Q3 2023 Hope Bancorp Inc Earnings Call

Speaker 1: Good day!

Good day.

Speaker 2: And welcome to the whole fan course 2023, third quarter, earning scomference call.

And welcome to the Hope Bancorp 2023 third quarter earnings Conference call.

Speaker 2: All participants will be in listen-only mode.

All participants will be in listen only mode.

Speaker 2: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Do you need assistance, please signal more conference specialist by pressing the star followed by zero.

Speaker 2: After today's presentation, there will be an opportunity to ask questions.

After todays presentation, there will be an opportunity to ask questions.

Speaker 2: Please note this event is being recorded.

Please note this event is being recorded.

Speaker 2: And I would now like to turn the conference over to Angie Yang, Director of Investor Relations. Please, go ahead.

And I would now like to turn the conference over to Angie Yang Director of Investor Relations. Please go ahead.

Speaker 3: Thank you, Marlise. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2023 third quarter investor conference call. As usual, we will be using a slide presentation to accompany our discussion this morning, which is available in the presentation page of our investor relations website.

Thank you Lisa good morning.

Everyone and thank you for joining us for the hope Bancorp 2023 third 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.

Beginning on slide two.

Speaker 3: Let me begin with a brief statement regarding forward-looking remarks.

You may 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 due to certain risks and uncertainties. In addition, some of the information.

Speaker 3: The call today may contain forward-looking projections regarding the future financial performance of the company and future events.

Speaker 3: These statements may differ materially from actual results due to certain risks and uncertainties. In addition, some of the information referenced on this call today are non-GAAP financial measures.

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 statement in our press release issued yesterday Hope Bancorp.

Speaker 3: For a more detailed description of the risk factors and a reconciliation of GAAP to non-GAAP financial measures, please visit www.nchsoftware.com.

Speaker 3: Please refer to the company's filings with the SEC, as well as the safe harbor statements in our press release issued yesterday. Hope Bank Group assumes no obligation to revise any forward-looking projections 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, Hope Bank Group's Chairman, President and CEO , and Juliana Bolliska, our chief financial officer.

<unk> assumes no obligation to revise any forward looking projections 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.

<unk>, Chairman, President and CEO and Giuliana thought as 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.

Speaker 3: Peter Coe, 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.

Speaker 4: Thank you, Angie. Good morning, everyone, and thank you for joining us today. Now let's begin on slide 3 with a brief overview of the quarter.

Thank you Angie good morning, everyone and thank you for joining us today.

Now, let's begin on slide three with a brief overview of the quarter.

Speaker 4: For the third quarter of 2023, our net income was $30 million, or 25 cents per diluted share.

For the third quarter of 2023, our net income was $30 million or 25 cents per diluted share highlights of our third quarter results include net interest margin expansion of 13 basis points quarter over quarter, which led to a 4% linked quarter growth in net interest.

Speaker 4: Highlights of our third quarter results include net interest margin expansion of 13 basis points quarter over quarter which led to 4% linked quarter growth in net interest income.

Income.

Speaker 4: We maintained disciplined expense control, resulting in a 1% decline in non-interest expenses compared with the preceding quarter. However, the provisions for credit losses increased to $17 million for the third quarter, and certain one-time gains in non-interest income from the second quarter did not reoccur. As a result, our net income decreased on a linked quarter basis.

We maintained disciplined expense control, resulting in a 1% decline in non interest expenses compared with the preceding quarter. However, the provisions for credit losses increased to $17 million for the third quarter and certain one time gains in noninterest.

<unk> come from the second quarter did not reoccur as a result, our net income decreased.

Decreased on a linked quarter basis.

Speaker 4: During the third quarter, we continue to strengthen our balance sheet, which positions us well to take advantage of profitable growth opportunities going forward. Total deposits grew 1%, quarter over quarter, reflecting stronger.

During the third quarter, we continued to strengthen our balance sheet, which positions us well to take advantage of profitable growth opportunities going forward total deposits grew 1% quarter over quarter, reflecting stronger.

Speaker 4: Customer deposit growth of 3% partially offset by a planned reduction of broker time deposit.

Customer deposit growth of 3%, partially offset by a planned reduction of brokered time deposits all regulatory capital ratios expanded our liquidity continues to be ample.

Speaker 4: all regulatory capital ratios expended. Our liquidity continues to be ample. Continuing to slide 4 for a more detailed review of our capital.

Turning to slide four where a more detailed review of our capital.

Speaker 4: Our capital ratios are strong, and all regulatory capital ratios expanded quarter over quarter. As of September 30, our common equity T01 ratio was 11.67%, up 62 basis points from June 30. And our total capital ratio was 13.23%, up 59 basis points quarter over quarter.

Our capital ratios are strong and all regulatory capital ratios expanded quarter over quarter as of September 30, our common equity tier one ratio was 11, six 7% or 62 basis points from June 30th and our total capital ratio was 13 point.

Two 3% up 59 basis points quarter over quarter.

Speaker 4: Adjusting for the allowance for credit losses and including hypothetical adjustments for investment security marks, all our capital ratios remain high. Our board of directors declared a quarterly common stock dividend of 14 cents per share payable on November 16th to stockholders of record as of November 2nd of 2023. Moving on to...

Adjusting for the allowance for credit losses, and including hypothetical adjustments when investment security marks all our capital ratios remain high our board of directors declared a quarterly common stock dividend of <unk> 14 per share payable on November 16th to stockholders.

The record as of November 2nd of 2023 <unk>.

Moving onto slide five.

Speaker 4: At September 30, our cash and cash equivalents were $2.5 billion, up from $2.3 billion at June 30.

At September 30, our cash and cash equivalents were $2 $5 billion up from $2.3 billion at June 30 at the end of the third quarter, our allow a lot our available borrowing capacity together with cash and cash equivalents and Unpledged investment securities.

Speaker 4: At the end of the third quarter, our available borrowing capacity, together with cash and cash equivalents and unclashed investment securities increased to $8.3 billion or 53% of our deposits and well exceeding our uninsured deposit balances.

Sure. It is increased to $8 $3 billion or 53% of our deposits and well exceeding our uninsured deposit balances.

Continuing to slide six.

Speaker 4: At September 30, our total deposits were $15.7 billion, an increase of 1%, quarter over quarter, reflecting linked quarter growth of 3% in customer deposits, primarily in money market and savings accounts, partially offset by a $368 million reduction of broker time deposit.

At September 30, our total deposits were $15.7 billion, an increase of 1% quarter over quarter, reflecting linked quarter growth of 3% in customer deposits, primarily in money market and savings accounts, partially offset by a 368 million dollar.

The option of brokered time deposits increase.

Speaker 4: Increasing core deposits is a key priority for the company, and we saw excellent results from our front lines efforts during the third quarter. Our gross loan-to-deposit ratio was 91% at September 30, down from 95% at the end of the prior quarter, and down from 100% at the end of the year-ago quarter. Moving on to...

Increasing core deposits is a key priority for the company and we saw excellent results from our frontline's efforts during the third quarter, our gross loan to deposit ratio was 91% at September 30 down from 95% at the end of the prior quarter and down from one <unk>.

<unk> percent at the end of the year ago quarter.

Moving on to slide seven.

Speaker 4: At September 30, our loan portfolio was $14.3 billion, a decrease of 4% quarter over quarter, reflecting our prudent approach to loan growth and an intentional decrease in mortgage warehouse lending. Mortgage warehouse lines declined $126 million in the third quarter to $65 million at September 30 of 2023.

At September 30, our loan portfolio was $14.3 billion, a decrease of 4% quarter over quarter, reflecting our prudent approach to loan growth and an intentional decrease in mortgage warehouse lending mortgage warehouse lines declined 100.

$26 million in the third quarter to $65 million at September 30 of 2023.

Speaker 4: We are in the process of winding down this business.

We are in the process of winding down this business. In addition, payoffs and Paydowns in a high interest rate environment continued to hamper loan growth.

Speaker 4: In addition, payoffs and paydowns in a high interest rate environment continue to hamper long growth.

On slides eight and nine.

