Q4 2021 Hope Bancorp Inc Earnings Call
Speaker 1: Beginning on slide two, let me begin with a brief statement regarding forward-looking remarks.
Beginning on slide two let me begin with the 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 are based on current expectations estimates forecasts and projections.
Speaker 1: The call today may contain forward-looking projections regarding the future financial performance of the company and future events.
Speaker 1: These statements are based on current expectations, estimates, forecasts, projections, and management assumptions about the future performance of the company, including any impact as a result of the COVID-19 pandemic, as well as the businesses and markets in which the company does and is expected to operate.
And management assumptions about the future performance of the company, including any impact as a result of the COVID-19 pandemic 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.
Speaker 1: 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.
Of the U S. Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance.
Actual outcome and.
Speaker 1: and results may differ materially from what is expressed or forecasted in such forward-looking states.
<unk> 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 SEC as well as the Safe Harbor statements in our press release issued yesterday Hope Bancorp assumes no obligation to revise.
Speaker 1: We refer you to the documents the company files periodically with the FCC, as well as the safe harbor statements in our press release issued yesterday. Hope Bank Corp assumes no obligation to revise any forward-looking projections that may be made on today's call.
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 annual report on Form 10-K for the year ended December 31, 2021 could differ materially from the financial results being reported today.
Speaker 1: The company cautions that the complete financial results to be included in the annual report on Form 10-K for the year ended December 31, 2021 could differ materially from the financial results being reported.
In addition, some of the information referenced on this call today are non-GAAP financial measures. Please refer to our 2021 and fourth quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures.
Speaker 1: In addition, some of the information referenced on this call today are non-GAAP financial measures.
Speaker 1: please refer to our 2021 fourth quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures.
Speaker 1: Now, we have allotted one hour for this call. Presenting from the management side today will be Kevin Kim, Hope Bank Corp's Chairman, President, and CEO , Alex Koh, Senior Executive Vice President, and Chief Financial Officer. Peter Koh, who was promoted to Senior Executive Vice President and Chief Operating Officer effective the beginning of 2022, is here with us as usual and will be available for the Q&A session.
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 , Alex Ko Senior Executive Vice President and Chief Financial Officer, Peter Koh, who was promoted to senior executive Vice President.
And Chief operating officer effective the beginning of 2022 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.
Speaker 1: 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.
Speaker 2: Thank you, Angie. Good morning, everyone, and thank you for joining us today. Let's begin on slide three with a brief video.
Let's begin on slide three.
With a brief overview of our financial results.
Speaker 2: We delivered an outstanding financial performance in the fourth quarter of 2021 with a continuation of many of the positive trends that we experienced throughout the year. Another record level of loan originations.
We delivered an outstanding financial performance in the fourth quarter of 2021 with a continuation of many of the positive trends that we experienced throughout the year.
Another record level of loan originations.
Further reduction in our deposit costs.
Speaker 2: additional expansion in our net interest margin and continued expense management, leading to an improvement in operating efficiencies.
Additionally expansion in our net interest margin.
And continued expense management, leading to an improvement in operating efficiencies.
Speaker 2: And as we indicated on our last earnings call, following the significant de-risking of our balance sheet in the second and third quarters, our exceptionally strong loan production resulted in a high level of loan growth.
And as we indicated on our last earnings call. Following the significant derisking of our balance sheet in the second and third quarters, our exceptionally strong loan production resulted in a higher level of loan growth.
Speaker 2: that is more reflective of our traditional performance.
That is more reflective of our traditional performance.
Speaker 2: This led to a strong increase in revenue and pre-provisioned net revenue for the fourth quarter.
This led to a strong increase in revenue and pre provision net revenue for the fourth quarter.
Speaker 2: Our net interest income for 2021 fourth quarter increased 2% over the preceding third quarter, while our non-interest income increased 23% quarter over quarter.
Our net interest income for 2021 fourth quarter increased 2% over the preceding third quarter, while our non interest income increased 23% quarter over quarter.
Speaker 2: Altogether, with a 2% quarter-over-quarter decrease in non-interest expense, we delivered a significant improvement in our core performance, with pre-provision net revenue coming in at $72.2 million in the fourth quarter, up 10% from the preceding third quarter.
All together with a 2% quarter over quarter decrease in non interest expense, we delivered a significant improvement in our core.
Core performance with pre provision net revenue coming in at $72 2 million in the fourth quarter of.
10% from the preceding third quarter.
Speaker 2: Moving on to slide four, despite the continued challenges presented by the pandemic and supply chain disruptions, for a second consecutive quarter, we've produced record loan originations as the larger, more productive commercial banking teams we have built.
Moving on to slide four despite the continued challenges presented by the pandemic and supply chain disruptions for a second consecutive quarter, we produced record loan originations as the larger more productive commercial banking teams we have built.
<unk> continued to capitalize on high quality lending opportunities total loan production was a record $124 billion in the fourth quarter, an increase of 23% compared with the preceding third quarter.
Speaker 2: continue to capitalize on high quality lending opportunities.
Speaker 2: Total loan production was a record $1.24 billion in the fourth quarter, an increase of 23 percent compared with the preceding third quarter.
Speaker 2: This resulted in annualized loan growth of 15.9% in the fourth quarter.
This resulted in annualized loan growth of 15, 9% in the fourth quarter excluding.
Excluding PPP loans loans outstanding increased four 9% quarter over quarter or 19, 6% annualized.
Speaker 2: Excluding PPP loans, loans outstanding increased 4.9%, quarter over quarter, or 19.6% annualized.
Speaker 2: We continue to see higher levels of commercial loan production resulting from the increasing contributions.
We continue to see higher levels of commercial loan production, resulting from the.
The increasing contributions we're getting now.
Speaker 2: from new banking talent added in the past couple of years.
From new banking talent added in the past couple of years.
Speaker 2: our success in developing relationships with larger corporate clients, and the expansion of our lending in attractive vertical markets such as telecom and health care.
Our success in developing relationships with larger corporate clients and the expansion of our lending in attractive vertical markets, such as telecom and health care.
We had $538 million of commercial loan production in the fourth quarter, which was an increase of 57% over the preceding third quarter. As a result, our commercial loan portfolio increased by 9% from the end of the end of the prior quarter, which continued to improve.
