Q2 2023 Hope Bancorp Inc Earnings Call
Good morning, and welcome to the Hope Bancorp 2023 second quarter earnings Conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone. Please note. This event is being recorded I would like now to turn the conference over to Angie Yang Director of Investor Relations. Please go ahead.
Thank you Alan Good morning, everyone and thank you for joining us for the Hope Bancorp 2023 second quarter Investor Conference call as usual, we will begin we will be using a slide presentation to accompany our discussion. This morning, which is available in the presentations page of our IR website.
Okay.
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.
Future financial performance of the company in future events. These statements may differ materially from the actual results due to 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.
Filiation of GAAP to non-GAAP financial measures. Please refer to the company's filings with the SEC as well as the safe Harbor.
As well as.
Sorry, as well as the Safe Harbor statements in our press release issued earlier today Hope Bancorp assumes no obligation to revise any forward looking projection that may be made on today's call. Now we have allotted one hour for this call presenting from the management side today will be Kevin Kim.
Corp's, Chairman, President and CEO , and Giuliano, Scott, our Chief Financial Officer, Peter Koh, Our Chief operating Officer is also 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.
Thank you Angie and good morning, everyone and thank you for joining us today.
Now, let's begin on slide three with a brief overview of two quarter.
For the second quarter of 2023, our net income was $38 million.
And our diluted earnings per share were <unk> 32.
Our pre provision net revenue was $6 million, an increase of 11% from the first quarter.
Our asset quality remains healthy and we recorded net recoveries of $552000 in the second quarter.
The operating environment for regional banks continues to be challenging and we are focused on prudent risk management, maintaining high liquidity levels and building strong capital our tangible common equity ratio increased to eight 4% at June 30 of 2023.
13 basis points from March 31 quarter.
Quarter over quarter, our risk based capital grew and ratios expand it.
Continuing on slide four for a more detailed review of our strong capital position.
Our company's total capital was $2 1 billion at June 32023, growing 2% quarter over quarter at June 30, our common equity tier one ratio was 11, 6% up 31 basis points from March 31, and our total capital ratio was.
$12, six 4% up 39 basis points quarter over quarter.
Adjusting for the allowance for credit losses, and including hypothetical adjustments or investment security marks all of our capital ratios remain high.
Given the strength of our capital our board of directors declared a quarterly common stock dividend of <unk> 10 per share payable on August 17th to the stockholders of record as of August 3rd.
Moving on to slide five.
During the second quarter, we continued to maintain a higher than usual level of cash and cash equivalents on our balance sheet and we believe this is a this is prudent in the current banking environment.
At June 30 of 2023, our cash and cash equivalents were $2 3 billion.
Compared with $2 $2 billion at March 31st.
At the end of the second quarter, our available borrowing capacity together with cash and cash equivalents and Unpledged investment securities.
$775 billion.
<unk> to 50% of our total deposits and well exceeding our uninsured deposit balances in.
In May we paid off $197 million of our convertible notes with existing cash.
Now continuing to slide six.
June 30 of 2023, our total deposits were $15 $6 billion down modestly, 1% quarter over quarter and up 4% year over year.
In navigating this cycle Banco Pope has benefited from the granular granularity of our deposits. Our average commercial account size is approximately $300000 and the average consumer account size is approximately $50000 over a third of our balances are consumer.
Deposits, which are up 3% year to date and 13% year over year. We believe this is reflective of the strength and longevity of our relationships with our depositors at June 30 of 2023, the banks uninsured deposit ratio was 36%.
Compared with 38% at March 31.
Across the organization, we are focused on strengthening our deposit franchise and expanding our relationships with our clients. We have been steadily investing in our treasury management products and services and the efforts of our team has been generating a steady pace of growth in the number of new.
New Tms relationships, increasing the stickiness of our demand deposits.
Now moving on to slide seven.
In the second quarter, we funded $491 million in new loans, including $332 million in commercial and industrial loan production.
The decrease in loan production reflects current market dynamics, including declining customer demand in a high interest rate environment as well as our disciplined pricing and conservative underwriting the.
The average rate on our new loan production was 823, 7% in the second quarter up 84 basis points from the first quarter.
Moving on to slide eight at June 30 of 2023, our loans receivable were $14 9 billion.
