Hope Bancorp Inc (HOPE) 2021 Q3 法說會逐字稿

Good day, and welcome to the Hope Bancorp's 2021 Third Quarter Earnings Conference Call. (Operator Instructions). Please note, this event is being recorded.

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

Thank you, Matt. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2021 Third Quarter Investor Conference Call. As usual, we will be using a slide presentation to accompany our discussion this morning. If you have not done so already, please visit the Presentations page of our Investor Relations website to download a copy of the presentation or if you are listening in through the webcast, you should be able to view the slides from your computer screen as we progress through the presentation.

Beginning on Slide 2, let me begin with a brief statement regarding forward-looking remarks. The call today may contain forward-looking projections regarding the future financial performance of the company and future events. These statements are based on current expectations, estimates, forecasts, projections and management assumptions about the future performance of the company, including any impact as a result of the COVID-19 pandemic as well as the businesses and markets in which the company does and is expected to operate. These statements constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.

These statements are not guarantees of future performance. Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. We refer you to the documents the company files periodically with the SEC as well as the safe harbor statements in our press release issued yesterday. Hope assumes no obligation to revise any forward-looking projections that may be made on today's call. The company cautions that the complete financial results to be included in the quarterly report on Form 10-Q for the quarter ended September 30, 2021, could differ materially from the financial results being reported today.

In addition, some of the information referenced on this call today are non-GAAP financial measures. Please refer to our 2021 third quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures. Now we have allotted 1 hour for this call. As usual, presenting from the management side today will be Kevin Kim, Hope Bancorp's Chairman, President and CEO; and Alex Ko, Senior Executive Vice President and Chief Financial Officer; Peter Koh, our Deputy Chief Operating Officer, is here with us as usual, and will be available for the Q&A session.

With that, let me turn the call over to Kevin Kim. Kevin?

Thank you, Angie. Good morning, everyone, and thank you for joining us today. Let's begin on Slide 3 with a brief overview of our financial results. We had a very productive quarter with increased profitability, record high loan originations, further enhanced deposit trends and a significant improvement in our asset quality metrics. We generated net income of $55.5 million in the third quarter or $0.45 per diluted share, up 3% from the preceding quarter. Pre-provision net revenue of $65.4 million represented an increase of 1.4% over the preceding second quarter. And our return on tangible common equity increased 21 basis points to 13.71% quarter-over-quarter.

New loan production reached a record high and exceeded $1 billion for the first time in our history, up 13% quarter-over-quarter. Our deposit mix continued to shift favorably to lower cost deposits with noninterest-bearing deposits increasing 7% quarter-over-quarter and accounting for 40% of total deposits, which is also a record high. As expected, our efforts to de-risk the portfolio impacted growth in our total loans this quarter, although we continue to increase earning assets, which is driving higher net interest income.

Our third quarter results included a $10 million release of our reserve for loan losses, reflecting the progress we have made in moving higher risk loans of our balance sheet and the improved performance we are seeing in our Hotel/Motel and retail CRE portfolios, combined with an improving economy. During the third quarter, we sold $29.6 million of loans and moved another $131.6 million of potentially higher risk loans to held-for-sale at the end of the quarter, contributing to the large decline in substandard loans during the quarter. At this point, we believe the process of de-risking the loan portfolio has been largely completed, and we are not anticipating a material amount of additional strategic loan sales in the fourth quarter. Given what has occurred, we believe we are well positioned to drive organic loan growth and enhance operational profitability in the quarters ahead.

Moving on to Slide 4. As we indicated on our last call, we expected to see an acceleration of loan production as we entered the seasonally stronger second half of the year, and economic conditions continue to improve. While the resurgence in COVID-19 cases and supply chain disruptions impacted the pace of the economic recovery, we were still able to have an exceptionally productive quarter of business development, leading to a record $1 billion in new loan production in this quarter.

Compared with the prior quarter, our overall loan production increased by 13%, with strong performances occurring in all areas of our business. And in each segment, we achieved a high level of production than we had in the preceding second quarter. In particular, commercial loan production increased 14% quarter-over-quarter to $344 million. Our Corporate banking group continues to gain traction and develop new relationships with larger corporate clients, which is driving the higher level of commercial loan production. Excluding PPP loans and strategic loan sales and transfers, our commercial loans outstanding balance would have grown 6% quarter-over-quarter.