Speaker 2: We had $538 million of commercial loan production in the fourth quarter, which was an increase of 57 percent over the preceding third quarter. As a result, our commercial loan portfolio increased by 9 percent from the end of the prior quarter, which continued to improve the diversification of our loan portfolio.
The diversification of our loan portfolio.
Speaker 2: Our CRA loan production increased 6 percent quarter over quarter, resulting in 2 percent growth in this portfolio during the fourth quarter.
Our CRE loan production increased 6% quarter over quarter, resulting in 2% growth in this portfolio during the fourth quarter.
The higher levels of CRE loan production, partially attributable to the continued expansion of our multifamily lending.
Speaker 2: The higher levels of CRE loan production are partially attributable to the continued expansion of our multifamily lending.
Speaker 2: Multi-family loans accounted for 15% of our total CRA loan originations this quarter. And as a result, our multi-family portfolio increased 8% from the end of the prior quarter, furthering our progress in creating a more diversified, lower risk commercial real estate portfolio.
Multifamily loans accounted for 16% of our total CRE loan originations this quarter.
And as a result, our multifamily portfolio increased 8% from the end of the prior quarter furthering our progress in creating a more diversified lower risk commercial real estate portfolio.
Speaker 2: In addition to multifamily, another area where we are seeing strong CRA demand is in warehouse properties given the growing need for inventory storage and fulfillment facilities.
In addition to multifamily another area, where we are seeing strong CRE demand is in warehouse properties, given the growing need for inventory storage and fulfillment facilities.
Warehouse CRE loans accounted for 22% of our total CRE originations in the fourth quarter, resulting in a 7% increase from September 30 of 2021.
Speaker 2: Warehouse CRE loans accounted for 22% of our total CRE originations in the fourth quarter, resulting in a 7% increase from September 30, 2021.
Speaker 2: The broader business development capabilities we have built have enabled us to generate record loan production while substantially eliminating originations of motel loans in order to continue working down this concentration in our portfolio.
The broader business development capabilities, we have built.
Have enabled us to generate record loan production, while substantially eliminating originations of hotel motel loans.
In order to continue working down this concentration in our portfolio.
Our SBA loan production totaled $65 million in the fourth quarter, which is lower than the preceding third quarter as overall demand for SBA loans across the industry declined following the end of the fee waiver and payment relief in September .
Speaker 2: Our SBA loan production totaled $55 million in the fourth quarter, which is lower than the preceding third quarter, as overall demand for SBA loans across the industry declined following the end of the fee waiver and payment relief in September .
Speaker 2: We generally saw good trends in loan pricing in the fourth quarter, with the average rate on commercial loans increasing from the preceding third quarter and commercial real estate loan rates being stable.
We generally saw good trends in loan pricing in the fourth quarter with the average rate on commercial loans, increasing from the preceding third quarter and commercial real estate loan rates being stable.
Speaker 2: Overall, the average rate on our total loan production was two basis points higher than the prior quarter. Notably, the fourth quarter was our third consecutive quarter in which variable rate loans accounted for greater than 50 percent of the mix of new loans despite the high level of demand for fixed rate loans in the low interest rate environment.
Overall, the average rate on our total loan production was two basis points higher than the prior quarter, notably the fourth quarter was our third consecutive quarter in which variable rate loans accounted for greater than 50% of the mix of new loans. Despite the high level of demand.
For fixed rate loans in the low interest rate environment.
Speaker 2: Now I will ask Alex to provide additional details on our financial performance for the fourth quarter.
Now I will ask Alex to provide additional details on our financial performance for the fourth quarter Alex.
Speaker 3: Thank you, Kevin. Beginning with slide five, I will start with our net interest income, which totaled $133.3 million for the fourth quarter of 2021, an increase of 2 percent from $130.3 million in the preceding third quarter.
Thank you Kevin.
Beginning with slide five I will start with our net interest income, which totaled $133 3 million for the fourth quarter of 2021 on.
An increase of 2% from $133 million.
The preceding third quarter.
This increase was due to a 2% increase in interest income, resulting from higher average balances of loans and investment securities.
Speaker 3: This increase was due to a 2% increase in interest income resulting from higher average balances of loans and investment securities and a 6% decrease in interest expense.
And a 6% decrease in interest expense.
During the fourth quarter.
Speaker 3: During the fourth quarter, $107 million of PPP loans were forgiven, versus
$107 million of PPP laws were forgiven versus.
Speaker 3: $236 million in the preceding third quarter.
$236 million in the preceding third quarter.
Speaker 3: And that's the realized from PPP forgiveness was.
The net realized from PPP forgiveness was.
Speaker 3: $3.7 million in the fourth quarter versus $3.2 million in the third quarter.
$3 7 million in the fourth quarter versus $3 $2 million in the third quarter.
Our net interest margin increased six basis point quarter over quarter to 3.13%.
Speaker 3: Our net interest margin increased 6 basis points quarter over quarter to 3.13%.
Speaker 3: excluding the impact of purchase accounting adjustment.
Excluding the impact of purchase accounting adjustment.
Our net interest margin increased seven basis points quarter over quarter two.
Speaker 3: Our net interest margin increased seven basis points quarter over quarter to 3.0%.
3.09%.
The increase was due to a more favorable mix of earnings assets.
Speaker 3: The increase was due to a more favorable mix of earnings assets as we redeployed more of our excess cash into the loan and security portfolio.
<unk> redeployed more of our excess cash into that long.
And securities portfolios.
As well as a three basis point reduction in our cost of deposits.
Looking at the first quarter of 2022.
Speaker 3: we expect our net interest margin will be relatively stable compared with the fourth quarter of 2021. Moving on to slide six. From a long
We expect our net interest margin will be relatively stable compared with the fourth quarter of 2021.
Moving on to slide six.
I'm a long term perspective.
We are asset sensitive position.
And considering the <unk> interest rate hikes in 2022.
Speaker 3: and considering the projected interest rate hikes in 2022.
Speaker 3: we are well positioned to benefit in a rising interest rate environment.
We are well positioned to benefit.
The rising interest rate environment.