Speaker 4: We provide more details on our commercial real estate loans, which are well diversified by property type and granular in size. The loan to values for these CRE properties are low across all segments, and the vast majority of these loans have full recourse with personal guarantees. The weighted average LTV of our total CRE portfolio was 45% as September 30 of 2023. Ourmann Place, Baltimore, Illinois, www.wall eveningont Brewers.electricg pirate twitter wittbers.com

We provide more details on our commercial real estate loans, which are well diversified by property type and granular insides the loan to values for these CRE properties are low across all segments and the vast majority of these loans have full recourse with personal guarantees.

The weighted average LTV of our total CRE portfolio was 45% at September 30 of 2023.

Speaker 4: office commercial real estate of $455 million represented just 3% of total loans with no central business district exposure.

Office commercial real estate of $455 million represented just 3% of total loans with no central business District exposure.

Speaker 4: With that, I will ask Juliana to provide additional details on our financial performance for the third quarter. Juliana. your

With that I will ask Giuliana to provide additional details on our financial performance for the third quarter Juliana.

Thank you Kevin.

Speaker 5: Beginning with slide 10, our net interest income totaled $135 million for the third quarter of 2023, up 4% from the second quarter, driven by a 13 basis point expansion in our net interest margin to 2.83%.

With slide 10.

Net interest income totaled $135 million for the third quarter of 2023 up 4% from the second quarter driven by a 13 basis point expansion in our net interest margin to 283%.

Speaker 5: The link order increase in our net interest income and expansion of our net interest margin was driven by higher yields on interest earning assets. A reduction in average borrowing some debt and an increase in the average volume of interest earning cash and deposits at other banks.

The linked quarter increase in our net interest income and expansion of our net interest margin was driven by higher yields on interest, earning assets a reduction in average borrowings and debt and an increase in the average volume of interest, earning cash and deposits at other banks, partially offset by higher cost of interest bearing deposits and a reduction in average loan balances.

Speaker 5: partially offset by a higher cost of interest bearing deposits, and a reduction in average loan balance.

Speaker 5: In the third quarter, we executed on $1 billion of one-year forward start, receive-fix, pay-float swaps that have a three-year term and will go into effect mid-year next year and continuing on after that.

In the third quarter, we executed on $1 billion of one year forward start receive fixed pay floating swaps that have a three year term.

We will go into effect mid year next year and continuing on after that.

Moving on to slide 11.

Speaker 5: Our average loans of $14.6 billion decreased 4% linked quarter. The average yield on our loan portfolio increased to 6.27% up 28 basis points in Q3.

Average loans of $14 6 billion decreased 4% linked quarter.

Yield on our loan portfolio increased to $6, 27% up 28 basis points in Q3.

Speaker 5: Our average deposits of $15.7 billion were essentially stable, decreasing by only $45 million in the quarter. The average cost of deposits increased to 2.98%, up 19 basis points from the second quarter. The rate of change in the cost of deposits decelerated from the second quarter.

Our average deposits of $15 $7 billion were essentially stable decreasing by only $45 million in the quarter.

The average cost of deposits increased to $22, 98% up 19 basis points from the second quarter the rate of change in the cost of deposits decelerated from the second quarter.

Speaker 5: Moving on to slide 12. Our non-interest income was $8 million for the third quarter, compared with $17 million in the second quarter of 2023. Last quarter's non-interest income included a one-time $6 million cash distribution related to an investment in a portable housing partnership, and $2 million of gains on SBA loan sales.

Moving on to slide 12.

Noninterest income was $8 million for the third quarter compared with $17 million in the second quarter of 2023.

Last quarter's noninterest income included a one time $6 million of cash distributions related to an investment in an affordable housing partnership and $2 million of gains on SBA loan sales.

Speaker 5: In the third quarter, we elected to retain SBA 7A production on balance.

In the third quarter, we elected to retain SBA seven day production on balance sheet excluding.

Speaker 5: Excluding these two Q2 gains, non-interest income decreased $1 million quarter over quarter.

Excluding these two Q2 gains noninterest income decreased $1 million quarter over quarter.

Moving onto slide 13.

Speaker 5: We continue to maintain expense discipline. Our non-interest expense of $87 million decreased 1% quarter over quarter. Our fees and benefits expense of $51 million decreased 2%.

We continue to maintain expense discipline.

Noninterest expense of $87 million decreased 1% quarter over quarter salaries and benefits expense of $51 million decreased 2%.

Speaker 5: Our efficiency ratio was 60.5% as of September 30th, up slightly from 59.1% as of June 30th. The change in efficiency ratio was primarily due to the decrease in non-interesting...

Our efficiency ratio was 65% as of September 30th up slightly from 59, 1% as of June 30th the change in the efficiency ratio was primarily due to the decrease in noninterest income.

Speaker 5: Now, moving on to slide 14, I will review our asset quality.

Now moving on to Slide 14, I will review our asset quality.

Speaker 5: Our non-performing assets of September 30, 2023 decreased 20% quarter over quarter to $62 million, or 31 basis points of total assets. The lean quarter decrease reflects charge-offs of non-accrual loans, pay-offs and workouts, partially offset by new inflows.

Our nonperforming assets at September 30th 2023 decreased 20% quarter over quarter to $62 million or 31 basis points of total assets. The linked quarter decrease reflects charge offs of nonaccrual loans. They have some work out partially offset by new inflows.

Speaker 5: Net charge-offs for the 2023 third quarter totaled $31 million, which included an idiosyncratic full charge-off of $23.4 million related to a borrower that entered Chapter 7 liquidation in August 2023.

Charge offs for the 2023 third quarter totaled $31 million, which included an idiosyncratic full charge offs of $23 $4 million related to the borrower entered chapter seven liquidation in August 2023.

Speaker 5: As of June 30, 2023, we have recorded $9.6 million in impairment reserves related to this credit. For the third quarter, our provision for credit losses was $17 million, reflecting the increase in charge-off.

As of June 30 of 2023, and we have recorded a $9 $6 million in impairment reserves related to this credit.

For the third quarter, our provision for credit losses was $17 million, reflecting the increase in charge offs.

Speaker 5: September 30, 2023, our allowance for credit losses was $159 million, representing 111 basis points of loans receivable. The allowance coverage as of June 30 was 116 basis points. However, excluding the $9.6 million of impairment reserves related to the idiosyncratic charge-off, the allowance coverage as of June 30 was 110 basis points.

At September 30th 2023, our allowance for credit losses was $159 million, representing 111 basis points of loans receivable allowance coverage as of June 30th was 116 basis points.

Excluding the $9 $6 million of impairment reserves related to the idiosyncratic charge offs. The allowance coverage as of June 30th was 110 basis points.

Speaker 5: year over year, allowance coverage is up from 104 basis points at September 30, 2022.

Year over year.

Allowance coverage is up from 104 basis points at September 30th 2022.

Speaker 5: Special mention loans at September 30th, 2023 decreased quarter over quarter to $187 million. Substandard loans increased to $174 million during the same period. 21 million dollars of the link quarter increase in our substandard loans were completed multi-family residential projects. These projects are well secured and are awaiting the issuance of temporary certificates of occupancy by their local jurisdiction.

Special mention loans at September 30th Twenty-twenty create decreased quarter over quarter to $187 million substandard loans increased to $174 million during the same period.

$91 million of the linked quarter increase in our substandard loans were completed multifamily residential projects. These projects are well secured and are awaiting the issuance of temporary certificates of occupancy by their local jurisdictions.

Speaker 5: Overall, we are not seeing any broader systemic issues within the loan portfolio.

Overall, we are not seeing any broader systemic issues within the loan portfolio.

With that let me turn the call back to Kevin.

Speaker 4: Thank you, thank you, Juliana. Moving on to slide five. Today, we announced a strategic reorganization that is designed to enhance shareholder value over the long term. Accordingly, the company realigned its structure around lines of business and product delivery channels, optimized its production capacity, and reduced headcounts.

Thank you. Thank you giuliana moving on to slide five today, we announced a strategic reorganization that is designed to enhance shareholder value over the long term accordingly, the company realigned its structure around lines of business and product delivery channels.

Optimized its production capacity and reduced head count.

Speaker 4: Since its inception, Bank of Hope has made great progress in growing from a traditional community bank into a diversified regional bank. However, our industry continues to undergo secular changes and adapting our business model to meet these challenges is essential to long-term success.