Over the last year, our Corporate Banking group has further expanded into telecom and health care with the addition of experienced business development and specialized credit teams in each of these verticals. And we are pleased to see the positive impact these teams are making to our overall loan production volumes. This production has been a significant driver of the diversification we have achieved over the last few years, and we will continue to opportunistically add experienced teams to supplement our growth. Our SBA loan production totaled $115 million in the third quarter, which is a record level of non PPP production. Excluding the impact of PPP and strategic loan sales and transfers, SBA loans in our portfolio would have increased 11% quarter-over-quarter.

Our CRE loan production increased 14% quarter-over-quarter. As we have mentioned previously, we are looking to create a more diversified, lower risk profile commercial real estate portfolio and have been increasing our focus on multifamily loan origination over the last year. The stronger CRE loan production this quarter is largely attributable to the success we are having with this effort. New multifamily loans more than doubled quarter-over-quarter and accounted for approximately 12% of our total loan originations in the third quarter. This resulted in 20% growth in this portfolio from the end of the prior quarter.

As part of our efforts to increase this loan segment, we recently recruited a highly experienced multifamily team led by an executive who joined us from a large money center bank. This is an attractive product that complements our existing portfolio and the improved diversification and lower level of risk associated with this lending segment are in line with our longer-term strategic initiatives of enhancing franchise value. Overall, excluding PPP loans and the impact of the loan sales and transfers, we would have had total loan growth of 3% quarter-over-quarter or 12% on an annualized basis. This level of loan production is more reflective of the stronger business development capabilities of our franchise.

In terms of our loan modification program, granted under the CARES Act, we continue to see a steady decrease in the balances of our active loan modifications. At September 30, modified loans decreased to below 1% of total loans, down from 2.4% as of June 30, 2021. Our COVID-19 modifications have been maturing as scheduled and we expect they will wind down to nearly 0 by the end of the year.

Now I will ask Alex to provide additional details on our financial performance for the third quarter. Alex?

Thank you, Kevin. Beginning with Slide 5. I will start our net interest income, which totaled $130.3 million for the third quarter of 2021. An increase of 3% from $126.6 million in the preceding second quarter. This increase was due to a 2% increase in interest income and 8% decrease in interest expense. During the third quarter of 2021, $236 million of PPP loans were forgiven versus $14 million in the preceding second quarter.

The net fee realized from PPP forgiveness was $3.2 million in the third quarter versus $1.8 million in the second quarter of 2021. Our net interest margin decreased 4 basis points quarter-over-quarter to 3.07%. The increase in our net interest margin reflects an 8 basis point negative net interest margin impact from the excess cash as a result of our strong deposit growth. If not for the excess liquidity, we would have had a margin expansion this quarter given the reduction in our cost of deposits and increase in average yield on investment securities, which together had a net positive impact of 6 basis points to our net interest margin.

Looking ahead to the fourth quarter, we expect our net interest margin to remain fairly stable with relative stability in both loan yields and deposit costs. So at this point, we are not expecting to see much margin pressure in the fourth quarter.

Moving on to Slide 6. From a longer-term perspective and looking at the potential for higher interest rates next year, we are well positioned to benefit from a higher interest rate environment. Variable rate loans as a percentage of total loans have been trending higher due to our increase in commercial lending and accounted for 41% of our portfolio as of September 30, 2021. Together with higher trending noninterest-bearing demand deposits, we have steadily become more asset-sensitive each quarter of this year.

Now moving on to Slide 7. Our noninterest income was $10.6 million for the 2021 third quarter, down from $11.1 million in the preceding second quarter. Looking at our customer-related fee income and net gain on sale of loans, noninterest income decreased by $300,000. The primary drivers of the decrease included lower loan service fees as a result of the higher level of SBA 7(a) loan payoff and a lower level of net gain on sale of mortgage loans due to a lower volume of loans sold in the quarter.

Moving on to noninterest expense on Slide 8. Our noninterest expense was $75.5 million, representing an increase of 3% from the preceding second quarter. The largest factor contributing to this increase was a $4.7 million increase in salaries and employee benefit expense. This was caused by a number of factors, including increased headcount and associated increase in base salaries. This largely reflects a new frontline hires, including the multifamily team that Kevin mentioned as well as wage increases that were necessary to retain existing employees. Second, higher group insurance expense.