Decrease of 1% quarter over quarter, and up 2% year over year second quarter payoffs and pay downs of $647 million exceeded the volume of new loan originations.
Our portfolio is well balanced between the major loan types of commercial real estate, including owner occupied commercial real estate and multifamily mortgage.
Commercial and industrial and residential mortgage loans, our commercial and industrial loan portfolio is well diversified by industry.
Moving on to slides nine and 10.
For an overview of our commercial real estate portfolio.
Our commercial real estate loans are well diversified by property type and have low loan to value ratios across all segments.
Less than 3% of the portfolio has a loan to value ratio over 70%. The vast majority of our commercial real estate loans, a full recourse with personal guarantees office commercial real estate is a small segment of $464 million representing.
Representing 3% of total loans.
And with no central business District exposure at June 30 of 2023, 99% of our office portfolio was pass graded.
Our commercial real estate portfolio is very granular with very few loans over $30 million in size, we are well diversified geographically across the submarkets in our footprint with very small exposure to markets, such as San Francisco or Manhattan and no exposure.
To the central business district in downtown Los Angeles.
With that I will ask Giuliana to provide additional details on our financial performance for the second quarter Giuliana.
Thank you, Kevin and good morning, everyone.
Beginning with slide 11.
Our net interest income totaled $131 million for the second quarter of 2023, representing a decrease of 2% from the first quarter.
Second quarter net interest margin was 270% down 32 basis points quarter over quarter.
That's a higher cost of funds and an increase in average borrowings.
Actually offset.
Loan yields and growth in average interest, earning cash and equivalent.
The increase in average interest, earning cash and equivalents reflects our conservative approach to navigating current market volatility.
Funded through borrowings.
This level of cash with a positive contributor to net interest income.
Moving on to Slide 12, our 2023 second quarter average loans of $15 1 billion decreased 1% linked quarter and the average yield on our portfolio increased to $5, 99% up 20.
Basis points quarter over quarter.
On slide 13, you can see that our.
Our average deposits were essentially stable at $15 $8 billion in the second quarter.
Average cost of deposits increased to $2, 79% up 42 basis points quarter over quarter.
On slide 14 or.
Noninterest income was $17 million in the 2023 second quarter up from 11% up from $11 million in the first quarter.
Second quarter income included a $5 8 million cash distribution from a gain on an investment in an affordable housing partnership quarter.
Quarter over quarter service fees on deposit accounts grew and customer swap fee income increase.
Moving on to noninterest expense on slide 15.
Noninterest expense was $87 million in the second quarter of 2023, a decrease of 3% quarter over quarter. This reflected lower salary and benefits expense, partially offset by an industry wide increase in the FDIC annual base assessment rate a few basis points.
Our efficiency ratio in the 2023 second quarter improved 325 basis points to 59, 1%.
Down from 62, 4% in the first quarter.
Now moving on to Slide 16, I will review, our asset quality, which continues to be healthy.
Recorded a provision for credit losses of $8 9 million for the 2023 second quarter building, our allowance for credit losses to 173 million at June 32023.
Our coverage ratio increased to 116% upfront from one 9% at the end of the prior quarter and the second quarter. We recorded net recoveries of 552000 equivalent to one basis point of average loans annualized.
Total nonperforming assets at June 30 were $77 million, a decrease of 3% quarter over quarter and equivalent to 38 basis points of total assets.
Year over year, our nonperforming assets were down 30%.
At the end of the second quarter, our criticized loans ratio was two 3% up quarter over quarter and down year over year. Our criticized loans were 345 million at June 32023 up from $305 million at March 31.
Quarter over quarter substandard loans decreased and our special mentioned loans increased.
Looking at our special mentioned loans, we note that the borrowers financial performance is generally improving and or we have takeouts for the allowance in place.
Overall, we are not seeing any broader systemic issues of concern within the loan portfolio.
With that let me turn the call back to Kevin for a discussion of our outlook.
Thank you Giuliana moving on to slide 17.
We'll wrap up with a few comments about our outlook for the second half of 2023.
Given the lower level of loan demand from our customers competitive market pricing and an elevated pace of paydowns and payoffs in a high interest rate environment. We now expect that our total loans will be generally stable in the second half of the year relative to June 30.