Since its inception, Banco Pope has made great progress in growing from a traditional community bank into a diversified regional bank. However, our industry continues to undergo secular changes.

And adapting our business model to meet these challenges is essential to long term success.

Speaker 4: With this reorganization, we will have four distinct business groups instead of our prior region-based structure, namely retail banking, commercial banking, corporate and institutional banking, and a fee-based business group. This will enable us to expand our client relationships, empower deposit growth, enhance revenue generation, and run our bank more efficiently.

With this reorganization, we will have four distinct business groups instead of our prior region based structure, namely retail banking commercial banking corporate and institutional banking and a fee based business group. This will enable us to expand our client.

Our relationships empowered deposit growth enhance revenue generation and run our bank more efficiently as.

Speaker 4: As part of this transformation, we are planning to rationalize our branch network over the next six months, subject to customary notices and approvals, and are winding down certain non-core businesses.

As part of this transformation, we are planning to rationalize our branch network over the next six months subject to customary notices and approvals and are winding down certain noncore businesses.

Speaker 4: We understand this action has a human component, and thus we have not made this decision lightly. We are making every effort to support those employees affected by the reorganization. These decisions are never easy, and we deeply value their contributions to our franchise.

We understand this action has a human component and thus we have not made this decision lightly we are making every effort to support those employees affected by the reorganization. These decisions are never easy and we deeply value their contributions to our franchise.

Speaker 4: We believe these changes will benefit customers, employees, and shareholders in many ways over the long term and allow us to sustainably expand our profitability. Up front, we expect to realize more than $40 million in estimated annualized cost savings, largely related to the staffing reduction, the branch rationalization, and operational process improvement.

We believe these changes will benefit customers employees and shareholders in many ways over the long term and allow us to sustainably expand our profitability at the front, we expect to realize more than $40 million in estimated annualized cost savings.

Largely related to the staffing reduction the branch rationalization and operational process improvements.

Speaker 4: Related to the reorganization, we expect to recognize one-time charges of approximately $12 million in the fourth quarter of 2023.

Related to the reorganization, we expect to recognize one time charges of approximately $12 million in the fourth quarter of 2023.

Speaker 4: In light of the organizational restructuring, we will dispense, providing you with an outlook for the remaining two months of the year. And we will provide a full year outlook for 2024 when we report earnings in January . With that, we would be happy to take your questions and add any additional color as requested. Operator, please open up the call.

In light of the organizational restructuring, we will dispense providing you with an outlook for the remaining two months of the year and we will provide a full year outlook for 'twenty 'twenty four when we report earnings in January with that we would be happy to take your questions and add any additional color.

As requested operator, please open up the call.

Yeah.

Okay.

Speaker 2: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchstone phone.

Thank you we will now begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

Speaker 2: If you are using a speakerphone, please pick up your handset before pressing the T.

If you are using a speakerphone please pick up your handset before pressing the teach.

Speaker 2: To withdraw your question, please press star, then 2.

To withdraw your question. Please press Star then two.

Speaker 2: At this time, we will pause momentarily to assemble our roster.

At this time, well pause momentarily to assemble our roster.

Yeah.

Speaker 2: Our first question comes from Chris McGrady from KBW. Chris, please go ahead.

Our first question comes from Chris Mcgratty from K B W.

Great.

Please go ahead.

Speaker 6: Good morning. Hey, Kevin. Hey, Juliana. Kevin, I want to start with the strategic reorganization.

Oh, good morning, Hey, Kevin Hey, Joanna.

Kevin I wanted to start with the strategic reorganization.

Speaker 6: In the past you've talked about managing the company to an expense to asset ratio. I'm interested kind of what the bogey will be for judging success. Will it be that metric? Will it be the ROE, the efficiency ratio, which has its limitations because of rate? I'm trying to understand how we should be thinking about capturing this 40 million into the numbers.

In the past you've talked about managing the company to an expense to asset ratio I'm interested in kind of what what the bogey will be for judging success will be that metric will it be the ROE, we deficiency ratio, which has its limitations because of rates I'm trying to understand how we should be thinking about <unk>.

I'm sharing this this $40 million in into the numbers.

Yeah.

Speaker 4: Well, I, you know, the main purpose of this restructuring is obviously to obtain sustainable profitability on a longer term basis. And we have been.

Well I I you know the main purpose of this restructuring is obviously a to obtain sustainable profitability on a longer term basis, and we have been really trying to operate and run this company with.

Speaker 4: really trying to operate and run this company.

Speaker 4: with the existing structures that we inherited from the predecessor organizations.

The existing structures that we inherited from the the predecessor organizations.

Speaker 4: and which turn out to be vulnerable in an economic

And which turned out to be vulnerable in a economic situation.

Speaker 4: situation where interest rates were fluctuating very rapidly at an unexpected pace.

As you know interest rates were fluctuating very rapidly and then had an unexpected pace and are we really took time to reassess the whole structure of how we can be a more profitable a more sustainable organization and obviously, our O E and <unk>.

Speaker 4: And we really took time to reassess the whole structure, how we can be a more profitable, more sustainable organization. Obviously, ROE and…

Speaker 4: ROA and profitability efficiency ratio, all those metrics are very relevant, but the baseline is how we can provide better services to customers, how we can motivate our employees for a better opportunity in their career, and how we will have a better return to our shareholders. All

Our OE and profitability efficiency ratio all those metrics are very relevant but the baseline is how we can provide better services to customers. How we can motivate our employees for a better opportunity in their career.

And how we will have a better return to our shareholders. It's all stakeholder a consideration and this is a very painful painful process and that we have to let go.

Speaker 4: stakeholder consideration. And this is a very painful process in that we have to let go a certain level of people much higher than the level that we had in the past. But I think this is a fundamental change of this organization, which will ultimately bring to a better profitability over a long term in a very sustainable manner.

Certain level people are much higher than the levels that we had in the past, but I think this is a fundamental change of this organization, which will ultimately bring to a better profitability over a long term in a very sustainable manner.

Speaker 6: Thank you for that. That's good color. If I could ask a follow-up on the metric, is this, given the environmental pressures you spoke about, is this to capture certain metrics, whether it's expense to asset or efficiency, from moving further, maybe higher? Or is it an outright reduction, I guess? Is your goal to outright reduce these metrics?

Thank you for that that's that's good color if I could ask a follow up on on the metric is this given the environmental pressures. He spoke about is this to.

Capture.

Certain metrics, whether it's expense asset or efficiency from for moving further you know maybe higher or is it an outright reduction I guess is your goal to outright reduce these no matter Oh.

Speaker 4: Yeah, the reduction reflect the realignment around our business, lines of business, which minimize redundancies in both front line and back office.

Yeah, the reduction reflect a the realignment around our business lines of business, which minimize the redundancies in both frontline and back office.

Speaker 4: support staff in our prior region-based structure. A lot of resources have been fragmented and we have redundancies because the region-based structure is not

Support stuff in our prior reason based structure a lot of our resources have been fragmented and we have redone redundancies because the region. The regions, we're kind of independent in their operations and so as a result of this alignment.

Speaker 4: The regions were kind of independent in their operations. So as a result of this alignment, I think we will be a lot more effective bankers providing our customers with a more consistent level of excellence in service.

I think we will be a lot more effective bankers, providing our customers with a more consistent level of excellence in service. So this is not just a cost savings measure. This is a more fundamental change in how we do our business are and how we drive our.

Speaker 4: So this is not just a cost savings measure. This is a more fundamental change in how we do our business.

Speaker 4: and how we drive our profits from our businesses.

Profits from from our businesses.

Speaker 6: Maybe if I could get one more on capital, Kevin, we ask you every quarter about how you're thinking about capital return. Certainly shrinking some of these businesses that are not core will free up some capital. How are you thinking about buybacks given the value of the stock and the outlook for 2024?

Maybe if I could if I could get one more on capital can we ask you every quarter about how youre thinking about capital return.

Certainly shrinking some of these businesses that are not core will free up some capital how are you thinking about yeah.

Buybacks I'm, given the value of the stock and the outlook for 'twenty four.

Speaker 4: Yeah, we believe capital preservation and capital expansion, they are very important in this current environment. In terms of shareholder return, I think we are maintaining a strong dividend payout rate.

