Q3 2022 Hope Bancorp Inc Earnings Call
Good day and welcome to the Hope Bancorp 2022 third quarter earnings Conference call.
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I would now like to turn the conference over to Angie Yang Director of Investor Relations. Please go ahead.
Thank you Joe Good morning, everyone and thank you for joining us for the Hope Bancorp 2022 third quarter Investor Conference call.
We show, we will be using a slide presentation to accompany our discussion. This morning. If you have not done. So please visit the presentations page of our Investor Relations website to download a copy of the presentation or if you are listening into the webcast you should be able to view the slides from the 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 financial performance of the company and future events. These statements are based on current expectations estimates forecasts 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 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 state.
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 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 32022 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 2022 third quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures now we have a lot in one hour for this call presenting from the management side today will be Kevin Kim Hope Bancorp.
Bancorp's, Chairman, President and CEO , and Alex Ko Senior Executive Vice President and Chief Financial Officer, Peter Koh Senior Executive Vice President and Chief operating Officer is here with us as usual and will be.
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 delivered a strong performance in the third quarter, which reflects the improved earnings power of our franchise and our ability to perform well in a variety of economic environments.
Despite the macroeconomic headwinds of inflationary pressures and concerns about a potential recession, we generated an increase in earnings per share and pre provision net revenue compared with the prior quarter with all of our P. P N our profitability metrics improving as well we.
Reported net income of $53 $7 million or 45 cents per share in the third quarter.
From 43 cents in the preceding second quarter, while our pre provision net revenue increased 12% to $82 $6 million a record level for the company.
Most importantly, due to strong loan production margin expansion enhance decisions is and meaningfully improved asset quality, we are generating profitable growth with our pre provision net revenue return on average assets increasing to 1.79% from one six.
5% in the preceding quarter, while our pre provision net revenue return on average equity increased to 16.26% from 14.66% in the prior quarter.
Moving on to slide four.
In the third quarter, we funded $1.35 billion in new loans, which was 5% higher than the preceding quarter.
34% increase over the third quarter of 2021 and another record level for the company.
Our strong loan production in the third quarter resulted in six 5% loan growth quarter over quarter or 11% year to date as expected given the investments we have made to build our corporate banking group.
Lending was the largest contributor to our overall loan production accounting for 55% of our total loan fundings in the third quarter, we disbursed a record $747 million in new commercial loans during the third quarter and the average rate of new commercial loans increased.
Greece 97 basis points over the preceding quarter.
Within the corporate banking group, we are getting strong contributions across industries and geographies, resulting in a well diversified loan production in the third quarter, we had particularly strong contributions from our Texas region, which focuses on general middle market lending, our health care group, which join.
This in mid 'twenty, 'twenty, one and our teams that focused on financial institutions and telecom industry in terms of commercial real estate, while we expected to see a softening in demand due to higher interest rates. It did not softened as much as we thought we had $534 million.
As a commercial real estate loan production in the third quarter, which was down slightly from the preceding second quarter.
Counted for 40% of total originations, but the average rate of new CRE loans increased 99 basis points over the preceding second quarter overall, we still increasing trends in loan pricing in all asset classes during the third quarter combined with a higher mix of commercial.
Own production. This resulted in our average rate on total loan production, increasing by 111 basis points compared with the preceding second quarter.
Moving on to slide five.
The investments we have made over the years to build our corporate banking group and establish extra cheese in new asset classes and vertical markets have resulted in a material transformation of our loan portfolio to a significantly lower risk profile.
If we look back three years ago at September 30 of 2019 commercial loans represented 22% of our total loan portfolio.
As of September 30 of 2022 commercial loans have increased by $2 $5 billion nearly doubling in volume and now represent 33% of our total portfolio.
Our corporate banking group has been the primary driver of increasing volumes of commercial loan fundings and a continued shift in our client base towards larger stronger commercial enterprises as well as a more diversified C&I portfolio. We have also seen a significant transfer.
Formation of our CRE portfolio. During this same time period.
Commercial real estate loans accounted for 71% of our total portfolio at September 32019, having increased by less than $1 billion over the course of three years CRE loans as a percentage of total loans declined to 61% as of Sept.
<unk> 30 of 2022.
More importantly, we are making good progress in creating a more diversified lower risk portfolio. We continued to see solid results from the multifamily lending team, we have built which accounted for 46% of our total CRE loan originations in the quarter.
As a result multifamily continues to grow as a percentage of our total CRE loans, representing 13% as of September 30 of 'twenty 'twenty. Two in contrast, our hotel motel portfolio at the end of the third quarter represented just 11% of our CRE portfolio down.