With the expectation of higher for longer interest rates in the second half of the year, we anticipate that our net interest income will modestly pressured through the balance of the year.
We expect our noninterest income to be essentially stable on a quarterly basis relative to the second quarter and excluding the affordable housing gain.
We will continue to tightly manage our expenses and expect noninterest expenses to be essentially stable on a quarterly basis relative to the second quarter. Excluding earned interest credits, which are wholly subject to interest rate changes.
And we expect our asset quality to continue to be healthy.
The current operating environment presents challenges, but with our conservative approach to balance sheet management.
We're well positioned to capitalize on the opportunities afforded to bankable as the largest and strongest Korean American bank in the nation with that we would be happy to take your questions and add any additional color as requested operator, please open up the call.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre 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.
The first question comes from Chris Mcgratty of <unk> go ahead.
Great Good morning.
Maybe giuliana start with you.
The net interest income guidance in a few of the assumptions.
Hey, guys terminal beta as.
Any migration you see further in the deposit mix.
And then also I'm interested in the CD growth like what's the maturity schedule look like for your Cds.
Hi.
Chris our terminal deposit beta assumptions are for total deposits approximately 60%.
That mix shift has started to stabilize.
They have changed starting to stabilize in between.
DDA and the interest bearing accounts.
And for our Cds.
We have there are predominantly 12 month's CES that's the most popular product. Although we are actively originating shorter duration Cds at this point in time.
And that maturity schedule, there is an elevated level of maturities in the second half of the year.
In response to the.
The maturities related to the promotions that were done last year, but other than that they arent more well evenly distributed.
Okay. Thank you. So 68 was the number right on the total business.
No I said approximately 60%.
Oh 66, Okay got it.
Yeah, Hey, Thanks, Tony just a follow up.
Follow up on the margin.
How do we think about given your comments about the mix getting a little bit more stable like do you have the margin for the month of June that you could share.
Yes, the June margin was 270%.
And.
Yeah, and our month to date changed in our cost of debt.
It's less than 10 basis points.
Okay.
Less than 10 noninterest bearing.
So $2 78 for June $2 70 for the quarter.
Yes.
Is that correct.
Thank you.
And our total deposits.
Spot rates through through July 20-F is up three basis points from June spot rate.
Okay got it.
And then maybe one more if I can jump back out.
ECR the new lines for that can you.
Just remind us how much of your noninterest bearing deposits have ECR.
How we should think about that line if the fed moves.
This week.
So that line cost will go up at the fed moves this week.
And how much of that.
Yes.
Yeah.
The mid $363 million.
Okay. Thanks, a lot.
Our next question comes from Matthew Clark of Piper Sandler go.
Go ahead.
Okay.
Hey, Julien Thank you Paul.
Julianna can you clarify the spot rate.
Can you give us the rate I'm, just not sure if we're comparing to the month or the quarter can you just gives us operate on deposits at the end of at the end of July 20th whatever number you want to go.
Yes, no. Good question. Thanks, our total <unk>.
Was it.
Our spot rate as of June 30 was $2, 97% and as of July 20th is 3%.
Got it thank you changed.
Yes.
Okay and just for <unk>.
Context, nearly through the whole month now in that.
Last quarter the spot change was 24 bps. So the rate of change is stabilizing or slowing.
Got it.
Okay.
And then on.
The reserve build can you give us a sense for what drove a lot of that is it.
Decent step up.
This quarter, we haven't seen that elsewhere as much and then you know what underlying businesses or industries drove the increase in special mentioned.
Okay.
So for special mention.
Yeah.
The change was through a variety of C&I loans, but not a particular industry concentration.
And the reserve increase quarter over quarter was an outcome of our seasonal model, which as you know has changes related to qualitative quantitative factors and specific reserves and the macroeconomic forecast so.
That whole mix enabled us to build our reserve, which we think is a prudent way to manage reserves at this point in the economic cycle.
Okay, Great and then just last one for me.
On your.
Kind of outlook on for deposits.
Embedded in your assumptions.
It sounds like Theres less of a mix change going forward.
But few balances do you assume balances stabilize from here.
Yes.
I think that.
Well, we definitely have some deposit goals and initiatives and programs in place to throw our balances, but what I can tell you is that month to date relative to June 30.