Yeah, Oh, we believe our capital preservation and capital expansion. They are very important in this current environment.

In terms of shareholder return I think we are maintaining a strong dividend payout ratio.

Speaker 4: And eventually our robust capital base will give us opportunities to more effectively take advantage of growth opportunities going forward. So if you are asking more specifically whether we will be...

And eventually of our robust capital base would give us opportunities to.

More effectively take advantage of growth.

The opportunities going forward. So if you if you are asking more specifically, where whether we will be.

Speaker 4: beginning to share our beginning to repurchase our shares. I think that is not likely. Okay, that is exactly it. Thanks, Kevin, for the call.

Beginning to share our are beginning to repurchase our shares I I think that is not likely okay.

Exactly thanks, Thanks, Kevin for the color.

Okay.

Speaker 2: And our next question comes from Matthew Clark from Piper Sandler. Matthew, please go ahead.

And our next question comes from Matthew Clark from Piper Sandler.

Please go ahead.

Hey, good morning, everyone.

Morning.

Speaker 7: First one for me around the RE-ORG, the net $40 million of

First one for me around the re org and that $40 million of.

Operator: Good day, and welcome to the Hope Bancorp's 2023 Third Quarter Earnings Conference call. All participants will be in listen only mode. Should you need assistance, please signify a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded, and I would now like to turn the conference over to Angie Yang, Director of Investor Relations. Please go ahead. Thank you, Marlene.

Speaker 7: savings you expect to extract. Can you give us a sense for the realization or timing of those savings and whether or not there might be some reinvestment necessary to realign these businesses.

Savings you expect to extract can you give us sense for the realization or timing of those savings and whether or not there might be some reinvestment necessary to realign these businesses.

Speaker 7: trying to get a sense for whether or not that 40 million will fall to the bottom line or not.

I'm trying to get a sense for whether or not that 40 million will fall to the bottom line or not.

Speaker 5: Hi, Matt, this is Juliana. Thank you for that question. A substantial amount of the cost savings that we are expecting of that 40 million dollars, namely 34 million dollars of that is going to come from the staff reduction that we executed last week. So that is already in place and will start to manifest itself in our operating results beginning.

Yeah.

Hi, Matt This is juliana thank you for that question.

A substantial amount of the cost savings that we are expecting of that 44 $40 million, namely $34 million of that is going to come from the staff reduction that we executed last week. So that is already in place and well start to manifest itself in our operating results.

Angie Yang: Good morning, everyone, and thank you for joining us for the Hope Bancorp 2023 Third 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.

Speaker 5: Now, then in the next six months, we have plans to consolidate some branches and the cost savings from that will roll in over the first half of the year. And then lastly, some cost savings from process improvements will continue and be phased in throughout the whole of the next 12 months. So then the $40 million that we are providing to you in slide 15, that's the fully loaded number. That being said,

Inning.

Now and then in the next six months, we have plans to consolidate some branches and the cost savings from that will roll in over the first half of the year and then lastly, some cost savings from process improvements will.

We will continue and be phased in throughout the whole of the next 12 months and then the $40 million that we are providing to you in slide 15, that's the fully loaded number that being said.

Angie Yang: 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 may differ materially from actual results due to certain risks and uncertainties. In addition, some of the information referenced on this call today are non-gap financial measures. For a more detailed description of the risk factors and a reconciliation of gap to non-gap financial measures, please refer to the company Spilings with the SEC as well as a safe harbor statement 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.

Speaker 5: Near-term actions around operational process improvements will continue to generate benefits that are not yet necessarily identified and quantified. And that's an important consideration to think about when you are reorganizing an organization and removing redundancies and streamlining operations for more efficient, simpler banking.

Near term actions around operational process improvements will continue to generate benefits that are not yet necessarily identified and quantified and that's an important consideration to take them out when you are reorganizing and organization and removing redundancies and streamlining operations for more efficient simpler banking.

Speaker 5: And in terms of how much of this is going to drop to the bottom line, the second part of your question.

Uh huh.

And in terms of how much of this is going to drop to the bottom line. The second part of your question.

Speaker 5: to be considered is that this organizational restructuring was designed to position our bank for high quality, well-balanced growth, regardless of cycle, and to promote total relationship banking through collaboration between our business groups and the expansion of our fee-based business products.

To be considered is that this organization restriction restructuring was designed to position our bank for high quality, well balanced growth regardless of cycle and to promote total relationship banking.

Angie Yang: 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, and Juliana Beliska, our Chief Financial Officer. Peter Poe, our Chief Operating Officer, is also here with us as usual and will be available for the Q&A session.

Collaboration between our business groups and expansion of our fee based business products and to succeed we need to continue to invest in our franchise and we've talked to you in the past. So this isn't anything new about investing investments that we've been making in Treasury management solutions and for example, we recently opened a new branch in Bellevue, Washington, So investing in <unk>.

Speaker 5: And to succeed, we need to continue to invest in our franchise. And we've talked to you in the past, so this isn't anything new about investments that we've been making in treasury management solutions. And for example, we recently opened a new branch in Bellevue, Washington. So investing in people, processes, and technology to strengthen our bank is going to be ongoing.

Kevin Kim: With that, let me turn the call over to Kevin Kim. Thank you Angie. Good morning everyone and thank you for joining us today.

People processes and technology to strengthen our bank is going to be ongoing.

Speaker 5: large fluctuations in our expenses because we do practice discipline expense management and we do not expect that approach to change. So to state firmly, the restructuring was not designed to extract cost savings just so we could redeploy into some new large scale not yet unveiled project. That's not the case. However, the large increase in social costs is not coming through historically my presidentros ofstanding to REIT aScience looked Tad Werewolf

However, what is important to point out is that the investments that we have been making have not cause large fluctuations in our expenses because we do practice disciplined expense management and we do not expect that approach to change so yeah.

Kevin Kim: Now let's begin on slide three with a brief overview of the quarter. For the third quarter of 2023, our net income was $30 million or 25 cents per diluted share. Highlights of our third quarter results include net interest margin expansion of 13 basis points, quarter of a quarter, which led to 4% linked quarter growth in net interest income. We maintained disciplined expense control, resulting in a 1% decline in non-interest expenses compared with the preceding quarter.

Kevin Kim: However, the provisions for credit losses increased to $17 million for the third quarter, and certain one-time gains in non-interesting income from the second quarter did not reoccur. As a result, our net income decreased on a linked quarter basis.

State firmly their restructuring was not designed to extract cost savings just so we could redeploy into some new large scale not yet unveiled projects that's not the case however.

Yeah.

Speaker 5: One thing I would say for your modeling purposes is that the cost savings are improvement to your existing 2024 baseline. And we will share our outlook in January . And your 2024 baselines will naturally have assumptions around typical business as usual expense growth in an organization. And so that's where the cost savings would be applied.

One thing I would say for your modeling purposes is that the cost savings or improvement to your existing 2024 baseline and we will share our outlook in January and you know your 2024 baselines are well naturally have assumptions around typical business as usual expense growth in an organization and so that's where the cost savings would be applied to.

Speaker 7: Got it. Great. And then on the mortgage warehouse business, just remind us of the balance there at the end of the quarter.

Got it great and then on the mortgage warehouse business.

Just remind us of the balance there at the end of the quarter.

Kevin Kim: During the third quarter, we continue to strengthen our balance, which positions us well to take advantage of profitable growth opportunities going forward. Total deposits grew 1% quarter of a quarter, reflecting stronger, customer deposit growth of 3% partially offset by a planned reduction of broker time deposits.

And then.

Speaker 7: I think I can answer the question myself, but just the rationale to exit that business.

I think I can answer the question myself, but just the rationale to exit that business.

Okay.

Speaker 8: This is Peter. Matt, the balance is actually 55 million and we've been continuing to wind that down. I think as you know, the mortgage business has had a big slowdown and an overall, I think pricing and risk profile of that line of business. We thought that winding down that business is a more sense for us at this point.

This is Peter Matt AR balances actually $65 million and we've been continuing to wind that down I think as you know the mortgage business has had a big slowdown and overall I think pricing and our risk profile of that line of business, we thought that winding down that business makes more sense for us.