And finally, an increase in the bonus accrual for the year to reflect the higher-than-expected financial performance. These increases in the employee costs were partially offset by a lower level of professional fees, primarily resulting from a decline in legal fees along with a nonrecurring software impairment charge in the preceding quarter. Looking into the fourth quarter, we expect noninterest expense will trend downward from the third quarter to our more normalized range of $72 million to $74 million.

Now moving on to Slide 9. I will discuss our deposit trends. We continue to run off higher costing time deposits and replaced them with lower cost deposits through our business development efforts. During the third quarter, our noninterest-bearing deposits increased 7% from the end of the prior quarter. while our time deposits decreased 4%. The increase in our noninterest-bearing deposits exceeded the runoff and time deposits resulting in a 2% increase in total deposits quarter-over-quarter. The cost of our interest-bearing deposits declined 6 basis points quarter-over-quarter and our total cost of deposits decreased 4 basis points. These decreases represents our 8 consecutive quarters of declining deposit costs.

Now moving on to Slide 10. I will review our asset quality. Nonaccrual loans and substantial loans decreased significantly by 51% and 36%, respectively, from the prior quarter. Nonaccrual loans decreased by $57 million quarter-over-quarter due to 3 primary factors. First, we charged off a large relationship that had moved to nonaccrual status in the first quarter of this year. Second, we had a couple of large payoffs of nonaccrual loans this quarter.

And finally, the transferable loans to -- held for sale also contributed to the decrease in nonaccrual loans. Substandard loans decreased by $137 million quarter-over-quarter. As a result of the loan sales and transfers as well as the charge-off and the payoff mentioned above. The charge-off relationship, combined with the loans that we sold and transferred to loans held for sale resulted in an elevated level of charge-offs in the third quarter of 2021, totaling $42.7 million. As previously discussed during our first quarter conference call this year, the relationship that was charged off this quarter is a unique situation with the borrower being involved in our legal dispute.

With regard to the loans transferred to held-for-sale in the third quarter, as of today, we have completed our sales of $69 million of the sales alone since the quarter end and anticipate that the remaining loans transferred to a held-for-sale will be sold during the fourth quarter.

The loans transferred to held-for-sale were already contracted for sales at quarter end. And therefore, the impact of these future sales have already been reflected in our financial results for the third quarter of 2021.

Now moving on to Slide 11. We recorded a credit for credit losses of $10 million in the third quarter. This reflects our significantly improved asset quality, combined with improving economic forecast. The allowance for credit losses as of September 30, 2021 was 1.05%, excluding PPP loans, compared with 1.47% as of June 30, 2021. The decrease in our ACL coverage ratio mainly reflects an improved macroeconomic forecast, asset quality improvement and a meaningful reduction of problem loans.

Our coverage ratio as of September 30, 2021, was slightly higher in comparison with our CECL day one coverage ratio of 0.98% at January 2020, notwithstanding the meaningful shift to a lower risk loan portfolio. On the other hand, our allowance for credit losses as a percentage of nonaccrual loans, nonperforming assets and nonperforming assets all increased significantly quarter-over-quarter.

Now moving on to Slide 12. Let me provide an update on our capital position and returns. As of September 30, 2021, we continued to maintain a meaningful amount of excess capital to be utilized for future growth. Tangible common equity per share increased 23 basis points from the quarter -- prior quarter and 63 basis points year-over-year. Based on our strong capital and liquidity positions, we maintained our quarterly dividend at $0.14 per share. With the continued strength of our financial performance and capital position as well as the significantly reduced credit risk in our loan portfolio. We resumed stock buybacks and repurchased $47 million of common stock during the third quarter. This reduced our shares -- sorry, this reduced total common stock outstanding by approximately 3.5 million shares compared with the end of the prior quarter.

With that, let me turn the call back to Kevin.

