Hope Bancorp Inc. Q1 2023 Earnings Call
Good afternoon, and good morning, and welcome to the Hope Bancorp first quarter 2023 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two.
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 Gary Good morning, everyone and thank you for joining us for the Hope Bancorp 2023 first quarter Investor Conference call as usual, we will be using a slide presentation to accompany our discussion. This morning, which is available in the presentations page of our Investor Relations website.
Yeah.
Beginning on slide two let me begin with a brief statement regarding forward looking remarks. The call today may contain forward looking projections regarding the future financial performance of the company and future events. These statements may differ materially from actual results.
Certain risks and uncertainties. In addition, some of the information referenced on this call today are non-GAAP financial measures for a more detailed description of the risk factors and a reconciliation of GAAP to non-GAAP financial measures. Please refer to the company's filings with the SEC as well as the safe Harbor.
Statements in our press release issued yesterday.
Bancorp assumes no obligation to revise any forward looking projections that may be made on today's call.
Now we have a lot of one hour for this call presenting from the management side today will be Kevin Kim Hope Bancorp's, Chairman, President and CEO and David Malone, who stepped in as our interim Chief Financial Officer earlier this year, Peter Cahill, our Chief operating officer is here with us as usual and we will.
Be available for the Q&A session and we also have here with us our new Chief Financial Officer, Giuliano de risk 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.
Before I begin my presentation I would just like to say a few words about how pleased we are to have giuliano onboard as our new CFO .
We have known Giuliana since our days as a research analyst covering our predecessor banks and while we have certainly have undergone a transformation as bank of hope today. She is fitting right in and is up and running already now.
Now, let's begin on slide three with a brief overview of our quarter.
For the first quarter of 2023, our total deposits were $52 8 billion increased 1% quarter over quarter and 9% year over year.
<unk> ended the quarter with a strong balance sheet with high levels of capital and available liquidity.
Company's total risk based capital ratio increased to $12 two 5% at March 31 of 2023.
28 basis points quarter over quarter.
In response to the banking industry disruption in mid March we substantially increased our cash and cash equivalents. So $2 $2 billion. At March 31 was 23 up from $507 million in December 31 of 2022.
This increase in on balance sheet liquidity reflects Banco Pope's conservative approach to risk management.
<unk> was substantially funded through the use of the bank term funding program at a cost of $4 49%.
Use of the bank funding program is a positive contributor to net interest income.
For the first quarter of 2023, our net income was $39 $1 million and our diluted earnings per share were 33.
Our return on average tangible equity was nine 9%.
Now moving on to slide four for a review of our capital position.
We continue to maintain robust capital ratios all of our regulatory capital ratios are meaningfully above requirements for well capitalized institutions.
At March 31 of 23, our common equity tier one ratio was $10 seven 5% up 20 basis points from year end at quarter end, our company total risk based capital ratio was 12, 22, 5% and our bank level total risk based capital.
Our ratio was 12.
6%.
A lot of attention has been paid this quarter to pro forma capital for us after adjusting for allowance for credit losses, and including hypothetical adjustment for investment security remarks, all of our capital ratios remain very strong.
I would also like to announce that our board of directors has declared a quarterly common stock dividend of <unk> <unk> per share.
Moving on to slide five.
We closed the quarter with a significantly higher than usual level of cash and cash equivalents on our balance sheet and we believe this was prudent in light of the heightened financial sector volatility.
At March 31, our cash and cash equivalents were $2 $2 billion.
From halfway billion as of December 31 of 2022.
At the end of the first quarter, our available borrowing capacity together with cash and cash equivalents and Unpledged investment Securities was $8 billion equivalent to 50% of our total deposits and well exceeding our not our uninsured deposit back.
<unk>.
During the first quarter, we repurchased $11 million of our convertible senior notes, we expect to pay off the remaining balance of $207 million in may with our excess cash.
Our liquidity and capital positions will continue to remain strong following the pay off.
Continuing to slide six Banco Pope has a granular deposit base with an average commercial account size of approximately $300000 and an average consumer account size of approximately $50000 over a third of our balances are consumer deposits menu.
Of our depositors have had long time relationships with Banco Pope or its predecessor banks.