Kevin Kim: To be ample, continuing to slide for for a more detailed review of our capital, our capital ratios are strong and all regulatory capital ratios expanded quarter to quarter. As of September 30, our common equity tier 1 ratio was 11.67% up 62 basis points from June 30, and our total capital ratio was 13.23% up 59 basis points quarter of a quarter. Adjusting for the allowance for credit losses and including hypothetical adjustments for investment security marks, all our capital ratios remain high.

Yeah.

Okay.

Okay and then.

Your.

Speaker 7: Nick exposure, can you just update us there on the size of that portfolio and whether or not you went through a recent exam and whether or not there any upgrades or any downgrades there?

Snick exposure can you just update us there on the size of that port folio, and whether or not you went through a recent examine whether or not there are any upgrades or any downgrades there.

Speaker 5: We're downgrades related to the shared national credit exam and the syndicated lending portfolio that we have The term would be type portfolio It's approximately 300 million dollars and that's down from six approximately six hundred million dollars at the beginning of

There were downgrades related to the shared national credit exam, and the syndicated lending portfolio that we have.

That terminal B type portfolio, that's approximately $300 million and that's down from six nine approximately $600 million at the beginning of.

Yeah.

Speaker 5: Okay, and then just last one for me on the deposits deposit costs. If you have the spot rate at the end of September . One second, let me get you the spot rate.

Okay, and then just last one from me on the deposits deposit costs. If you have the spot rate at the end of September.

Kevin Kim: Our board of directors declared a quarterly common stock dividend of 14 cents per share, payable on November 16 to stockholders of record as of November 2, 2023. Moving on to slide 5, at September 30, our cash and cash equivalents were $2.5 billion off from $2.3 billion at June 30. At the end of the third quarter, our available borrowing capacity together with cash and cash equivalents and unclashed investment securities increased to $8.3 billion or 53% of our deposits and well exceeding our uninsured deposit balances.

One second let me get you the spot rate.

Yeah.

Yeah.

370, no excuse me a three pack.

What's the story.

That's it for total deposits just to be clear.

Yeah.

Yeah.

Speaker 2: And we would like to just remind everyone that if you would like to ask a question, you may press star 1 and also...

And we would like to just remind everyone.

If you would like to ask a question you May press Star one.

<unk> also.

Speaker 2: Please limit yourself to two questions at a time. You may always come back into the question queue. Thank you.

Kevin Kim: Continuing to slide 6, at September 30, our total deposits were $15.7 billion, an increase of 1% quarter of a quarter, reflecting linked quarter growth of 3% in customer deposits, primarily in money market and savings accounts, partially offset by a $368 million reduction of broker time deposits. Increasing core deposits is a key priority for the company and we saw excellent results from our front lines efforts during the third quarter. Our gross loan to deposit ratio was 91% at September 30, down from 95% at the end of the prior quarter and down from 100% at the end of the year ago quarter.

Please limit yourself to two questions at a time you may always come back into the question queue. Thank you.

Speaker 2: And for our next question, we have Gary Tanner from DA Davidson. Gary, please go ahead.

And for our next question, we have Gary Tanner from D. A Davidson.

Gary Please go ahead.

Speaker 9: Thanks for morning. A couple of questions. First, in terms of the loan yields in the quarter, is there anything unusual that kind of drove some of that loan yield expansion this quarter? Or is it more of a mix?

Thanks, Good morning.

A couple of questions first in terms of the loan yields in the quarter was there anything unusual there.

Kind of drove some of that loan yield expansion. This quarter was it more of a mix change quarter to quarter.

Speaker 5: It's a combination of three things, a mixed change quarter over quarter, the accumulation of interest rate increases and interest rates moving higher on our variable loan portfolio, and interest income recovery.

It's a combination of three things the mix change quarter over quarter.

That accumulation of.

Interest rate increases in interest rates moving higher on our variable loan portfolio and interest rate interest income recoveries.

Kevin Kim: Moving on to slide 7, at September 30, our loan portfolio was $14.3 billion, a decrease of 4% quarter of a quarter, reflecting our prudent approach to loan growth and an intentional decrease in mortgage warehouse lending. Mortgage warehouse lines declined $126 million in the third quarter to $65 million at September 30 of 2023. We are in the process of winding down this business. In addition, payoffs and paydowns in a high interest rate environment continued to hamper loan growth.

Speaker 5: And one thing I'd like to add to Matt's prior question that was into my answer, our spot rate on deposits was 310 at the end of the quarter, up from 297 at the end of the prior quarter. So the spot moved 13 basis points quarter over quarter.

And one thing I'd like to add to Matts a prior question I was into my answer our spot rate on deposits was 310 at the end of the quarter up from 297 at the end of the prior quarter. So.

Got milk 13 basis points quarter over quarter.

Okay.

Speaker 9: Juliana, the interest income recoveries that you just mentioned, can you quantify that I guess maybe relative to the prior quarter?

Drilling out of the interest income recoveries that you just mentioned could you quantify that I guess, maybe relative to the prior quarter, how much of an impact that was.

Speaker 9: quarter of the interest income recoveries were $3 million.

This quarter the interest income recoveries were $3 million.

Yeah.

Versus any meaningful amount in the second quarter.

It wasn't that meaningful amount in the second quarter.

Kevin Kim: On slides 8 and 9, we provide more details on our commercial real estate loans, which are well diversified by property type and granular insights. The loan to values for these CRA properties are low across all segments and the vast majority of these loans have full recourse with personal guarantees. The weighted average LTV of our total CRA portfolio was 45% as September 30 of 2023. Office commercial real estate of $455 million represented just 3% of total loans with no central business district exposure.

Okay.

Thank you and then.

Speaker 5: in terms of the swabs. Your question, in terms of kind of our net interest margin expansion, even with the net interest income recovery, when we backed that out, our net interest margin still expanded from the improvement on the liability side.

In terms of the swap.

Your question.

In terms of kind of our net interest margin expansion, even with the net interest income recovery when we back that out our net interest margin still expanded from the improvement on the liability side.

Speaker 9: Okay, appreciate that. And on the swaps you mentioned, what is the received fixed rate on this?

Okay I appreciate that and then on the swaps you mentioned what is the receive fixed rate on those.

367 over sofa.

Thank you.

Okay.

Julianna Balicka: With that, I will ask Julianna to provide the additional details on our financial performance for the third quarter. Julianna? Thank you, Kevin. Beginning with slide 10, our net interest income totaled $135 million for the third quarter of 2023, up 4% from the second quarter, driven by a 13 basis point expansion in our net interest margin to 2.83%. The link quarter increase in our net interest income and expansion of our net interest margin was driven by higher yields on interest earning assets, a reduction in average borrowings and debt, and an increase in the average volume of interest earning cash and deposits at other banks, partially offset by a higher cost of interest bearing deposits, and a reduction in average loan balances.

Yeah.

Speaker 2: And we do have one more question from Chris McGrady from KBW. Please go ahead, Chris.

And we do have one more question from Chris Mcgratty from <unk>. Please go ahead Chris.

Okay.

Speaker 6: Just maybe Juliana, coming back to the margin net interest income comments. Normalizing for the recoveries, I guess maybe a little help on the trajectory of net interest income. Feels like a smaller balance sheet but more profitable, but interested in your comments about whether the trough might be an NII.

Just maybe giuliana coming back to the the margin net interest income comments.

Normalizing for the recoveries are.

I guess, maybe a little help on the trajectory of net interest income it feels like a smaller balance sheet, but more profitable, but interested in your comments about whether the trough might be in on NII.

Speaker 5: I think in terms of our net interest income expectations and the interest margin expectations, obviously, we will talk about 2024 in January . But and we are pleased with the improvement that we saw this quarter, even with the. Like even with the.

I think in terms of our net interest income expectations are net interest margin expectations. Obviously, we will talk about 2024 and January right and we are pleased with the improvement that we saw this quarter, even with that Alex.

Julianna Balicka: In the third quarter, we executed on $1 billion of one year forward start, received fixed pay float swaps that have a three year term, and will go into effect late year next year and continuing on after that. Moving on to slide 11, our average loans of $14.6 billion decreased 4% linked quarter. The average yield on our loan portfolio increased to 6.27%, up 28 basis points in Q3. Our average deposits of $15.7 billion were essentially stable, decreasing by only $45 million in the quarter. The average cost of deposits increased to 2.98% up 19 basis points from the second quarter. The rate of change in the cost of deposits decelerated from the second quarter.