Speaker 3: Variable rate loans as a percentage of total loans accounted for 41% of our portfolio as of December 31st, 2020.
Variable rate loss as a percentage of total loans accounted for 41% of our portfolio.
As of December 31, 2021.
In addition, our noninterest bearing deposits increased significantly during 2021.
Speaker 3: In addition, our non-interest bearing deposits increased significantly during 2021.
Speaker 3: up by nearly $938 million or 19% year over year.
Up by nearly $938 million or 19% year over year.
Speaker 3: And this has had a positive impact in increasing our asset sensitivity position during the year.
And this has had a positive impact and increasing our asset sensitivity position during the year.
Now moving on to slide seven.
Speaker 3: Our non-interest income was $13.1 million for the fourth quarter.
Our noninterest income was $13 $1 million for the fourth quarter.
Up from $10 $6 million in the preceding third quarter.
Speaker 3: up from $10.6 million in the preceding third quarter.
As we saw increases in nearly all of our fee generating areas.
Speaker 3: as we saw increases in nearly all of our regenerating areas.
The largest increase was that gains on sale of SBA loans, which was up 47% compared to prior quarter.
Speaker 3: The largest increase was net gains on sale of SBA loans, which was up 47% compared to prior quarter. This was due to a higher volume of sales.
This was due to a higher volume of sales.
Speaker 3: as well as an increase in the average net premium on the sale of SBA loans.
As well as an increase in the average net premium on the sale of SBA loans.
Yeah.
Speaker 3: Moving on to non-interest expense on slide 8.
Moving on to noninterest expense on slide eight.
Our noninterest expense was $74 2 million, representing a decrease of 2% from the preceding third quarter.
Speaker 3: Our non-interest expense was $74.2 million, representing a decrease of 2% from the preceding third quarter.
Speaker 3: The most significant variance was a 5% decline in our salary and benefit expense.
The most significant variance was a 5% decline in our salary and benefit expense.
Speaker 3: which was primarily due to more normalized bonus reserves, stock compensation expense, and an increase in deferred loan origination costs.
Which was primarily due to more normalized bonus reserves stock.
Stock compensation expense and the increase in deferred loan origination cost.
Speaker 3: which had the effect of reducing our salary expense for the quarter.
Which had the effect of reducing our salary expense for the quarter.
Our efficiency ratio for the fourth quarter improved two 9% to 57% from 53, 6% in the preceding third quarter.
Speaker 3: Our efficiency ratio for the fourth quarter improved 2.9% to 50.7% from 53.6% in the preceding third quarter.
Speaker 3: Non-interest expense as a percentage of average assets improved to 1.67% for the 2021 fourth quarter from 1.7% for the third quarter. Now moving on to slide nine.
Noninterest expense as a percentage of average assets improved to 167% for the 2021 fourth quarter from one 7% for the third quarter.
Now moving on to slide nine.
I will discuss our key deposit trends.
Speaker 3: Our total deposits were essentially unchanged from the end of the prior quarter.
Our total deposits were essentially unchanged.
The endo prior quarter.
Speaker 3: as growth in money market deposits offset a seasonal decline in non-interest-bearing deposits and continued reduction in our time deposits.
As growth in money market deposits offset a seasonal decline in noninterest bearing deposits and continued reduction in our time deposits.
The small decline in noninterest bearing deposits was due to fluctuations in the end of period balances of some of our large clients and corporate banking group, whereas seasonality is a factor.
Speaker 3: The small decline in non-interest-bearing deposits was due to fluctuations in the end-of-period balances of some of our large clients in corporate banking groups, where seasonality is a factor.
Underscoring the seasonality aspect.
The average balance of noninterest bearing deposits for the fourth quarter increased 2% over the preceding third quarter.
Speaker 3: The average balance of non-interest-bearing deposits for the fourth quarter increased 2% over the preceding third quarter.
And subsequent to year end.
Speaker 3: The deposit balances of these clients have started to build back up.
So deposit balances of these clients have started to build back up.
The cost of our interest bearing deposits and total deposits each declined three basis points quarter over quarter.
Speaker 3: The cost of our interest-bearing deposits and total deposits each declined three basis points quarter over quarter.
This decrease is represent our ninth consecutive quarter of declining deposit costs.
Speaker 3: These decreases represent our ninth consecutive quarter of declining deposit costs.
Now moving on to slide 10.
Our review our asset quality.
Speaker 3: We saw continued improvement in asset quality in the fourth quarter.
We saw continued improvement in asset quality in the fourth quarter.
Most notably.
Speaker 3: Most notably, Cresci's loss declined by $51 million or 9%.
Criticized loans declined by $51 million or 9%.
The further decline in criticized loss reflects our continued progress in working with borrowers.
Speaker 3: The further decline in criticized loans reflects our continued progress in working with borrowers following their COVID-19 modification period.
Following their COVID-19 modification period.
Nonperforming assets declined by approximately $1 $9 million.
Speaker 3: Non-performing assets declined by approximately $1.9 million, which was primarily due to the disposition of one large OREO property.
Which was primarily due to the disposition of one large Oreo property.
At year end 2021.
Our Oreo portfolio was just $2.6 million, representing a significant reduction from 'twenty one.
Speaker 3: Our OREO portfolio was just $2.6 million dollars, representing a significant reduction from $20.1 million dollars at the end of 2020.
$1 million at the end of 2020.
Speaker 3: Accruing TDRs increased by $12.9 million from the prior quarter.
<unk> increased by $12 $9 million from the prior quarter.
Speaker 3: The increase was due to one large, well-secured commercial real estate loan, which payments are current under the modified
The increase was due to one large well secured commercial real estate alone, which payments are current under the modified terms.
Speaker 3: Delinquent loans less than 90 days past due ticked up.
Delinquent loss less than 90 days past due ticked up.
As of year end.
Speaker 3: Approximately $9 million of this increase reflect administrative delays in the renewal of one large maturing.
Approximately $9 million of this increase reflect administrative delays in the renewal of one large maturing loan.
Speaker 3: This loan has been renewed and is current.
This loan has been renewed and is current.
In addition.
We have another $8 $5 million of mortgage loans.
Speaker 3: We have another $8.5 million of mortgage loans.
Speaker 3: which have already become current or have been paid off subsequent to year-end.
