing in geographic areas.
Is that we believe can become largest sources of organic growth in the future. We have had a loan production office in Atlanta for many years and late in the fourth quarter, we will be opening our first full service branch in the heart of a rapidly expanding Korean community in Duluth, a new.
Nobody suburb of Atlanta, we believe that our larger presence will enable us to better capitalize on the economic growth being experienced in this region as well as expand of expand our efforts to bank the Korean national corporations in the southeastern region of the <unk>.
You did state.
This should all lead to higher levels of loan growth going forward and more opportunities to remix our balance sheet toward higher yielding earning assets, which will positively impact our profitability.
Throughout this year, we have steadily reinvested a portion of the cost savings from efficiency initiatives, such as our branch consolidations into strengthening our business development capabilities and we are seeing very positive results from these from these efforts.
The new hires this quarter approximately 75%, our frontline employees, which represents a shift in our workforce more toward revenue generating personnel.
Notwithstanding these investments in our organization, we expect to maintain our noninterest expenses within our normalized range.
Following the significant reduction of potential problem loans. This quarter, we believe our asset quality will continue to improve in the near term as the U S economy as well as our borrowers continued to recover from the pandemic.
All together with relatively stable loan yields deposit costs and net interest margins. We believe we are well poised to drive improved profitability in the coming quarters.
And the end result of all of our efforts will be a stronger franchise with a more diversified high quality loan portfolio reduced the concentration risk and a lower cost deposit base, which will drive profitable growth and create additional value for the shareholders in the year.
To come.
With that we would be happy to take your questions and add any additional color as requested.
Operator, please open up the call.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
We are using a speakerphone please pick up your handset before pressing Mickey.
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At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question will come from Chris Mcgratty with K B W. Please go ahead.
Hey, good morning.
Good morning, Good morning, Chris.
Kevin maybe a question on on growth and capital you guys are very aggressive with the buyback.
Good valuations.
Can you help us with the outlook for additional buybacks, given what sounds like an improving growth outlook.
Well as we discussed we were quite active with our current buyback program in the third quarter, and we have less than $3 million remaining in that program.
So at current valuations along with our strong capital position of our tier one common equity ratio in excess of 11%.
Think it would be a good idea for us to consider another authorization sometime soon.
Okay.
And then could you I appreciate the color Alex on on the expenses near term.
Could you help us kind of more broadly we've we've heard from a lot of banks about kind of wage pressure given inflation and investments so more broadly beyond the quarter, how should we be thinking about the cadence of expenses from here.
Yeah.
Reported this quarter, we had a little bit of increase on noninterest expense due to the salary and bonuses, which also included a increase on bonus accrual that was a more kind of catch all for the <unk>.
First nine months and I don't expect the same level of accrual for the bonus is necessary for the Q4, so even though we have a little bit in the higher.
Salary expense.
Expenses due to the retention of the.
Employees for what's going on.
With the hiring.
Tiring environment, but you know.
I would expect our salary and benefit expense will be decreasing compared.
Two Q3, and all other items I would expect it will be.
Pretty similar level as we have seen in the Q3. So that's why I, we believe about 72.
$2 million to $74 million of run rate is what I would expect.
Hi, Chris.
In connection with that subject.
I think it is worth mentioning that our current job market is an employee market and the cost to hire an employee is ranging conservatively at 10% to 15% higher than our current base salaries for the same position.
So is that the cost to retain and attract employees in the current market is far greater than it was you know a year ago.
So there will certainly be some upward pressure in terms of.
Station and benefits, but as Alex mentioned, we will continue to look at other areas, where we can enhance efficiencies. So that we can manage our noninterest expenses within our more normalized range of $70 million to $74 million.
That's great color Colin Yeah, Kevin if I could just sneak one in just a clarification.
The $43 million of charge offs in the quarter.
Interested in how that kind of mapped to the large non accrual, which I think was around 23 or 24 in the fourth and the first quarter and then the loan sale of 30 and the transfer of 131 I'm just trying to.
Figure out where the loss content was within the three.
You called out thanks.
Hi, This is Peter I can address that one for you here. So we didn't have an elevated level of charge offs. This quarter and it really was a combination of various factors. The loan sales we had the one large relationship as well and a couple of large pay offs.
We are in the process of multiple workouts with current customers. So we can't share.
A lot of detail in terms of that breakdown, but but we will say that the discounts on the loan side loan sales side actually we are still very reasonable. If we felt that we had a significant amount of reserves attached to those discounts and a good portion.