Even with that.

Speaker 5: Outside of the interest income recovery 1 thing I will remind you all about is that we do have.

Outside of the interest income recovery, one thing I will remind you all about is that we do have some $1 $8 billion of Cds maturing in the fourth quarter from a promotion that we ran last year. So that will put some downward pressure or upward pressure either on the cost of deposits in the fourth quarter. So in terms of debt.

Speaker 5: some $1.8 billion of CDs maturing in the fourth quarter from a promotion that we ran last year.

Speaker 5: So that will put some downward pressure or upward pressure rather on the cost of deposits in the 4th quarter. So, in terms of the trough in the name. We'll talk about that in January . It's kind of curve dependent, right? Higher for longer. This is when the interest rate will be coming in, but. We're pleased with what happened this quarter and our frontline continues to execute excellently under growing customer deposits.

Trough in NII and NIM will talk about that in January it's kind of curve dependent right higher for longer versus when the interest rate will be coming in but we're pleased with what happened this quarter and our frontline continues to execute excellently on growing customer deposits.

Speaker 5: gives us the flexibility to run off higher cost funding and NetNet positions us to have a more profitable balance sheet. And then on my prior answer just now, the fixed rate is 367. I said over so far, but I should have just left it at 367. So, just for your clarification.

US the flexibility to run off higher cost.

Funding and net net positions us to have a more profitable balance sheet and then on my prior answer just now the fixed rate is 367, I said over so far but actually have just left it at 367. So that's helpful.

Julianna Balicka: Moving on to slide 12, our non-interesting income was $8 million for the third quarter compared with $70 million in the second quarter of 2023. Last quarter's non-interesting income included in one time $6 million cash distribution related to an investment in an affordable housing partnership and $2 million of gains on SBA loan sales. In the third quarter, we elected to retain SBA 7A production on balance sheet, excluding these Q2 gains, non-interesting income decreased $1 million quarter over quarter.

For clarification.

Speaker 6: The billionate, Juliana, that's coming up for renewal, what was the, what was that rate that was put on, I guess probably last year sometimes.

The the billion eight giuliana that's come in.

That's up for renewal what what was the.

What was that rate that was put on I guess, probably last year sometime.

Speaker 5: It was put on last year in the fourth quarter because these were 12 month CDs when it was put on. So the average rate that that was put on was 4.43.

It was put on last year in the fourth quarter. Because these are 12 month Cds when it was put on so the average rate that that was put on.

Was $4 43.

Speaker 6: And then maybe the last one, the SBA loan fill comments, having thoughts on retaining versus selling near term.

Okay.

And then maybe the last one the the SBA loan sale comments, I mean thoughts on retaining versus selling them near term.

Julianna Balicka: Moving on to slide 13, we continue to maintain expense discipline. Our non-interest expense of $87 million decreased 1% quarter over quarter, the salaries and benefits expense of $51 million decreased 2%. Our efficiency ratio was 60.5% as of September 30th, up slightly from 59.1% as of June 30th.

Speaker 5: At the moment, it is more profitable, more economically profitable to gain SBA loans.

At the moment, it is more profitable and more economically profitable too and SBA loans.

Temperature maintaining them is I would say.

Speaker 5: Yes, yes to make him vouchy. So we evaluate that from a perspective of profitability. Okay. Helpful. Thank you.

You have to maintain balance sheet. So we evaluate that from a perspective of profitability. Okay.

Julianna Balicka: The change in the efficiency ratio was primarily due to the decrease in non-interesting Now, moving on to slide 14, I will review our asset quality. Our non-performing assets of September 30th, 2023, decrease 20% quarter over quarter to $62 million, or 31 basis points of total assets. The link-quarter decrease reflects charge-offs of non-accrual loans, pay-offs and workouts, partially offset by new inflows. Net charge-offs for the 2023-3rd quarter total $31 million, which included an 80-usent-cratic full charge-off of $23.4 million related to a bar where the entered chapter 7 liquidation in August 2023.

Okay helpful. Thank you.

Yeah.

Yeah.

Speaker 2: Our next question comes from David Chiavanini from Webush Securities. David, you may proceed.

Our next question comes from David <unk> from Wedbush Securities. David You May proceed.

Speaker 10: Hi, thanks. So, I wanted to follow up, I guess, indirectly on the NII question. In terms of balance sheet growth and loan growth, any kind of figures or informal guidance in that regard?

Hi, Thanks, So I wanted to follow up I guess indirectly on the NII question.

In terms of balance sheet growth and loan growth any kind of figures or or.

You know informal guidance in that regard.

Speaker 5: No informal guidance at this time. We will provide guidance and outlook for 2024 in January . As you can imagine, we're going through our budgeting process and we are going through every organization.

Yeah.

No formal guidance at this time, we will provide guidance and outlook for 2024 in January as you can imagine we're going through our budgeting process and we are going through a reorganization.

Julianna Balicka: As of June 30th, 2023, we have recorded $9.6 million in impairment reserves related to this credit. For the third quarter, our provision for credit losses was $17 million, reflecting the increase in charge-offs. At September 30th, 2023, our allowance for credit losses was $159 million, representing 111 basis points of loans receivable. The allowance coverage as of June 30th was 116 basis points. However, excluding the $9.6 million of impairment reserves related to the 80-usent-cratic charge-off, the allowance coverage as of June 30th was 110 basis points.

Speaker 10: Yep, understood. And then shifting gears over to credit quality, any other kind of areas you mentioned that you're not seeing any systemic risk, which is, which is great, but can you comment on, you know, any areas that you're paying any more particular attention to you, I like the slide you laid out with the commercial real estate exposure and the low LTVs, but any other areas that you're focusing in on.

Yeah understood.

And then shifting gears over to credit quality any other kind of areas you mentioned that you're not seeing any systemic risk, which is which is great. But can you comment on.

Any areas that you're paying any more particular attention to you I like the slide you laid out with the commercial real estate exposure in the low ltvs, but any other areas that your book.

Focusing in on.

Speaker 8: No, this actually as you may know we went through a pretty substantial de-risking process over the last couple of years Particularly related to some of our CRE concentrations in hotel areas. So at this time You know outside of sort of the one-off case that we had seen this quarter Really, we're not seeing anything systemic.

No I'm actually as you May know, we went through a pretty substantial derisking process over the last couple of years, particularly are related to some of our CRE concentrations and hotel are areas. So at this time, you know outside of sort of the one off.

Julianna Balicka: Year over year, allowance coverage is up from 104 basis points at September 30th, 2022. Special mention loans at September 30th, 2023 decreased quarter over quarter to $187 million. Substandard loans increased to $174 million during the same period. $21 million of the link quarter increased in our substandard loans were completed multi-family residential projects. These projects are well secured and are awaiting the issuance of temporary certificates of occupancy by their local jurisdictions. Overall, we are not seeing any broader systemic issues within the loan portfolio.

Off case that we had seen this quarter really were not seeing anything systemic.

Speaker 10: Got it. And that one-off case, I'm assuming that it was the shared national credit related to an oil company, but can you confirm what that was related to?

Got it and that one off case I'm assuming.

That it was the the.

The shared national credit related twin.

Oil company, but can you confirm what that.

What that was related to.

Speaker 8: It was that participation. I think it was generally covered with the lead bank. We did have a participation in that credit and it was related to the gas industry.

It was that participation I think it was generally are covered with our lead bank. We do have a participation in that credit.

Kevin Kim: With that, let me turn the call back to Kevin. Thank you. Thank you, Juliana. Move you on to slide five.

And it was related to.

Kevin Kim: Today, we announced a strategic reorganization that is designed to enhance shoulder value over the long term. Accordingly, the company realigned its structure around lines of business and product delivery channels, optimized its production capacity, and reduced headcount. Since its inception, Bank of Hope has made great progress in growing from a traditional community bank into a diversified regional bank. However, our industry continues to undergo secular changes, and adapting our business model to meet these challenges is essential to long-term success.