Which have already become current or had been paid off subsequent to year end.
So in aggregate.
Speaker 3: Our delinquent loans are down by $17.5 million as of today.
Our delinquent loans are down by $17 $5 million as of today.
Following the portfolio de risking actions.
Speaker 3: following the portfolio de-risking actions in
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2021, our loss experience has improved.
Speaker 3: 2021, our loss experience has improved.
Speaker 3: and we recorded net recoveries of 2.3 million dollars in the fourth quarter.
And we recorded net recoveries of $2 $3 million in the fourth quarter.
We recorded a provision for credit losses of $1 $5 million in the fourth quarter.
Speaker 3: We recorded a provision for credit losses of $1.5 million in the fourth quarter.
Speaker 3: The allowance for credit losses coverage ratio as of December 31, 2021 was 1.02% of loans excluding PPP compared with 1.05% as of September 30, 2021.
The allowance for credit losses coverage ratio as of December 31, 2021.
It was 1.02% of loans, excluding PPP compared with 1.05% as of September 30th 2021.
The decrease in our ACL coverage ratio, mainly reflects an improved macroeconomic forecast.
Speaker 3: The decrease in our ACR coverage ratio mainly reflects an improved macroeconomic forecast.
Speaker 3: asset quality improvements, and a meaningful reduction of problem loans.
Asset quality improvements and a meaningful reduction of problem loans.
Sure.
Now moving on to slide 11.
Speaker 3: Let me provide an update on our capital position and return.
Let me provide an update on our capital position and returns.
We continue to maintain a meaningful amount of access capital to be utilized for future growth.
Speaker 3: We continue to maintain a meaningful amount of excess capital to be utilized for future growth.
Speaker 3: hands of a common equity per share increased 18 cents from the prior quarter and 70 cents
Tangible common equity per share.
Increased 18 from the prior quarter.
And 7% year over a year.
During the fourth quarter, we completed the repurchase of the previously announced $50 million stock buyback.
Speaker 3: During the fourth quarter, we completed the repurchase of the previously announced $50 million dollar stock buy.
Speaker 3: With our continued strong financial performance and capital position,
With our continued strong financial performance and capital position.
Speaker 3: We announced a new stock repurchase program yesterday.
We announced a new stock repurchase program yesterday.
Speaker 3: authorizing the company to repurchase up to 50 million dollars of its common stock.
Authorizing the company to repurchase.
Up to $50 million.
<unk> is common stock.
With that let me turn the call back to Kevin.
Speaker 2: Thank you, Alex. Now, moving on to slide 12, let me summarize our achievements for 2021.
Thank you Alex now moving on to Slide 12, let me summarize our achievements for 2021.
Speaker 2: New loan production accelerated throughout 2021 and positioned the company to return to historically strong growth rates.
New loan production accelerated throughout 2021 and position the company to return to historically strong growth rates.
Speaker 2: We continue to enhance the mix of deposits, which contributed to decreasing deposit costs throughout 2021.
We continue to enhance the mix of deposits, which contributed to decreasing deposit costs throughout 2021.
Speaker 2: We completed a significant derisking and rebalancing of our loan portfolio and expect to see meaningful improvement in our asset quality in 2022.
We completed a significant de risking and rebalancing of our loan portfolio and expect to see meaningful improvement in our asset quality in 2022.
And most importantly.
We delivered strong core performance with our pre provision net revenue increasing 11% over 2020.
Speaker 2: We delivered strong core performance with our pre-provisioned net revenue increasing 11% over 2020.
In all we successfully completed another year challenged by the COVID-19, pandemic and I believe we have emerged stronger than ever.
Speaker 2: In all, we successfully completed another year challenged by the COVID-19 pandemic, and I believe we have emerged stronger than ever.
Now moving on to Slide 13, let me provide a few comments about our outlook and priorities for 2022.
Speaker 2: Now moving on to slide 13, let me provide a few comments about our outlook and priorities for 2022.
Speaker 2: With the increasing levels of loan production that we have consistently generated throughout 2021, we begin the new year with greater momentum and expect that we will deliver strong, more traditional high single-digit to low double-digit loan growth in 2022, excluding PPP.
With the increasing levels of loan production that we have consistently generated throughout 2021, we began the new year with great momentum and expect that we will deliver strong more traditional high single digit to low double digit loan growth in 2022.
Excluding PPP.
Speaker 2: We expect the loan growth will continue to be well diversified, with increasing contributions from our corporate banking group and expanded industry verticals. The higher level of loan growth should enable us to continue remixing our balance sheet towards higher yielding earning assets and driving further growth in our net interest income.
We expect our loan growth will continue to be well diversified with increasing contributions from our corporate banking group and expanded industry verticals the higher level of loan growth should enable us to continue remixing, our balance sheet towards higher yielding earning assets and driving for.
The growth in our net interest income.
Speaker 2: In 2022, we will continue to employ these strategies to strengthen our commercial banking platform.
In 2022, we will continue to employ the strategies to strengthen our commercial banking platform.
We have been successful in attracting talent from mainstream banks that has enabled us to expand our addressable markets.
Speaker 2: We have been successful in attracting talent from mainstream banks that has enabled us to expand our addressable markets, effectively target new and attractive industries, and add expertise in new areas like telecom, healthcare, and multifamily lending.
Effectively target, new and attractive industries and add expertise in new areas like telecom healthcare and multifamily lending.
Speaker 2: We recently opened our first full-service branch in the Atlanta area, and toward the end of the year, we plan to open another branch in the Seattle area. Both markets have large and growing Korean American communities, and we believe they can be good sources of loan and deposit growth in the coming years.
We recently opened our first full service branch in the Atlanta area and towards the end of the year, We plan to open another branch in the Seattle area.
Both markets have large and growing Korean American communities.
And we believe they can be good sources of loan and deposit growth in the coming years.
Speaker 2: We are very optimistic as we start 2022, given the positive trends and high level of execution that we are seeing throughout the company.
We are very optimistic as we start 2022, given the positive trends and high level of execution that we are seeing throughout the company.
Speaker 2: We have seen excellent results from the investments we have made to strengthen our commercial banking platform over the past few years.