Thank you, Alex. Now moving on to Slide 13. Let me provide a few comments about our outlook. Our loan pipeline remains robust, and we expect to maintain a higher level of production, particularly as many of the new bankers we have added this year continue to gain traction. We also have a good pipeline of new banking talent, and we expect to continue making additions on a consistent basis that will further strengthen our commercial banking capabilities, add expertise in new areas and contribute to the further diversification of our loan portfolio in the coming years.

With more of our energies focused on growth and business development, we are also investing in geographic areas that we believe can become larger sources of organic growth in the future. We have had a loan production office in Atlanta for many years. And late in the fourth quarter, we will be opening our first full-service branch in the heart of a rapidly expanding Korean community in Duluth, a nearby suburb of Atlanta.

We believe that our larger presence will enable us to better capitalize on the economic growth being experienced in this region as well as expand our efforts to bank the Korean National Corporation in the Southeastern region of the United States. This should all lead to higher levels of loan growth going forward and more opportunities to remix our balance sheet towards higher-yielding earning assets, which will positively impact our profitability.

Throughout this year, we have steadily reinvested a portion of the cost savings from efficiency initiatives such as our branch consolidations into strengthening our business development capabilities, and we are seeing very positive results from these efforts. Of the new hires this quarter, approximately 75% of frontline employees, which represents a shift in our workforce more toward revenue-generating personnel.

Notwithstanding these investments in our organization, we expect to maintain our noninterest expenses within our normalized range. Following the significant reduction of potential problem loans this quarter, we believe our asset quality will continue to improve in the near term as the U.S. economy as well as our borrowers continue to recover from the pandemic.

Altogether with relatively stable loan yields, deposit costs and net interest margins, we believe we are well poised to drive improved profitability in the coming quarters. And the end result of our efforts will be a stronger franchise with a more diversified, high-quality loan portfolio, reduced concentration risk and a lower cost deposit base, which will drive profitable growth and create additional value for the shareholders in the years to come.

With that, we would be happy to take your questions and add any additional color as requested. Operator, please open up the call.

(Operator Instructions) Our first question will come from Chris McGratty with KBW.

Kevin, maybe a question on growth and capital. You guys are very aggressive with the buyback at good valuations. Can you help us with the outlook for additional buybacks given what sounds like an improving growth outlook?

Well, as we discussed, we were quite active with our current buyback program in the third quarter, and we have less than $3 million remaining in that program. So at current valuations, along with our strong capital position of Tier 1 common equity ratio in excess of 11%, I think it would be a good idea for us to consider another authorization sometime soon.

Okay. And then could you -- I appreciate the color, Alex, on the expenses near term. Could you help us kind of more broadly, we've heard from a lot of banks about kind of wage pressure given inflation and investments. So more broadly beyond the quarter, how should we be thinking about the cadence of expenses from here?

Yes. As we reported this quarter, we had a little bit of increase on noninterest expense due to the salary and bonuses, which also included an increase on bonus accrual. That was a more kind of catch-up for the first 9 months. And I don't expect same level of accrual for the bonuses necessary for the Q4. So even though we have a little bit higher salary expenses due to the retention of the employees for what's going on with hiring environment. But anyhow, I would expect salary and benefit expense will be decreasing compared to Q3 and all other items, I would expect it will be a pretty similar level as we have seen in the Q3. So that's why we believe about $72 million to $74 million of run rate is what I would expect.

Chris, in connection with that subject, I think it is worth mentioning that the current job market is an employee market, and the cost to hire an employee is ranging conservatively 10% to 15% higher than our current base salaries for the same position. So the cost to retain and attract employees in the current market is far greater than it was a year ago. So there will certainly be some upward pressure in terms of compensation and benefits. But as Alex mentioned, we will continue to look at other areas where we can enhance efficiencies so that we can manage our noninterest expenses within our more normalized range of $70 million to $74 million.

That's great color, Kevin. If I could just sneak one in that clarification. The $43 million of charge-offs in the quarter. I'm interested in how that kind of mapped to the large nonaccrual, which I think was around 23% or 24% in the first quarter. And then the loan sale of 30 and the transfers of 131. I'm just trying to figure out where the loss content was within the 3 that you called out?