<unk> balances are up close to $200 million.
So we are certainly having.
Positive trends in our deposits that are going on.
Kind of the volatility to happen in the banking industry earlier in the year starts to recede more into the background.
Perfect. Thank you.
Okay.
Again, if you have a question. Please press Star then one.
Our next question comes from Gary Tenner of D. A Davidson.
Go ahead.
Thanks, Good morning.
Just a follow up on the <unk>.
Question about CD maturities Giuliana could tell us what the.
What the rate is on those Cds that are maturing back half of this year.
One second.
The average rate on the CD maturity in the third.
In the third quarter will be 413% and in the fourth quarter will be $4, 39%.
Okay. Thank you.
And then just given where the stock is trading still 75% of tangible book any thoughts on buyback.
We're utilizing that buyback.
Our capital ratios are all strong and we'd like the growth that we saw this quarter, but.
At this time I don't think.
We are anticipating.
We purchase is anytime soon.
Okay, Great and then last question.
Uh huh.
In terms of the multi tenant retail just because it's the largest of your commercial real estate segments.
Can you talk about kind of what amount of those loans are scheduled to reprice or mature.
Back half of this year in 2024.
Well, we don't have that very specifics by property type handy with US right now, but we can follow up with you offline on the very specifics of that one particular property segment okay.
Great and then maybe maybe Julianna just in general as you think about commercial real estate and repricing and maturing.
Similar time period.
How far out are you going in terms of kind of stressing.
Analyzing the credits are you going out into 2024 at this point or really just back half of this year in terms of kind of getting a better sense of where.
Those borrowers lie with the ability to service at higher rates et cetera.
Yes. This is Peter maybe I'll take that one so I think overall CRE portfolio is performing pretty good up tick up to now I think as we're looking at sort of that refi risks that you're I think you're referencing here.
I think in the very initial stages, maybe early this year.
We went through a pretty much a deep dive and tried to stress that portfolio in terms of higher interest rates and things and I think at this point, we feel pretty confident right now that the majority of our customers are able to refinance I think partly due to just.
The lower Ltvs.
And then improving cash flows that we have seen post pandemic.
<unk> ability to refinance.
With us even at the higher rates so.
They are all one off cases, where there are.
Potential workout some things, but for the majority vast majority of our customers, we're seeing that that refi risk is pretty low.
And Gary just to add to the maturity of CRE you are coming up.
Typically ask about multi tenant retail and hotels.
In the remainder of my to increase of $32 million and then another $127 million in 2024, but our total CRE maturities in 2023 will be or.
$470 million and then.
In 2024 $742 million.
Yeah.
Thank you.
Okay.
As a reminder, if you have a question. Please press Star then one.
Our next question comes from Chris Mcgratty of K B W.
Go ahead.
Well, thanks for the follow up.
In terms of the balance sheet.
<unk>.
Size can you just remind us.
What level of cash is coming off the bond portfolio.
Monthly or quarterly and then.
Kevin you alluded to just the excess cash has been how do you see.
See this being the right amount of cash for the foreseeable future do you think can work that down in that part of the margin stability.
Stability narrative Barry.
Yes.
Deposit outflows and in response to the bank failures earlier this year.
<unk> has been stabilized and we're starting to see some of those deposits actually coming back to the bank.
And we also have a product campaigns in place and when deposit growth accelerates in the deposit situation normalizes, we think we will return to more normalized levels of liquidity, but.
The time being.
We think an elevated level of cash is prudent.
I think that's the case industry wide. So we will.
Hold the higher level of cash for the time being that will gradually.
Decrease as our deposits as Jason's improve.
And to your other question the average cash flow coming off our bond book is about 15% to $20 million, a month, and we're targeting purchasing 20% to $30 million of investments with that cash flow kind of replacing our investment secured investment securities, but also building that book up by about $10 million per month. So.
So for a longer term kind of.
The largest size of investment Securities book.
In terms of our optimal balance sheet mix kind of coast.
This banking industry disruption.
Okay.
Okay. That's helpful. Thanks, a lot.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Once again, thank you all for joining us today, and we look forward to speaking with you again next quarter bye everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
The conference.
<unk> is now concluded thank you for attending today's presentation.