Get mountain gas gas industry, yes.

Speaker 2: Thank you. And just a reminder again, if you would like to answer the question queue, press star 1.

Thank you Andrew.

Just a reminder, again if you would like to answer the question queue Press Star one.

Speaker 2: Right now we have a follow-up question by Matthew Clark from Piper Sandler. Please, Matt, go ahead.

Right now we have a.

Follow up question by Matthew Clark from Piper Piper Sandler. Please go ahead.

Okay.

Speaker 7: Thanks. I just wanted to follow up on the Office CRE portfolio and get an update on

Thanks, just wanted to follow up on the office CRE portfolio.

Get an update on.

Speaker 7: the reserve that you have against that portfolio and what amount is criticized.

The reserve you have against that portfolio and in what amount is criticized.

Kevin Kim: With this reorganization, we will have four distinct business groups instead of our prior region-based structure, namely retail banking, commercial banking, corporate and institutional banking, and a fee-based business group. This will enable us to expand our client relationships, empower deposit growth, enhance revenue generation, and run our bank more efficiently. As part of this transformation, we are planning to rationalize our branch network over the next six months, subject to customary notices and approvals, and a winding down certain non-core businesses.

Speaker 8: We'll look at the reserve level right now, but as you know, we have a very small office CRE portfolio. So I think over 99% of our portfolio or around 99% of it is past graded. We do not have any central business district exposure. And most of ours is really class B in office properties in metropolitan areas. So we do understand the concern and from an industry perspective, but.

I will look at the reserve level right now, but as you know we have a very small office CRE portfolio. So.

I think over 99% up our portfolio or ramp up 99% of it is pass graded we do not have any central business district, our exposure and most of ours is really a class b and office properties in metropolitan areas. So we do understand the concern and from an industry perspective, but.

Speaker 5: really within our portfolio. We're not seeing any signs of concern at the moment. And do we have any reserves? Well, the reserves in our total book are 111 basis points and that covers all of our portfolios. Office is very small so the reserves that we have specifically on office is not a meaningful number. 111 basis point coverage.

Really within our portfolio, we're not seeing any.

Signs of concern at the moment and do we have any reserve reserves on our total book or 111 basis points and that covers all of our portfolios office is very small so the reserves that we have specifically on office is not a meaningful number 111 basis point coverage.

Kevin Kim: We understand this action has a human component and thus we have not made this decision lightly. We are making every effort to support those employees affected by the reorganization. These decisions are never easy and we deeply value their contributions to our franchise. We believe this changes will benefit customers, employees and shareholders in many ways over the long term and allow us to sustainably expand our profitability. Up front, we expect to realize more than $40 million in estimated annualized cost savings, largely related to the staffing reduction, the branch rationalization and operational process improvements.

Great well I would go with it.

Okay Yep Yep.

Okay.

Okay.

Speaker 2: And at this time, we have no further questions.

And at this time, we have no further questions.

Speaker 2: And this will conclude this session. I would like to turn the conference back over to management for some closing remarks. Thank you.

And this will conclude the session I would like to turn the conference back over to management for some closing remarks. Thank you.

Speaker 4: Thank you. I am confident that our strategic reorganization announced today will enable us to better serve our customers, expand customer relationships, and operate our bank more efficiently, benefiting all our stakeholders through sustainably improved profitability. Once again, thank you all for joining us today, and we look forward to speaking with you next quarter.

Thank you I am confident that our strategic reorganization announced today.

<unk> enable us to better serve our customers expand customer relationships and operate our bank more efficiently benefiting all our stakeholders through sustainably improve profitability.

Kevin Kim: Related to the reorganization, we expect to recognize one-time charges of approximately $12 million in the fourth quarter of 2023. In light of the organizational restructuring, we will dispense providing you with an outlook for the remaining two months of the year and we will provide a full year outlook for 2024 when we report earnings in January.

Once again, thank you all for joining us today, and we look forward to speaking with you next quarter.

Okay.

Speaker 2: And the conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you for attending today's presentation.

And the conference is now concluded. Thank you for attending today's presentation you may now disconnect.

Kevin Kim: With that, we would be happy to take your questions and add any additional color as requested.

Good day.

Yeah.

Operator: Operator, please open up the call. Thank you. We will now begin the question and answer session to ask a question you may press star then one on your touchstone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two.

Operator: At this time, we will pause momentarily to assemble our roster.

Christopher McGratty: Our first question comes from Chris McGrady from KBW. Chris, please go ahead. Oh, good morning. Hey, Kevin.

Kevin Kim: I want to start with the strategic reorganization. In the past, you've talked about managing the company to an expense asset ratio. I'm interested kind of what the bogie will be for judging success. That metric will be the RWE deficiency ratio, which has its limitations because of rate. I'm trying to understand how we should be thinking about capturing this 40 million into the numbers.

Kevin Kim: Well, I, you know, the main purpose of this restructuring is obviously to obtain sustainable profitability on a longer-term basis. And we have been really trying to operate and run this company with the existing structures that we inherited from the predecessor organizations. Which turned out to be vulnerable in an economic situation where, you know, interest rates were fluctuating very rapidly at an unexpected pace. And we really took time to reassess the whole structure, how we can be a more profitable, more sustainable organization.

Kevin Kim: And obviously RWE and RWE and profitability efficiency ratio, all those metrics are very relevant, but the baseline is how we can provide better services to customers, how we can motivate our employees for a better opportunity in their career, and how we will have a better return to our shoulders.

Christopher McGratty: It's all stakeholder consideration, and this is a very painful process in that we have to let go, you know, the certain level of people much higher than the level that we had in the past. But I think this is a fundamental change of this organization, which will ultimately bring to a better profitability over a long term in a very sustainable Thank you for that. That's good color.

Kevin Kim: If I could ask a follow up on on the metric, is this given the environmental pressures you spoke about, is this to capture, you know, certain metrics, whether it's expense to asset or efficiency from from moving further, you know, maybe higher, or is it an outright reduction? I guess, is your goal to outright reduce these metrics? No, well, the reduction reflect the realignment around our business, lines of business, which minimizes redundancies in both frontline and back office support staff.

Kevin Kim: In our prior region-based structure, a lot of resources have been fragmented, and we have redundancies because the regions were kind of independent in their operations, and so as a result of this alignment, I think we will be a lot more effective bankers providing our customers with a more consistent level of excellence in service. So this is not just a cost-saving measure, this is a more fundamental change in how we do our business and how we drive our profits from our businesses.

Kevin Kim: Maybe if I could get one more on capital, can we ask you every quarter about how you're thinking about capital return? Certainly shrinking some of these businesses that are not core, we'll free up some capital.

Kevin Kim: How are you thinking about, you know, the buybacks given the value of the stock and the outlook for 24? Yeah, we believe capital preservation and capital expansion, they are very important in this current environment. In terms of shoulder return, I think we are maintaining a strong dividend payout ratio, and eventually our robust capital base will give us opportunities to more effectively take advantage of growth opportunities going forward.

Christopher McGratty: So if you are asking more specifically whether we will be beginning to share our, beginning to repurchase our shares, I think that is not likely. Okay, that's exactly. Thanks, go ahead for the color.

Matthew Clark: And our next question comes from Matthew Clark from Piper Sandler. Matthew, please go ahead. Hey, good morning, everyone.

Julianna Balicka: First one for me around the reorg net $40 million of savings you expect to extract. Can you give us a sense for the realization or timing of those savings and whether or not there might be some reinvestment necessary to realign these businesses? Trying to get a sense for whether or not that $40 million will fall to the bottom line or not. Hi, Matt, this is Juliana. Thank you for that question. A substantial amount of the cost savings that we are expecting of that $40 million, namely $34 million of that, is going to come from the staff reduction that we executed last week.

Julianna Balicka: So that is already in place and we'll start to manifest itself in our operating results beginning. Now. Then in the next six months, we have plans to consolidate some branches and the cost savings from that will roll in over the first half of the year. And then lastly, some cost savings from process improvements will continue and be phased in throughout the whole of the next 12 months. So then the $40 million that we are providing to you in slide 15.