You can leave from 19% three years ago.
Now I will ask Alex to provide additional details on our financial performance for the third quarter, Alex. Thank you Kevin.
Any way to slide six I'll start with our net interest income, which totaled $153 $2 million for the third quarter of 2022.
An increase of eight 2% from the preceding second quarter.
The strong growth in net interest income was largely driven by a 4% quarter over quarter increase in average loss receivable.
A 59 basis point increase in the average loan yield and expansion of our net interest margin.
Our net interest margin increased 13 basis points quarter over quarter to 349%.
The expansion in our net interest margin was driven by a favorable shift in our mix of earning assets.
As well as higher loan yields, resulting from the repricing of variable rate loans and the higher pricing on new loan production.
Overall, the yield on interest, earning assets increased by 56 basis point quarter over quarter.
These benefits were partially offset by an increase in deposit cost, resulting from higher rates paid on interest bearing deposits.
With a lag in deposit cost catching up to the increasing yield on interest, earning assets, we may see flat to slight margin compression in the fourth quarter.
Potentially offsetting to a small degree.
So the year to date margin expansion.
Moving on to slide seven.
We remain in an asset sensitive position as of September 32022.
And our position to benefit from higher interest rates.
Well, if our new loan production in the third quarter, 57%, representing a variable rate loans.
And as of September 32022 variable rate loss increased to 46% of our total loan portfolio.
Now moving on to slide eight.
Our noninterest income was down $10.4 million for the third quarter, an increase of 5% over the preceding second quarter.
We had a lower gains on sale of SBA loans, reflecting a lower volume of loans sold.
The lower net premiums on SBA loan sales.
We also recorded lower gains on sale of residential mortgage loans.
A lower volume of loans sold.
These decreases were mostly offset by higher deposit of a calix service charges.
And encourage that swap fee income and reduction in the fair value losses on equity investments.
Moving on to noninterest expense on slide nine.
Our noninterest expense was $83 $9 million compared with $84 million in the preceding second quarter.
We had decreases in most expense areas.
This were offset by increases mainly in two areas.
First we had an increase in salary and benefit expense, largely reflecting higher incentive compensation accruals.
In light of our strong financial performance.
And a second.
Noninterest expense trend at a higher reflecting an increase in earnings credit expense on deposit accounts.
With our strong revenue growth outpacing our increase in expenses.
<unk> efficiency ratio improved to 54% from 52.1% in the preceding second quarter.
Now moving on to slide 10.
I'll discuss our chief deposit trends.
Our total deposits increased three 1% from the end of the prior quarter.
While our two part.
Business development efforts continue to result in the consistent additional new commercial deposit relationships.
We had one particularly sizeable outflow from a large corporate client as they capitalized on our significant acquisition opportunity to expand their business.
Given that much of our loan pipeline included into low risk variable rate commercial loans.
We have been targeting.
We determined that the longer term benefits of adding this laws and the new commercial relationships.
Outweighed the consideration of time deposits that were utilized to support the strong loan growth in the quarter.
Overall, the cost of our interest bearing deposits increased by 71 basis points quarter over quarter.
Due to higher rates across all of our deposit categories.
This resulted in a 46 basis point increase.
Our overall cost of deposits.
At this point in the rising rate cycle management of our deposit cost and mix is a top priority.
As we remain focused on generating profitable growth.
We have a number of deposit strategy is in place.
Would you expect real help and increase our core deposits and the mitigating the pressures of rising deposit costs.
Now moving on to slide 11.
I will review our asset quality.
Our in house credit administration processes, and tightened underwriting criteria kantar.
Contributed to a continuation of positive trends in our portfolio in the third quarter.
With reductions in all categories of nonperforming assets and criticized loans.
Total nonperforming assets at September 30 of 2022 decrease too.
$97 million and reflected reductions in nonaccrual loans.
The Lincoln last 90 days or more although cross status.
Green G D ours and other real estate owned.
At quarter end total nonperforming assets represented 51 basis points of total assets.
Down from 61 basis points at the end of the second quarter.
Total criticized loans declined by another 17% in the third quarter and represented our fifth consecutive quarters of steady reductions.
Our loss experience remains minimal.
We had to just $219000 and net charge offs during the third quarter or 0.0% to 1% of average loans receivables.
Annualized basis.
Year to date, we haven't netted recoveries of $18.6 million.
We recorded a provision for credit losses of $9 $2 million.
Which primarily reflects the strong growth in the loan portfolio.
The third quarter and addresses future economic headwinds.
At September 32020 to our allowance for credit losses coverage ratio.
And at 1.0, a full percent of loans, while our coverage of nonperforming assets increased 266% from 137% at June 32022.