We have seen excellent results from the investments we have made to strengthen our commercial banking platform over the past few years.
Speaker 2: We are generating record levels of loan production while maintaining the strong underwriting criteria that we have in place.
We are generating record levels of loan production, while maintaining the strong underwriting criteria that we have in place.
Speaker 2: Following the significant de-risking of our loan portfolio in 2021 and a more active stance on working through our criticized assets.
Following the significant derisking of our loan portfolio in 2021, and a more active stance on working through our criticized assets.
Speaker 2: Assuming no major disruptions in the economic recovery, we expect improving asset quality metrics with our criticized loan balances declining by approximately 20-30% by the end of 2022.
Assuming no major disruptions in the economic recovery, we expect improving asset quality metrics with our criticized loan balances declining by approximately 20% to 30% by the end of 2022 .
With the current expectation of rising interest rates the improvement in our deposit base should enable us to have a lower deposit beta and see a more positive impact on our net interest margin than in the last cycle of rising interest rates.
Speaker 2: With the current expectation of rising interest rates, the improvement in our deposit base should enable us to have a lower deposit beta and see a more positive impact on our net interest margin than in the last cycle of rising interest rates.
Speaker 2: And we are effectively managing expenses while still investing in talent and technology, which should help us to enhance operating leverage as our revenue increases from our continued balance sheet growth.
And we are effectively managing expenses, while still investing in talent and technology.
It should help us to enhance operating leverage as our revenue increases from our continued balance sheet growth.
Speaker 2: Although the impact of the pandemic continues to linger, we believe that we have never been in a better position to generate profitable growth and create additional value for our shareholders.
Although the impact of the pandemic continues to linger, we believe that we have never been in a better position to generate profitable growth and create additional value for our shareholders.
Speaker 2: With that, we would be happy to take your questions and add any additional color as requested. Operator, please open up the call.
With that we would be happy to take your questions and add any additional color as requested.
Operator, please open up the call.
Speaker 4: We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question from the queue, please press star, then two.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing a key to with.
Questions from the queue. Please press Star then.
Speaker 5: The first question is from Matthew Clark of Piper Center, please go ahead. Hi, good morning. Good morning. Good morning.
The first question is from Matthew Clark of Piper.
Please go ahead.
Hey, good morning.
Good morning, good morning, good morning.
Maybe just starting off with the buyback.
Speaker 6: What's your plan, you know, in terms of how active you might be? Do you think you might front-end load it like you did last time, or do you feel like it might be kind of spread out more evenly throughout the year?
What's your plan.
In terms of how active you might be do you think you might front end loaded like you did last time or do you feel like it might be kind of spread out more evenly throughout the year.
Speaker 2: Well, even looking at the current valuation in the market, we still believe it is an opportune time for us to utilize our stock value add program, so I think it will be active.
Well.
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Looking at the current valuation in the market. We still believe it is an opportune time for us to utilize our stock buyback program. So.
I think it will be active.
Okay.
And then.
On the rig.
Speaker 6: Recovery on the previously charged off loan, can you quantify how much that was that drove the overall net recoveries just on a dollar?
Covered.
On a previously charged off loan can you quantify how much that was that drove the overall net recoveries just on a dollar basis.
Speaker 7: It was a sizable loan. I might have to get back to you on the exact figure, but it is a current workout situation in a sense, so we can't disclose the actual details there, but it was one of the larger loans in the third quarter, which was previously charged off.
It was a sizable loan.
I may have to get back to you on the exact figure, but it is a current workout situations in the sense. So we can't disclose.
The actual details there, but it was one of the larger loans in the third quarter, which was previously charged off.
Speaker 6: Okay. I was trying to back into kind of a normalized net charge-off ratio, but we can follow up. Okay. And then just on the reserve coverage at this point, at 102 X PPP, I guess, how do you feel about that ratio?
Okay, I was trying to back into kind of a normalized net charge offs ratio, but we can follow up.
Okay, and then just on the reserve coverage at this point at one or two ex PPP I guess, how do you feel about that.
That ratio based on.
You know the pipeline and the expected.
Speaker 6: the pipeline and the expected mixed change within your portfolio.
Mix change within your portfolio.
Speaker 7: Sure, you know, our CECL Day 1 allowance was around 96 basis points and we're a little over 100 basis points right now, so we're sort of nearing the Day 1 CECL allowance. I think we still have some room, I believe, just looking at the kind of the mechanics behind
Sure our seasonal day, one allowance was around 96 basis points and were little over 100 basis points right. Now so we're sort of nearing the day one allowance. So I think where we still have some room I believe just looking at the kind of the mechanics behind.
Speaker 7: our ACL methodology. I think there's still a little bit of room to reduce, but there are various factors including loan growth expectations and obviously the asset quality we anticipate will continue to show improvement. So, there will be some variables that will have to play out, but again, I think we have some room, but we are nearing the day one
Our ACL methodology, I think theres still a little bit of room to reduce but there are various factors, including loan growth expectations and.
Obviously, the asset quality, we anticipate will continue to show improvement. So there will be some variables that will have to kind of play out, but again I think where we have some room, but we are nearing sort of the day one allowance there.
Speaker 6: Okay, and then just on the swap fees and equity income,
Okay, and then just on the swap fees in equity income.
Fees this quarter.
Speaker 6: Can you quantify both of those and how they compared to the third quarter? I'm just trying to get a sense for the sustainability of both those items.
Can you quantify both of those and how they compared to the third quarter I'm, just trying to get a sense for the sustainability of both.
Those items.
Speaker 3: Yeah, you know, swap fee income is fluctuate. This quarter, we had about 600K. And I would expect that will, you know, continue to the same level or a little bit increase going forward. But it will be a function of the interest rate, you know, the movement as well.
Yes, no swap fee income it fluctuates this quarter, we had about 600 K.
I would expect that we'll continue to the same level or a little bit increase going forward, but it will be a function of the interest rate movement as well.
And then on the equity income.
Speaker 6: And then on the equity income and dividend gain revenue.
Different game revenue.
Revenue.
Speaker 3: The equity income was also, you know, it was kind of a one-off item, because we got a kind of refund from the equity investment, so I don't think it will continue going forward. It was also in the neighborhood of about half a million in this quarter. We might not recur that amount of income going forward.