Julianna Balicka: That's the fully loaded number. That being said, near term actions around operational process improvements will continue to generate benefits that are not yet necessarily identified and quantified. And that's an important consideration to think about when you are reorganizing an organization and removing redundancies and streamlining operations for more efficient simpler banking. And in terms of how much of this is going to drop to the bottom line, the second part of your question needs to be considered is that this organizational restriction restructuring was designed to position our bank for high quality, well balanced growth, regardless of cycle and to promote total relationship banking through collaboration between our business groups and the expansion of our fee based business products.

Julianna Balicka: And to succeed, we need to continue to invest in our franchise. And we've talked to you in the past. So this isn't anything new about investing investments that we've been making in treasury management solutions. And for example, we recently opened a new branch in Bellevue, Washington. So investing in people processes and technology to strengthen our bank is going to be ongoing. However, what is important to point out is that the investments that we have been making have not caused large fluctuations in our expenses because we do practice discipline expense management and we do not expect that approach to change.

Julianna Balicka: So to state firmly, the restructuring was not designed to extract cost savings just so we could redeploy into some new large scale, not yet unveiled project. That's not the case. However, one thing I would say for your modeling purposes is that the cost savings are improvement to your existing 2024 baseline. And we will share our outlook in January. And you know, your 2024 baselines will naturally have assumptions around typical business as usual expense growth and an organization. And so that's where the cost savings would be applied to. Got it great.

Peter Koh: And then on the mortgage warehouse business just remind us of the balance there at the end of the quarter.

Peter Koh: And then I think I can answer the question myself, but just the rationale to exit that business. This is Peter. Matt, the balance is actually 55 million and we've been continuing to wind that down. I think as you know, the mortgage business has had a big slowdown and an overall, I think, pricing and risk profile of that line of business. We felt that winding down that business made more sense for us at this point. Okay.

Peter Koh: And then your sneak exposure.

Peter Koh: Can you just update us there on the size of that portfolio and whether or not you went through a recent exam, whether or not there are any upgrades or any downgrades there. The word downgrades related to the shared national credit exam and the syndicated lending portfolio that we have, the term will be type portfolio, it's approximately $300 million and that's down from $600 million at the beginning of the year. Okay, and then just last one for me on the deposit cost, if you have the spot rate at the end of September, one second, let me get you the spot rate, 370, excuse me, 310 was the spot rate. That's a total deposit, just to be clear.

Operator: And we would like to just remind everyone that if you would like to ask a question you may press star one, and also please limit yourself to two questions at a time, you may always come back into the question too. Thank you.

Gary Tenner: And for our next question, we have Gary Tenner from D.A. Davidson. Gary, please go ahead.

Gary Tenner: Thanks, good morning. A couple of questions. First, in terms of the loan yields in the quarters, everything unusual that kind of drove some of that loan yield expansion this quarter is a more of a mixed-change quarter to quarter. It's a combination of three things, a mixed-change quarter to quarter. The accumulation of interest rate increases and interest rates moving higher on our variable loan portfolio and interest rate, interest income recoveries. And one thing I would like to add to Matt's prior question, into my answer, our spot rate on deposits was 310 at the end of the quarter, up from 297 at the end of the prior quarter.

Gary Tenner: So the spot moved 13 basis points quarter over quarter. Julie, out of the interest income recoveries that you just mentioned, could you quantify that, I guess, from maybe relatives of the prior quarter? How much have been impact that was? This quarter of the interest income recoveries were $3 million. Versus any meaningful amount in the second quarter? It wasn't that meaningful amount in the second quarter.

Julianna Balicka: Okay. Thank you.

Julianna Balicka: And then, just in terms of the spot. In terms of kind of our net interest margin expansion, even with the net interest income recovery when we backed that out, our net interest margin still expanded from the improvement on the liability site. Okay, I appreciate that. And then on the swaps you mentioned, what does the receive fixed rate on us? 367 over SOFA. Thank you.

Christopher McGratty: And we do have one more question from Chris McGratty, from KBW, please go ahead, Chris. Just maybe Julianna going back to the margin and interesting comments, normalizing for the recovery, I guess maybe a little help on the trajectory of net interest income. It feels like a smaller balance, even more profitable, but interested in your comments about whether the trough might be in NII. I think in terms of our net interest income expectations and the interest margin expectations, obviously we will talk about 2024 in January, and we are pleased with the improvement that we saw this quarter, even with the outset of the interest income recovery.

Christopher McGratty: One thing I will remind you all about is that we do have some $1.8 billion of CDs maturing in the fourth quarter from a promotion that we ran last year, so that will put some downward pressure or upward pressure rather on the cost of deposits in the fourth quarter.

Christopher McGratty: So in terms of the trough in the NII and NIM, we will talk about that in January. It's kind of curve dependent, right? Higher for longer, which is when the interest rate will be coming in, but we are pleased with what happened this quarter and our front line continues to execute excellently on growing customer deposits, which gives us the flexibility to run off higher cost funding and net and net positions us to have a more profitable balance sheet.

Christopher McGratty: And then on my prior answer just now, the fixed rate is 367. I said over so far, but I should have just left it at 367, so that is from your clarification. The billionate, Giuliana, that is coming up for renewal, what was that rate that was put on, I guess probably last year sometime? It was put on last year in the fourth quarter because these were 12 months CDs when it was put on, so the average rate that that was put on was 4.43.

Christopher McGratty: Okay. And then maybe the last one, the SVA loan sale comments, having thoughts on retaining versus selling near-term? At the moment, it is more profitable, more economically profitable to an SVA loan. Should we turn maintain them, is that what you said? Yes. You have to maintain them now, Chief. So we evaluate that from a perspective of profitability. Okay. Helpful.

David Chiaverini: Thank you.

David Chiaverini: Our next question comes from David Chauvinini from WebBush Securities. David, you may proceed. Hi, thanks.

David Chiaverini: So I wanted to follow up, I guess indirectly on the NII question, in terms of balance sheet growth and loan growth, any kind of figures or informal guidance in that regard? No informal guidance at this time, we will provide guidance and outlook for 2024 in January as you can imagine. And we're going through our budgeting process and we are going through every organization. Yeah, understood.

David Chiaverini: And then shifting gears over to credit quality. Any other kind of areas, you mentioned that you're not seeing any systemic risk, which is great, but can you comment on any areas that you're paying any more particular attention to? I like the slide you laid out with the commercial real estate exposure and the low LPVs, but any other areas that you're focusing in on. No, this actually, as you may know, we went through a pretty substantial, de-risking process over the last couple of years, particularly related to some of our CRI concentrations in hotel areas.

David Chiaverini: So at this time, you know, outside of sort of the one-off case that we had seen this quarter, really we're not seeing anything systemic. Got it in that one-off case. I'm assuming that it was the shared national credit related to an oil company, but can you confirm what that was related to? It was that participation. I think it was generally covered with lead bank. We do have a participation in that credit, and it was related to get mountain gas, gas industry.

Operator: Thank you. And just a reminder, again, if you would like to answer the question, you press star one.

Matthew Clark: Right now, we have a follow-up question by Matthew Clark from Piper Sandler. Please, Matt, go ahead. Thanks. I just wanted to follow up on the Office Theory portfolio and get an update on the reserve that you have against that portfolio, and what amount is criticized? We'll look at the reserve level right now, but as you know, we have a very small office CRI portfolio. So I think over 99% of our portfolio or around 99% of it is pass graded.

Matthew Clark: We do not have any central business district exposure, and most of ours is really cross-by in office properties and metropolitan areas. So we do understand the concern in the Department of Industry perspective, but really within our portfolio, we're not seeing any signs of concern at the moment. And do we have any reserve? The reserves in our total book are 111 basis points, and that covers all of our portfolio's offices very small, so the reserves that we have specifically on office is not a meaningful number. 111 basis point coverage. Great. I would go with for that. Thank you. Yep.

Kevin Kim: And at this time we have no further questions, and this will conclude this session. I would like to turn the conference back over to management for some closing remarks. Thank you.

Kevin Kim: I am confident that our strategic reorganization announced today will enable us to better serve our customers, expand customer relationships and operate our bank more efficiently, benefiting all our stakeholders through sustainably improved profitability. Once again, thank you all for joining us today and we look forward to speaking with you next quarter.

Operator: Then the conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Have a good day.