At March 31, the bank's uninsured deposit ratio improved to 38% down from 41% at December 31 of 2022.
Now moving on to slide seven in the first quarter, we funded $569 million of new loans, which is lower than the preceding quarters and reflect changing customer demand and a higher interest rate environment in the first quarter, we had 350 million.
The commercial and industrial loan production, which represented 61% of our total loan production.
Average rate when our new loan production was 7.53% in the first quarter.
82 basis points quarter over quarter, and up 399 basis points year over year.
Moving on to slide eight.
As of March 31, our loan portfolio was <unk> 1 billion, a decrease of 2% quarter over quarter, New loan production in the first quarter was offset by early loan pay offs maturing commercial real estate loans as well as a decline in the utilization of warehouse lines of credit.
Year over year total loans increased 7%.
Our portfolio is well balanced among the major loan types of commercial risk commercial real estate commercial and industrial owner occupied commercial real estate and consumer loans, which are predominantly residential mortgage loans, our commercial and industrial loan portfolio is.
Well diversified by industry.
Moving on to slide nine and 10.
For an overview of our commercial real estate portfolio.
Our commercial real estate loans that granular well diversified by property type and have low loan to values across all segments. The weighted average loan to value ratio of our commercial real estate portfolio is 53, 3%.
The vast majority of our commercial real estate loans, a full recourse with personal guarantees.
MS commercial real estate is a small segment of $465 million, representing 3% of total loans and with no central business District exposure.
Our average commercial real estate loan size is $1 $9 million and as you can see in the chart on slide 10, we have only eight loans over $30 million in size. You can also see that the low loan to value ratios that consistent across all size segments.
Only 1% to lower commercial real estate loans have a loan to value ratio of over 75%.
With that I will ask David to provide additional details on our financial performance for the first quarter.
David Thank.
Thank you Kevin and good morning, everyone, beginning with slide 11, I will start with our net interest income, which totaled $134 million for the first quarter of 2023, representing a decrease of 11% from the preceding fourth quarter.
Net interest margin was 3.0% to 2% in the first quarter down 34 basis points quarter over quarter.
This was primarily attributable to an increase in our average cost of interest bearing deposits, which reflected customer preferences for more yield and a higher interest rate environment, partially offset by expanding earning asset yields.
Moving on to slide 12, our average loans of $15 $2 billion decreased 1% linked quarter and the average yield on our loan portfolio increased to 5.75% up 39 basis points quarter over quarter.
In slide 13, you can see that our average deposits up 15, $8 billion grew 2% quarter over quarter.
The average cost of deposits increased to 2.41%, reflecting the rapid pace of fed fund rate hikes consumer preferences, and the banking industry disruption in mid March.
On Slide 14, you can see that our noninterest income was $11 million for the first quarter, a decrease of 9% from the preceding fourth quarter.
Quarter over quarter deposit service fees and net gains on SBA loan sales increased offset by decreases in other income and fees.
Moving on to noninterest expense on slide 15.
Our non interest expense was $90 million in the first quarter, an increase of 7% from the preceding fourth quarter.
This was largely driven by compensation expense, which is typically higher in the first quarter due to payroll taxes and other items.
In March 2023, we executed a staffing rationalization, which is estimated to result in $12 million of annualized cost savings.
Related to this we incurred $1 7 million of severance charges.
Excluding this item <unk>.
Salaries and employee benefits expense would have increased 5% quarter over quarter and our total noninterest expense.
But also have been up by.
5%.
For the first quarter of 2023, our efficiency ratio was 62%.
Now moving on to Slide 16, I will review, our asset quality, which continues to be healthy.
We built our allowance for credit losses to $164 million at March 31, representing.
Representing a coverage ratio of 1.09%.
Overall, our loss experience remains minimal we had only $108000 in net charge offs during the first quarter, which annualized to a net charge off ratio of less than one basis points.
Yes.
Total nonperforming assets at March 31st were 39 basis points of total assets.
Paired with 36 basis points at December 31.
2022.
Non accrual loans were $79 million at March 31, 2023, compared with $50 million at December 31.
The linked quarter change was primarily due to $1 $18 5 million dollar fully secured commercial loans based on our current workout plans, we anticipate resolving this loan by midyear with minimal risk of loss.