Now moving on to slide 12.
Let me provide an update on our capital position and returns.
So accelerate of interest rate hikes during the third quarter continued to result in unrealized losses in our investment security portfolio.
Christian negatively impacted tangible common equity to tangible asset ratio.
Approximately 35 basis points.
In the 2022 third quarter.
Our tangible common equity to tangible asset ratio remained strong at 8.09% as of September 32022.
And changes in unrealized losses do not have an impact on our regulatory capital ratios.
As announced yesterday, our board of directors declared a quarterly cash dividend of 14 cents per share, which remains the same as last quarter.
During the quarter, we did not repurchase any stock and continue to have available.
$5 $3 million of our $15 million stock repurchase program.
As of September 32022, all up all of our capital ratios remain at strong levels to support our continued balance sheet growth.
With that let me turn the call back to Kevin.
Thank you Alex now moving on to Slide 13, I will wrap up with a few comments about our outlook.
Well the operating environment has certainly become more challenging we expect to continue benefiting from the significant shift we have made to a more relationship focused commercial banking model over the past few years with the growth we had in the third quarter.
Actual loans now represent one third of our total loan portfolio, which reflects the success. We have had in building our corporate banking group.
This has had a positive impact on our loan production volumes, our deposit gathering and the diversification of our franchise with each passing year. Our see BG group has made a larger contribution to our growth and diversification strategy is accelerating our progression to a lower Roe.
High performing regional bank.
With the success, we have had with the C. B G initiative. We have also steadily built Banco Pope's reputation as an attractive destination for experienced commercial bankers, which in turn has enhanced our ability to recruit banking talent to continue our expansion and target new industries.
And geographic markets.
More recently, we have added teams in Florida, Chicago, Boston, and San Francisco with the Boston team focused on private banking and the San Francisco team focused on the tech industry.
We expect to continue to see growth in commercial loans and deposits further diversification and stronger asset quality over the longer term given our reduced CRE concentration and a stronger more liquid commercial enterprises that now comprise a larger percentage of our client.
Days.
In due in part due to the stronger commercial banking capabilities that we have built we have been able to effectively manage through the macroeconomic headwinds that have accelerated throughout the year.
Through the first nine months of 2022 we generated a loan growth of 11% or 13%, excluding SBA PPP loans, which has helped produce the margin expansion efficiency improvements and increases in profitability that we have seen whoa.
We continue to maintain strong capital levels and asset quality.
As we look forward to the final quarter of the year, we expect the higher rates to have an increasingly larger impact on CRE loan demand and while the fourth quarter tends to be a seasonally slower quarter for commercial loan production.
Our loan pipeline continues to be relatively strong as the more recent additions to the CPG team ramp up their business development efforts.
Particularly as they expected the recession draws nearer we're being ever more selective with the loans that we are adding to our portfolio and focusing on those that are more recession resistant have greater ability to absorb interest rate and macroeconomic risk.
And ultimately contribute to profitable growth for the company.
So while we fully anticipate continued growth for the balance of the year.
It would be prudent for us to expect loan growth to moderate meaningfully from the very strong third quarter given all of these factors.
<unk> the impact of the accelerated interest rate hikes on our deposit costs will remain a top priority for her leadership.
And even with moderated loan growth expected in the near term together with improved efficiencies that we are realizing as we continue the balance sheet growth and the ongoing improvements in our asset quality. We believe that we are well positioned to continue generating strong financial results.
For our shareholders.
With that we would be happy to take your questions.
And add additional any additional color as requested operator, please open up the call.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
And our first question here will come from Clark right with D. A Davidson. Please go ahead.
Yeah.
Hi, sorry, this is Gary tenner actually from D. A Davidson a quick question in terms of.
What the September 30 deposit spot rates, where interest bearing or total.
Sure Gary.
Deposit spot rate as of 930, a total interest bearing deposit spot rate was a 1.8.
A full percent.
And if you want to.
Have a total deposit.
Pause at the spot rate was a one point to 1%.
Yeah.
Thank you.
And so the commentary in terms of the NIM compression are for the fourth quarter as you think about kind of ongoing.
Positive growth and costs going higher does that NIM.
NIM compression and potentially accelerate in the first half of 2023 or.
Maybe just characterize how you how you see the margin first half next year.
Yes, Gary that's a good question actually we are trying to evaluate that hard but given there was a lot of uncertainty and the variables.
We are not actually giving a guidance says for NIM.
NIM for 2023.
Well, you're kind of limited given where guidance is for Q4.
With a flat or a small compression as the lagging deposit pricing for our C. D. It will catch up.