The equity income was also.
It was kind of a one off item.
We got kind of a refund from the equity investments. So I don't think it will continue.
Going forward. It was also in the neighborhood of about a half million in this quarter.
Not.
Recur that amount of income going forward.
Speaker 6: Okay, thank you, and last one for me, just on the SBA production and premiums.
Okay. Thank you and last one from me just on the SBA.
Production and and premiums.
Should we should we assume this piece of.
Speaker 6: Production or loans sold into the secondary market will continue
Production of loans sold into the secondary market will continue.
And how do you think about the outlook for premiums a little surprised that it went up this quarter given the fact that the.
Speaker 6: And how do you think about the outlook for premiums, a little surprised that it went up this quarter given the fact that the government has kind of...
Government is kind of.
Backed away a little bit.
Speaker 2: Well, the SBA loan premiums in the secondary market is holding up pretty well. I don't see much difference in the premium level from the fourth quarter to the first quarter of this year. In terms of the SBA loan sales income for 2022,
Well.
SBA loan premiums in the secondary market is holding up pretty well.
I don't see much difference.
In the premium level from the fourth quarter.
To the first quarter of this year.
In terms of the.
SBA loan sales income for 2022.
I I think we are planning to sell approximately $40 million per quarter, but obviously that will depend upon.
Speaker 2: I think we are planning to sell approximately $40 million per quarter, but obviously that will depend upon the premium rates offered in the secondary market. So the SBA loan sales income will be between like $3.5 million to $4.5 million per quarter.
The premium rates offered in the secondary market.
So the.
SBA loan sales income will be.
Between.
Like a $3 5 million to $4 $5 million per quarter.
Speaker 2: In terms of production, we still expect robust production in 2021 versus 2022. We had approximately $288 million of production in 2021, and in 2022, we expect about a quarter billion dollars, about $250 million of SBA loan production. So our SBA loan production will continue to be robust.
In terms of production.
We still expect a robust production in 2021.
Versus 2022, we had approximately $288 million of production in 'twenty one.
And in 'twenty, two we expect about a quarter billion dollars about $250 million of.
SBA loan production, so our SBA loan production will continue to be robust.
Thank you.
The next question is from Chris Mcgratty of <unk>. Please go ahead.
Speaker 4: The next question is from Chris McGrady of KBW. Please go ahead.
Oh, great good afternoon.
Okay.
Speaker 8: I want to maybe dig into the rate sensitivity for a moment. Kevin, I think you mentioned your prepared marks. Much better positioning this cycle. I'm interested in kind of maybe some numbers behind what each 25 basis point might mean.
I wanted to.
Maybe dig into the rate sensitivity for a moment.
Kevin I think you mentioned in your prepared remarks, much better positioning.
This cycle.
Interested in kind of maybe some.
Some numbers behind what each 25 basis point might mean to the interest income if you have that.
Speaker 3: Sure, Chris. Let me start with a 25 basis point increase, and I don't know the exact timing, but let's assume in March. If we have a 25 BIPS increase, I would quantify the remaining nine months of impact.
Sure, Chris Let me start with.
25 basis point increase and I don't know the exact timing, but let's assume in March.
We have a 25 bps increase.
Quantify the remaining nine months this of Impac.
Speaker 3: I would expect around like $5 million of additional net interest income or like a 95 basis point increase. That would be my expectation at this juncture, but I also wanted to note our deposit beta.
I would expect around like $5 million of additional net interest income or like a 95 basis points.
Increase that would be my expectation at this juncture, but I also wanted to note our deposit beta.
Speaker 3: You know, we did have a quite high deposit beta in our interest rate rising environment, let's say, you know, later part of 2017 and 2018, and our deposit beta was very high. But given the changes that we made, or actually improvement that we made, i.e.
We did have a quite high deposit beta in our interest rate rising environment, let's say in a later part of 2017 and a churn and our deposit beta was very high.
But given the changes that we made or actual improvement that we made I E. Much.
Speaker 3: much lower reliance on the CEDs and a much higher composition of non-interest-bearing deposit accounts, I would expect our deposit beta for the interest rate increasing environment will be much lower. And I think that will help.
Much lower rely on on the.
Cds and the much higher composition of noninterest bearing.
Deposit accounts I would expect our deposit beta.
Paul.
The interest rate, increasing environment will be much lower and I think that will help.
Speaker 3: our margin, expectation, and also NII.
Our margin.
Expectation and also NII.
Sure.
Speaker 8: and uh... that nine months that five million dollars a plate picture and i think that would be a nine-month basis so
That nine months of that $5 million, just so I make sure I understand it that would be on a nine month basis. So.
Speaker 8: Assuming it were to occur on an annual basis, it would be closer to like $6.5, $7 million or around four basis points to margin. Is that the right math? Yes. Yes. That's only nine months, so you can annualize to annual. What is your expectation for model deposit betas and also I think what we're as a sell side struggling with is just deposit retention at the industry level or deposit growth from here given all the stimuli? Yes.
Assuming that were to occur on an annual basis, it would be closer to like $657 million or around four basis points of margin is that the right math, yes, yes. That's all in the nine months. So you can annualize two annual okay and what is your.
What is your expectation.
For model deposit betas and also.
What we are.
Kind of as a sell side struggling with is just deposit retention at the industry level or deposit growth from here given all the stimulus.
Yes deposit beta.
Speaker 3: Yeah, you know, deposit beta, you know, Chris, that's the area that we are actually spending a lot of hours as well to make sure we can accurately quantify.
Chris that's the area that we are actually spending a lot of hours as well to make sure we can accurately quantify.
Speaker 3: The beta and maybe it might be helpful if I just give you a little bit color on our previous interest rising rate environment, let's say 2018 our total deposit beta was around 70 percent
Yeah.
And maybe it might be helpful. If I just gave you.
A little color on our previous interest rising rate environment, Let's say 2018, our total deposit beta was around 70%.
Speaker 3: And why it was kind of high was because our reliance on the CD was pretty high.
And why it was a kind of high was because our reliance on the CD was pretty high and.