Some of the larger elevated charge offs was due to the larger relationship that we discussed.
Okay. Thank you.
Again, if you have a question. Please press Star then one our next question will come from Gary Tenner with D. A Davidson. Please go ahead.
Thanks, Good morning.
A bit of a follow up I suppose to the last question, but in terms of the property types.
You know that were sold in the quarter I thought if I looked at your data that you provide on your on your tables in terms of the real estate loans by property type other than you know interferon that there were some hotel motel involved in the in the sales and transfers.
Yeah.
It doesn't quite jump out at me in terms of what other property types were represented there. So can you talk about.
Sure.
Sure I can add a little color. So if you recall the second quarter, we really focused on the hotel motel space for the loan sales and in the third quarter, a smaller portion of the hotel motel, we continued to address but we actually looked at our focus on the retail side as well.
So when you look at the overall composition on.
On the CRE side, we looked at the two primary categories, where we felt that there was risk stemming from the pandemic, which is the hotel and the retail so.
In combination with the loan sales from QQ and three Q.
We feel confident that we have addressed all the significant kind of concerns and as you know as mentioned in the prepared remarks, we really do feel that with the improving economic conditions and monitoring our underlying borrowers financial performance, which is improving.
Cross the board.
We felt we felt.
Comfortable.
Reducing levels of reserves and things like that but to answer your question. Yes. It was mostly from the hotel and the <unk>.
Retail sectors.
Okay, and obviously a good portion of your commercial real estate fundings. This quarter. Then we are also in the retail.
Our property type as well just give me kind of quarter over quarter growth. So you're still comfortable in the space you just needed to kind of derisk some specific credits.
That's correct. So we do we still are finding good opportunities in the retail sector, but we are looking at that very closely and I. You know I do think we will moderate the growth there where we feel that we can we can manage the levels.
The retail sector has a history you know is to I'll say more diversified as a category. That's a hotel there there are a lot of underlying cash flows that come from different sectors of the economy.
And as you May know we are focusing on.
The convenience store type of retail where it is most of the internet resistant and so we are looking at a sort of a re composition play within the CRE and that I think applies to the retail sector as well.
Great. Thank you for that.
In terms of our loan sales going going forward.
Will you be continuing to solve both the SBA and single family production.
Yes, yes.
We will continue to sell the SBA loans are at this point, we're not expecting any dramatic change in the level of gain on sale of SBA loans, but we have on our books.
In excess of $280 million of guaranteed portion of SBA loans. So we are.
Keeping a close eye on.
The secondary market and premiums available in the secondary markets. So.
But currently we don't have any plan to have any dramatic change in the level of gain on sale of SBA loans.
Okay and then last question for me in terms of the multifamily business.
Good.
Constraints. This quarter can you tell us specifically the yields are in the production in that segment this quarter.
Yeah.
Yes.
I think we all have to take a look at that I think maybe we can get back to you with that so you know there.
There are multifamily in general is you know from a CRE perspective is slightly lower yielding a category, but our risk adjusted I think it does make sense for us in terms of our strategic plan.
Okay. Thank you.
Thank you.
Again, if you have a question. Please press Star then one.
Our next question is a follow up from Chris Mcgratty with K B W. Please go ahead.
Yeah. Thanks for the follow up the question is.
<unk> had a lot of success on the deposit diversification over the last couple of years.
I'm interested in kind of your thoughts about.
Sustainability of these these really strong growth and particularly noninterest bearing I know theres some new verticals.
But any thoughts on just deposit growth over the next several quarters.
Yeah.
Had a great success, and especially on the non interest bearing deposits and when we look at the composition of that big increases we see in two types one from the institutional from a C.
<unk> deposits as well as lots of a retail deposit increase.
And we believe that retail depart is mainly coming from the government subsidize or P. P. P. Those laws maybe some there is some.
Temporary in nature. So there will be some run off I don't think that will be a dramatic a run.
All in all for those retail side and going back to the C V D or institutional noninterest bearing deposits are we see it as a very stable.
So we do not expect a.
Meaningful runoff for that institutional.
Noninterest bearing deposits. So those two combined we expect there might be some run off.
But we do not expect a substantial reduction of our deposit that we grew for the last 18 months or so in the near future.
Yeah.
Alright, great. Thank you.
Maybe Gary can I get back to you the most family the yield we just found out it was all around the 3.3% yield.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Okay. Once again, thank you all for joining US today, we hope everyone stays safe and healthy until we.
Speak with you again next quarter, so long everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.