This is Peter. I can address that one for you here. So we did have an elevated level of charge-offs at this quarter, and it really was a combination of various factors, the loan sales. We had the one large relationship as well and a couple of large payoffs. We are in the process of multiple workouts with current customers. So we can't share a lot of detail in terms of that breakdown. But we will say that the discounts on the loan side, loan sales side, actually, we're still very reasonable. We felt that we had a significant amount of reserves attached to those discounts. And a good portion of the larger elevated charge-off was due to the larger relationship that we discussed.

(Operator Instructions) Our next question will come from Gary Tenner with D.A. Davidson.

A bit of a follow-up, I suppose, to the last question. But in terms of the property types that were sold in the quarter, if I look at your data that you provide on your tables in terms of the real same loans by property type other than it appearing that there were some Hotel/Motel involved in the sales and transfers. I can't -- it doesn't quite jump out, I mean, in terms of what other property types were represented there. So can you talk to that point.

Sure. I can add a little color. So if you recall, the second quarter, we really focused on the Hotel/Motel space for the loan sales. And in the third quarter, portion of the Hotel/Motel, we continue to address. But we actually looked at focused on the retail side as well. So when you look at the overall composition on the CRE side, we looked at the 2 primary categories where we felt that there was risk stemming from the pandemic, which is the hotel and the retail. So in combination with the loan sales from 2Q and 3Q, we feel confident that we have addressed all the significant kind of concerns. As mentioned in the prepared remarks, we really do feel that with the improving economic conditions and monitoring our underlying borrowers financial performance, which is improving across the board, we felt comfortable in reducing levels of reserves and things like that. But to answer your question, yes, it was mostly from the hotel and the retail sectors.

Okay. And obviously, a good portion of your commercial real estate fundings this quarter then we're also in the retail property type as well, just given the kind of quarter-over-quarter growth. So you're still comfortable with the space. You just needed to kind of de-risk some specific credits?

That's correct. So we do -- we still are finding good opportunities in the retail sector, but we are looking at that very closely. And I do think we will moderate the growth there where we feel that we can manage the levels. The retail sector has is to us a more diversified category than, say, hotels. There are a lot of underlying cash flows that come from different sectors of the economy. And as you may know, we are focusing on the convenience store type of retail where it is mostly Internet-resistant. And so we are looking at a sort of a recomposition play within the CRE and that, I think, applies to the retail sector as well.

Great. In terms of loan sales going forward, will you be continuing to solve both the SBA and single-family production?

You have Yes. Yes. We will continue to sell the SBA loans -- At this point, we are not expecting any dramatic change in the level of gain on sale of SBA loans. But we have on our books in excess of $280 million of guaranteed portion of SBA loans. So we are keeping a close eye on the secondary market and premiums available in the secondary market. So -- but currently, we don't have any plan to have any dramatic change in the level of gain on sale of SBA loans.

Okay. And then last question for me. In terms of the multifamily business that showed good strength this quarter. Could you tell us specifically the yields in the production in that segment this quarter?

I think we will have to take a look at that. I think maybe we can get back to you with the yield there. Multifamily in general, is from a CRE perspective, is a slightly lower yielding category, but risk adjusted, I think, does make sense for us in terms of our strategic plan.

(Operator Instructions). Our next question is a follow-up from Chris McGratty with KBW.

The question is, you had a lot of success on the deposit diversification over the last couple of years. I'm interested in kind of your thoughts about sustainability of these really strong growth in particularly noninterest-bearing there some vertical. But any thoughts on just deposit growth over the next several quarters.

Yes. We had a great success, especially on the noninterest bearing deposits. And when we look at the composition of that big increases we see in 2 types: one, from the institutional from CVD deposits as well as lots of retail deposit increase. And we believe that retail deposit is mainly coming from the government of size or PPP, those loans. Maybe some -- there is some temporary nature. So there will be some runoff. I don't think there will be a dramatic runoff for those retail side.

And going back to the CBD or institutional noninterest-bearing deposits, we see it's very stable. So we do not expect a meaningful runoff for that institutional noninterest-bearing deposits. So both 2 combined, we expect there might be some runoff, but we do not expect a substantial reduction of our deposit that we grew for the last 18 months or so in the near future. Maybe, Gary, can I get back to you, the multi-family, the yield, we just found out it was around 3.3% yield.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Okay. Once again, thank you all for joining us today. We hope everyone stays safe and healthy until we speak with you again next quarter. So long, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.