Speaker 3: we see the real sensitivity on the deposit rate in the rising environment, CD is the most sensitive. So, you know, at that time, our loan-to-deposit ratio was not as low as we see now. So we need to offer a higher deposit rate. So that's the kind of main reason why we had almost 70 percent of a...
We see the real sensitivity on the deposit rate in a rising environment.
<unk> is the most sensitive so.
At that time, we our loan to deposit ratio was not as.
LOE as we see now so we need to offer a higher deposit.
So thats kind of a main reason why we had almost 70% of.
Speaker 3: deposit beta, but based on our new deposit mix, we have a much higher money market deposit as a percentage of a total deposit, and also in the time deposit is less than 19%.
Deposit beta, but based on our new.
Deposit mix.
Have a much higher.
Money market.
Deposit as a percentage of a total deposit.
And also in the time deposit is a less than 19%. So it's.
Speaker 3: So it's good. So we would expect like a mid 40% of the deposit beta, but I don't know exactly whether it will be 40 or 45, but it is management's focuses. They will be more disciplined in the deposit pricing, which will differentiate from our earlier experience because we were actually offering very high deposit rate.
Is good so we would expect like a mid 40.
Percent of the deposit beta but.
I don't know exactly whether it will be 40 or 45, but it is management's focus is there will be more disciplined in the deposit pricing, which will differentiate from our earlier experience because we.
We were actually offering very high deposit core deposit rate and it really hurt us and I don't think will repeat that and our deposit position as of today really support management's intention to be disciplined pricing on deposit side.
Speaker 3: call a deposit rate and it really hurt us and I don't think that we will repeat that and our deposit position as of today really supports management's intention to be disciplined pricing on deposit side.
Speaker 8: Yeah, that's great color. If I could just squeeze one more in on margin from rates.
Yes, that's great color, if I could just squeeze one more and more on on margin from rates.
Speaker 8: If we get a second and third rate hike, are there any liftoff points with regard to floors or any derivatives that would make you perhaps more asset sensitive on the second and third?
Get a second and third.
Rate hike are there any.
Are there any lift at all points with regard to floors or any derivatives that would make you.
Perhaps more asset sensitive on the second and third or is that.
Speaker 8: Matt, you gave us before kind of steady state for each.
Matthew gave us before kind of steady state for each 25.
Speaker 3: Uh, yeah, I don't think, you know, the derivatives would have a much impact. It's a more kind of a deposit, uh, beta and also, uh, loan price.
Yeah, I don't think the derivatives, we would have much impact if some more kind of a deposit.
Beta and also loan pricing.
Speaker 3: We have about 41% of our loans are variable and quite a substantial portion is prime as well and those will be immediately repriced. So I think those are the two main drivers for the margin expansion. And as I said earlier, net interest margin
Have about 41% of our loans are variable and quite substantial portion is.
Prime as well and.
Those will be immediately repriced. So I think those are the two main driver for the margin expansion and as I said earlier net interest margin.
Speaker 3: You know, Q1, we expect fairly stable.
Q1, we expect a fairly stable.
Going forward, you know Q2, and the remaining of 22 again I think it's a function of how many times and what a basis point a rate increase but in the directional wise if the rate goes up it will definitely help more and the positive expansion to the margin.
Speaker 3: But directional-wise, if the rate goes up, it will definitely help more in the positive expansion to the margin after the Q1 and the remaining of 2022.
After the Q1 and the remaining of 2022.
Great. Thank you very much and Kevin maybe just one on capital.
Speaker 8: Great, thank you very much. And Kevin, maybe just one on capital to follow up on Matt's question. You know, you were active with the buyback, but your CET1 is still 11 and hasn't really changed in the last year. Could you just remind us the...
Follow up on Matt's question, you were active with the buyback but your.
CET one is still 11, hasnt really changed in the last year could you just remind us the.
The governing ratio and where you would you'd like to run the bank understanding the balance between loan growth, which is improving and just opportunistic buybacks.
Speaker 8: the governing ratio and where you would you like to run the bank, understanding the balance between loan growth, which is improving and just.
Well, we do not have any specific ratio that we're sharing with the investors but.
Speaker 2: Well, we do not have any specific ratio that we are sharing with the investors, but what I can tell you is that our board considers this capital situation on a regular basis, taking into account all the, you know, potential uses of capital debt.
What I can tell you is that our board.
You know considers.
This capital situation on a regular basis, taking into account all the you know.
Potential uses of capital debt.
Speaker 2: uh... will be most beneficial for the shareholders so uh... if your question is about whether after the fifty million dollar current by the program we may have uh... another one coming uh... i don't think it is a little premature at this time to tell you but uh... obviously we will consider all the possibilities
We will be most beneficial for the shareholders. So.
If your question is about whether after this $50 million current buyback program. We may have another one coming.
I don't think it is a little premature at this time to tell you but.
Obviously, we will consider all the possibilities.
Okay. Thank you very much.
Again, if you have a question. Please press Star then one the next question is from Gary Tenner of D. A Davidson. Please go ahead.
Speaker 4: And if you have a question, please press star then 1. The next question is from Gary Penner of D.A. Davidson. Please go ahead.
Thanks. Good morning, just want to go back to a couple of items. Alex you just mentioned in terms of the mid 40% deposit beta that you were talking to is that the expectation for say the first 100 basis points of tightening or is that kind of where youre thinking from the initial.
Speaker 9: Thanks. Good morning. I just want to go back to a couple of items, Alex, you just mentioned. In terms of the mid-40 percent deposit beta that you were talking to, is that the expectation for, you know, say, the first 100 basis points of tightening, or is that kind of where you're thinking from the initial move, you know, 40 percent on the first 25 basis points, or are we starting lower and then getting to the mid-40s over the course of
40% on the first 25 basis points or restarting lower and then getting to the mid <unk> over the course of 100 basis points.
Speaker 3: Sure, I should have maybe clarified because there are many assumptions and it will result in different NII implications. So we have a parallel shock and also 25 basis points, day one shock, but the 43% is more our parallel shock ramp scenario.
Sure.
I should have maybe clarify because there is many assumptions and it will result in different NII.
Implication so we have a parallel shock and also you know 25 basis points they won.
Chalk, but 43% is more our perl a sharp ramp scenario.