So I don't think it will continue.
But there was a lot of variables.
And for 2023.
Yeah. Thank you Alex and then just last question if I could just in terms of capital you know total risk based capital under 12%. It was up over 13%, probably a year ago any any thoughts on doing anything to augment.
The total risk based capital number in terms of sub debt or otherwise.
Yeah sure you know we believe there is not a capital ratio as of today is a strong.
And.
Obviously, we'll assess the need for any you know augmentation of the capital as we move forward.
Especially there is a convertible bond debt that is schedule can be potentially to be prudent, but we are well aware of that but given our strong core earnings power.
We maintained our dividend at a fortune so that's for sure even though it and they'll stop repurchasing our shares but again, we believe.
Our capital ratios in all measures.
It is remains strong, but again you know we need to assess.
Oh on a regular basis for any argumentation over the capital going forward.
Thank you.
Again, if you have a question. Please press star then one to join the queue.
Our next question here will be from Matthew Clark with Piper Sandler. Please go ahead.
Hey, good morning, everyone.
Just following up on the interest bearing deposit costs.
I think you are.
Interest bearing deposit beta this quarter, it's 50% 40%.
So far for the cycle, what do you what are you guys assuming for.
Your deposit beta through the cycle on either end.
Just bearing or total basis.
Yeah, Matthew it's really difficult to have a 2023 a deposit beta again.
Even volatilities and in the interest rate hikes.
Hikes that we recently saw so we will try to give.
Eight our guidance is for the next.
2023 in the next quarter, when we have a conference call.
Yeah.
Okay.
And then just.
Got it.
Oh No go ahead.
Yeah.
Okay understood and then just.
Shifting to your outlook.
On the loan to deposit ratio crept up a little bit 200%.
It does sound like loan growth is going to slow pretty dramatically here, but what do you what are your what.
What are your plans for managing the loan to deposit ratio going forward and whats your limitation.
Yeah.
Yeah, you know Matthew let me start with a kind of a some sort of a assessment of our increased net loan to deposit ratio too.
Three and we'll we'll give you some sort of guidance says as well.
There are as we mentioned during the full.
Earlier remarks, there was a one kind of isolated large outflow.
It was in excess of six around $600 million of our deposit so without that if we didn't have that in our outflow because we believe that is isolated and though we expect a we still maintain a good relationship with that particular large depositors and we expect that will come back.
Even though it wasn't at all due to their investment opportunity that they had in Q3.
So if we didn't have that outflow are our loan to deposit ratio would have been in the neighborhood of 96%.
The bank, we have been managing our loan to deposit ratio of 90 698, 5% level throughout the quarter.
So that is still our target our loan to deposit ratio are going for it even though it at all.
You have a further lower but it will take a longer time.
Perspective.
So I think you know a.
Higher loan to deposit ratio for Q3, it was relatively a temporary basis.
Okay.
And then.
On expense growth.
I think we can easily back into.
Your guidance for the upcoming quarter. It looks like there was an uptick in earnings credits within other expense, which would probably continue here in <unk>, but I guess, how are you thinking about inflation.
Inflationary pressures as we get into next year, and whether or not the rate of increase in terms of the comp.
You know it is higher than years past or not.
Matthew Let me, let me respond to that are first of all on the loan demand.
Syed.
Obviously, the fourth quarter is a citizen when these softer quarter, but in addition to that.
You know the significant pace of rate increases and also uncertainties about the timing and depth of the recession.
We believe that a lot of our investors will be.
Be more reluctant to move forward with their fund investments so that goes to the a result of softer loan demand.
And then in addition to that our higher interest rates.
Make it a more challenging for them to meet our stringent underwriting criteria. So the loan growth in the third quarter was a pretty robust and our fourth quarter rone production will be at a lower volume relative to the fourth quarter.
In terms of non interest expense side as you mentioned.
ECR expense.
It will be higher in the in the fourth quarter than in the third quarter and I think that is that is pretty predictable.
So our non interest expense in the fourth quarter will be higher than our non interest expense of the third quarter and we'd we expect a little uptick indeed, not total noninterest expense in the in the fourth quarter.
Yeah.
If I if I add one more thing that you are in terms of loan loan demand side in connection with that you know our loan growth for the year will be at a the higher end of the high single to low double digit range as we previously guided.
But there is a good chance for us to even to exceed that range on a on on X P. P. P basis for full year 2022.
Okay. Thanks again.
Yeah.
Okay.
Again, if you have a question you May press Star then one to join the queue.
This will conclude our question answer session I.
I would like to turn the conference back over to management for any 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 next quarter. Thank you everyone.
Yeah.
Okay.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Yeah.