Looking at the entire portfolio, we're not seeing any broader systemic issues of concern.
And our asset quality metrics remain healthy.
With that let me turn the call back to Kevin for a discussion of our outlook.
Thank you David moving on to Slide 17, I will wrap up with a few comments about our outlook. We currently.
We expect full year loan growth in the low single digit range.
This reflects lower customer demand for commercial real estate loans, and a higher interest rate environment.
Even our cost of funds at the end of the first quarter, we expect that our net interest income will decline in the second quarter. Thereafter, we expect it to stabilize and begin to modestly increase in the second half of the year supported by loan growth.
In terms of non interest income, we expect to see modest quarterly growth for the rest of the year.
Importantly, we are focused on improving the profitability and efficiency of our organization.
We expect to see quarterly improvements in our efficiency ratio driven in part by the cost savings from the first quarter staffing rationalization.
Taken together, we expect to see pre tax pre provision revenue growth in the second half of the year.
Finally, as David discussed our asset quality remains healthy given that backdrop, we expect to continue to modestly build our allowance for credit losses for the remainder of the year.
Over the past several years, we have significantly strengthened our franchise with our strong balance sheet capital and liquidity, our financial institution serves as a source of strength and stability.
Our customers.
All economic and interest rate cycles.
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 telephone keypad if.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Matthew Clark with Piper Sandler. Please go ahead.
Hey, good morning, everyone.
Good morning, Matthew.
First one for me just around the margin trying to gauge where it might shake out in the upcoming quarter can you just give us the spot rate on deposits either interest bearing a total and then the average margin in the month of March.
Ah yes.
Spot rates at.
At the end of the quarter.
Or the interest bearing deposit so there was six to nine basis points.
Total deposits.
Oh, I'm, sorry interest bearing deposits of $3 eight 1% and total deposits of 273%.
And.
You also asked for the NIM.
Our projections for the remainder of the quarter.
Or just in the month of March yet.
For the month of March.
287% NIM for the third quarter third month of the quarter, yes.
Okay great.
And then what's the plan for the borrowings you put on to fund cash $2 1 billion of borrowings is the plan to just hold onto that for a while or should we expect you to right yeah, Yeah sure.
Yes, yes for the near term, we expect to hold the elevated amount of cash compared with historical levels.
Because.
Youth usage of term bank term funding program is not a drag on our profitability. So we think it is prudent to hold and use that cash at the time being.
Okay.
And then just shifting to credit.
You mentioned the commercial loan that was added to non accrual.
What type of commercial loan was that and what's the I guess.
What's the situation there.
And then <unk>.
Separately the uptick in criticized what drove the increase in criticized this quarter.
Sure Matthew this is Peter.
The nonaccrual loan that you mentioned there that was.
C&I credit it is actually.
I would say sort of a gas industry related credit.
Right now.
Kind of a unique circumstance with the management there. So we are in a workout situation and as we've stated we do feel like there is.
Very minimal locked there on that one and on the criticized.
Things that we do have a little bit of an uptick.
We're still at about 2% or so of criticized loans, which we feel is a very it's still a very low and manageable level and as we look at the relationships that are contributing to the increase in criticized loans. We are looking at.
Somewhat unique circumstances for each of the individual credits, we believe that they are well secured.
Lots of potential.
And just in general.
We look to the last many quarters that we have actually reduced our level of criticized assets I think quarterly basis for the last over over a year and a sense, so slight uptick care, but again retail asset quality is still very healthy.
Okay. Thank you.
Yeah.
Thank you.
Your next question is from Gary Tenner with D. A Davidson. Please go ahead.
Thanks, a couple questions on the deposit side in terms of the nearly $2 billion.
Growth in time deposits in the quarter.
How much if any of that was brokered deposits and what was the timing of the ads of those broker deposits if so.
Yes.
Yes, we added approximately $2 billion broken deposits during the quarter.
Yeah.
Yes.
Okay.
And was that weighted in terms of what has occurred.
And towards the end of the quarter.
Okay.
And then regarding your sort of guidance on NII stabilization in the back half of the year what is that.
What what assumptions do you have embedded there in terms of deposit migration does it assume that.
Things stabilize from here.