Speaker 3: Meaning, it will increase, but in a ramped scenario basis, that's what we are actually forecasting. And the ramped scenario that we modeled is 100 basis points, 1% increase, but it's gradual over the period as the ramped scenario defines.
Uh huh.
<unk>.
It will increase by in a ramp scenario.
[noise] basis, Thats, why we are actually forecasting and a ramp scenario that we.
Modeled is a 100 basis, 0.1% increase but its a gradual over the period as the ramp scenario of defined.
Okay. Thanks.
Speaker 9: Okay, thanks for that. And then just to clarify, as you're talking about the variable rate loan book, you know, almost $6 billion every loan, you're saying that there is no...
Thanks for that and then just to clarify are you talking about the variable rate loan book.
Almost $6 billion of reminds you are saying that there is no.
Speaker 9: meaningful amount of floors or in the money floors that will that will slow down and you're repricing it up
Meaningful amount of the floors or in the money for us that will that will slow down and you're repricing up.
Speaker 3: You know, yes, we do have variable rate loans with the floors, but that amount is less than a billion. It's only like a 16% or $900 million. And out of 93 million, out of that, you know, balances, you know, $834 million of loans have already an interest rate equal to a floor. So I don't think the floor would have much impact on our margin or so.
So yes, we do have a variable rates.
Laws, where the floors, but that amount is less than 1 billion, it's only like 16.
<unk> $900 million and out of 93 million out of debt balances and the $834 million of loans have already an interest rate equal to floor. So I don't think the floor or to have a much impact on our margin oriented board.
Speaker 9: Okay, thank you. And then just one last one for me that add to accruing TDRs, the commercial rules, and what what segment was it within sherry.
Okay. Thank you and then just one last one for me.
Add to accruing <unk>.
Commercial real estate and what segment was it within jewelry.
Yeah. It was just considered.
Speaker 7: Yeah, it was just considered CRE retail.
CRE retail.
Hey, Joe.
Okay. That's it for me thank you.
Yes.
Speaker 10: The next question is from Tim Coffey of Jammie. Please go ahead. Great, thanks, Marni. Can you remind me how much you have in PPP loans?
The next question is from Tim Coffey of Janney. Please go ahead.
Great. Thanks, Good morning Rudy.
Could you remind me how many how much you have in PPP loans.
Speaker 3: Sure. We have a total of PPP loans remained at Q4 was a total of $228 million. Great. Thanks, Alex.
Sure.
A total of PPP and loss remained at Q4 was.
Total of $228 million.
Thanks, Alex how much do you have remaining fees.
Speaker 3: Yeah, we recognize $5.2 million in Q4 and the remaining for the rest is only $6.7 million left.
Yeah, we recognized $5 $2 million in Q4, and the remaining for the rest is only $6 $7 million left.
Okay, great. Thanks.
Speaker 10: And then just kind of looking, thinking about the guide or your outlook for the next quarter and the next year on both sides, revenues and expenses, what's the right way to think about your efficiency ratio, right? Because, I mean, you obviously saw good improvement this quarter. It seems like you would X rates have an improved efficiency ratio going forward. Is it right to think that it's going to be in the low 50s?
And then just kind of looking thinking about the guy or your outlook for the next quarter in the next year on both sides revenues and expenses, what's the right way to think about your efficiency ratio right.
You, obviously saw grid improvement this quarter. It seems like you would ex rates.
An improved efficiency ratio going forward is it right to think that it's going to be in the low fifties.
Speaker 2: uh... can let me let me first respond to that uh...
Tim Let me, let me first respond to that.
Speaker 2: Uh, yeah, uh, efficiency ratio is, uh, uh, the ratio that, uh, we, uh, carefully monitor and also at the same time, uh, we, uh.
Yes.
CNC ratio is.
The ratio that we.
Carefully monitor and also at the same time.
Speaker 2: look at the ratio with respect to the average assets.
Look at the ratio.
With respect to the average assets.
In 2022, our goal is to maintain the efficiency ratio in the <unk>.
Speaker 2: In 2022, our goal is to maintain the efficiency ratio in the low 50s or around 50 percent. Understand it will be a
Low fifties or around 50%.
Understand it will be a <unk>.
Speaker 2: uh... challenge because uh... we expect that some of the uh... expense line items will uh... be picking up especially
<unk>, because we expect some of the.
Expense line items will be.
Be ticking up especially.
Speaker 2: compensation expense and things like that, but at the same time those expenses that we expect to increase are largely related to the business generation and as we previously mentioned a good chunk of
Compensation expense and things like that but at the same time those expenses that we expect to increase our largely related to the business generation and as we previously mentioned a good chunk of the increase in the compensation expense will be for hiring additional bankers Linda.
Speaker 2: the increase in the compensation expense will be for hiring additional bankers on the front line. So those expense increases will be directly tied to our
Frontline so.
Those expense increase will be.
Directly tied to our revenue generation.
Speaker 2: And a second point that I would like to point out is that in the rising interest rate environment, net revenue growth is expected from our asset-sensitive position, as Alex explained. And lastly, our continued balance sheet growth should also help us enhance our operating leverage. So...
The second point that I would like to point out is that in the rising interest rate environment.
Net revenue growth is expected from our S. S sensitive position as Alex explained and lastly, our continued balance sheet growth should also help us enhance our operating leverage so.
Speaker 2: our goal is to be close to fifty percent and uh... at the same time uh... did the ratio of our uh... uh... uh... non-interest expenses to the average assets will be under one point seven percent
Our goal is to be close to 50% and at the same time.
The ratio of our.
Noninterest expenses to the average assets will be under one 7%.
All right.
Yeah Fantastic those are my questions. Thank you.
Thank you.
Speaker 4: As a reminder, if you have a question, please press star then 1.
As a reminder, if you have a question. Please press Star then one.
There are no other questions at this time. This concludes our question and answer session I would like to turn the conference back over to management for closing remarks.
Speaker 4: There are no other questions at this time. This concludes our question and answer session. I would like to turn the conference back over to management for closing remarks.
Once again, thank you all for joining US today, we hope everyone stays safe and healthy and we look forward to speaking with you again in three months bye everyone.
Speaker 4: The conference is now concluded. Thank you for attending today's presentation. You may now...
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.