Are you are you modeling to a certain percentage of deposit versus noninterest bearing with us within that guidance.
Gary This is julianna when we're looking at our forward projections in our modeling and our outlook in terms of where we are with the financials.
You will know what happened in March caused a lot of banks to have a shift in deposit mix quarter to date, we are seeing positive trends from our core relationship customers and funds coming back. So in our outlook. We do expect a replacement of some of the broker deposits that we brought on with relationship based branch banks.
And when we are looking at our projections kind of going forward, we have a couple of things.
Within the content concept of that.
Margin assumption.
Big increase in the cost of deposits happened.
March I E. The spot rate at this point in time, the deposit mix between the DDA interest bearing is stabilizing.
Our projections still incorporate that and have some conservative assumptions around continued kind of DDA behaviors that are also informed by trends quarter to date from our customers and also informed by some of our branch based strategies that we will have a retail strategy for strengthening the deposit base.
Great very helpful. Thank you.
Okay.
Again, if you have a question. Please press Star then one the next question is from Chris Mcgratty with K B W. Please go ahead.
Oh, great. Thanks.
I wanted to ask about the net interest income guide the decline in Q2 and can you.
I got the back half off of there a little bit of growth stability, how should we think about the rate of change Q2 from Q1, obviously, there was a decent step down this quarter.
Because of the events, we talked about but how much more pressure.
On dollars of NII before you start to see the inflection.
Well I think if you look at the exit cost of funds.
Let's call it out on this call a minute ago that Mr. Malone I'll give you an idea of how to model where that kind of interest rate interest bearing deposit costs will go in the quarter and that should give you a framework to work with for your NII outlook.
Okay.
Yes.
And then in terms of the.
<unk>.
The assumptions on rates in your guidance do you guys assume.
The rate cuts I guess, how using the forward curve to get to that to get to the NII.
We are using the forward rate curve.
In terms of getting any lift or benefit from rate cuts as you know deposit pricing at this point in time, we are not assuming any lift just from rate cuts I think the first couple constant fed funds are not going to give thanks to pricing power to reduce deposit costs appreciably. So we are not.
Got it in order to cut.
Not giving ourselves that benefit at this point in time.
Okay. Thanks for that and then last one Kevin on the convert.
I think in prior quarters, you said, maybe cash on hand and.
Potentially.
Placing it is it now because of all the cash on the balance sheet the $200 million just simply goes away in may.
Without a replacement.
Yeah.
I think we will be okay without raising funds to replace the 2% convertible notes.
Have.
Enough liquidity to cover that and in terms of our capital ratios.
Senior debt is not capital. It is just borrowing so our capital ratios at the holding company level will not be affected.
Okay.
Thank you Greg.
Once again, if you have a question. Please press Star then one please standby as we poll for questions.
Showing no further questions. This concludes our question and answer session.
Excuse me, we do have a question from Tim Coffey with Janney. Please go ahead.
Hi, Great I got it Ed.
How are you doing this morning.
Alright, good morning, Tim.
Hey, Kevin I, just had a question about what kind of since you have for this air pocket that you're seeing among your borrowers, especially in commercial real estate borrowers how long do you think that might last.
Okay.
Can you can you.
Can you elaborate on what you mean by air pocket.
Originations have slowed the last two quarters, you've made comments about the higher interest rate environment not been conducive for additional demand for credit from your customers I'm wondering if you see a light at the end of the tunnel in terms of that regard.
Well Tim we.
We expect our loan growth to be in the low single digit range in 2023.
So we really do not.
See much of a drastic change in terms of the loan demand or our projected loan production in the CRE area although.
That 2% growth will be across across the board coming from memory.
Business unit of our organization, we do not see much of a change at least in 2023.
Okay. So youre not seeing much of an inflection point that near term. This is going to be steady across the balance of the year then is that right.
Yeah.
Yes.
Yes.
Generally correct.
Okay, Alright, great. Those are my questions. Thank you for the time.
Okay. Thank you Tim.
Yeah.
Okay.
Yeah.
Operator, do we have any other questions.
There are no more questions in the queue I'd like to turn things back over to management for any closing remarks.
Okay. Once again, thank you for joining us today, and we look forward to speaking with you again.
In three months, so long everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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