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spk05: Good day, and welcome to the Hope Bancorp's 2021 Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ms. Angie Yang. Please go ahead.
spk01: Thank you, Chuck. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2021 Second 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 two, let me begin with a brief statement regarding forward-looking remarks. The call today may contain forward-looking projections regarding the future financial performance of the company and future events. These statements 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 US 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 Bancorp assumes no obligation to revise any forward-looking projections that may be made on today's call. The company cautions that the complete financial results to be included in the quarterly report on Form 10-Q for the quarter ended June 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 second quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures. 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, Alex Koh, Senior Executive Vice President and Chief Financial Officer. Peter Koh has transitioned to a broader role as a Deputy Chief Operating Officer and continues to work closely with our Credit Admin Department and our new Chief Credit Officer, Richard Marshall. Peter 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?
spk09: Kevin Kim Thank you, Angie. Good morning, everyone, and thank you for joining us today. Let's begin on slide three with a brief overview of our financial results. Second quarter results underscore the sound management of our operations, and we saw the positive trends we were expecting in loan production, net interest margin, and revenue with linked quarter increases in both net interest income and non-interest income. Together with a modest reserve release this quarter, this resulted in a strong quarter earnings with net income of $53.8 million or 43 cents per diluted share and pre-tax, pre-provision income of $64.5 million an increase of 6% over the preceding first quarter. I would like to highlight a few notable items that were key factors in driving our performance in the second quarter. First, we continue to have success in attracting new commercial deposit relationships to the bank and expanding our deposit relationships with existing customers. This continues to support inflows of low-cost deposits. During the second quarter, our non-interest-bearing deposits increased 4% quarter-over-quarter, while money market deposits increased 16%. Combined, non-interest-bearing deposits and money market account balances now represent 78% of our total deposits, up from 63% one year ago. The significant shift in our deposit mix away from time deposits has substantially reduced our cost of deposits and driven the 32 basis point increase we have seen our net interest margin over the past year, despite the pressure on earning asset yields. Second, with premiums having increased in the secondary market, we resumed selling our SBA loans to take greater advantage of the strong SBA platform that we have built. The $2.4 million in gains we recognized this quarter helped drive the increase in our non-interest income at a time when many other fee-generating areas are under pressure. And third, and most importantly, we saw the steady improvement in our hotel, motel, and retail commercial real estate portfolios that we expected as the economy continued to reopen. With more borrowers returning to regularly scheduled payments, upon expiration of their modification period, our loan modifications declined to 2.4% of total loans at June 30 of 2021. During the quarter, we sold $119 million of higher-risk, special-mention, and substandard-graded hotel-motel loans. These loans were sold at a discount that was less than the reserves we held against these loans, which reflects the conservative approach that we took to building our allowance for credit losses. The sale of these loans at a discount less than the reserve held against them, combined with the decline in modified loans and improving economic forecasts, contributed to a reserve release this quarter. Moving on to slide four, as we expected, based upon our growing pipeline, we had a significant increase in loan production. Excluding PPP loans, we had $874 million in loan production, which was 61% higher than the preceding first quarter. It is also a record level of loan originations for the bank, so we have quickly surpassed even pre-pandemic levels of loan production. Excluding PPP loans in the second quarter, we funded $520 million in commercial real estate loans, $301 million of CNI loans, and $53 million of consumer loans consisting primarily of residential mortgages. SBA loans, which I included in the CRE and CNI production just discussed, totaled $78 million, including $65 million of 7 loans in the second quarter of 2021. We continue to be successful in attracting new commercial relationships, and the $301 million in commercial loan production represents one of the larger quarters of originations for commercial lending. The record level of loan production we had this quarter along with the purchase of $96 million in 30-year fixed-rate residential mortgage loans, was offset by a number of factors that resulted in total loans at quarter end decreasing 2 percent from the prior quarter. We had a $231 million quarter-over-quarter decline in warehouse line ending balances as demand for refinancing has decreased with the rise in mortgage rates and a lack of housing inventory in many markets has impacted purchase originations. Aggregate payoffs and paydowns were higher than usual at $891 million versus $572 million in the first quarter of 2021, reflecting in large part a significant increase in payoffs. We attribute the increase in payoffs to a number of factors, including highly competitive lending environment. Excess liquidity of our borrowers was also a contributing factor to the higher levels of payoffs. And as well, PPP forgiveness ramped up in the second quarter of 2021 and totaled $164 million versus $30 million in the preceding quarter. But even excluding PPP forgiveness, payoffs were higher quarter over quarter. During the quarter, we also completed the sale of an aggregate $119.3 million from our hotel-motel portfolio that were viewed to be higher risk. In addition to the sale of $42.6 million in residential mortgage loans, we resumed the sale of SBA 7A loans to the secondary market and sold $30 million during the 2021 second quarter. Now moving on to slide five, let me provide an update on our loan modification program under the CARES Act. We continue to see a steady decrease in the balances of our active loan modifications. At June 30, modified loans decreased to 2.4% of total loans, down from more than 6.9% as of March 31 of 2021. And we are pleased to report that virtually all the loans for which the CARES Act modifications have expired are current and performing. Based on our COVID-19 modifications expiration schedule, we expect active modifications to decrease to approximately 1% of total loans by the end of the third quarter of this year. So moving on to slide six, we have provided updated information on the modification program for our hotel-motel and retail CRE properties, the two sectors that have been most impacted by the pandemic. At June 30, the level of loans modified in our hotel-motel portfolio decreased to 8% of the portfolio, from 33% as of March 31 of 2021. We have approximately $82 million of modifications in this portfolio, maturing by the end of the third quarter, so this percentage will be reduced to minimal levels within the next three months. As I mentioned earlier, we sold $119 million of hotel-motel loans which we believed would require a longer recovery period. As a result of these sales, we have been able to significantly de-risk this portfolio. The red part data that we are tracking for our markets and the current financial data we are receiving on a monthly basis are demonstrating significant improvements, and we expect the performance of our hotel-motel borrowers will continue to improve. Looking at our retail CRE portfolio at June 30, we have $74 million of retail CRE loans that are currently operating on the modified terms representing 3% of our retail CRE portfolio. This is down from approximately 8% as of March 31 of 2021. For this portfolio, we have approximately $24 million of modifications expiring during the third quarter. Now, I will ask Alex to provide additional details on our financial performance for the second quarter. Alex?
spk06: Thank you, Kevin. Beginning with slide seven, I will start with our net interest income, which is totaled $126.6 million, an increase of 3% from $122.6 million in the preceding first quarter. and representing our fourth consecutive quarter of higher net interest income. The growth in net interest income this quarter was due to a 13% reduction in interest expense as a result of the lower cost of deposits, along with a higher weighted average yield on loans, reflecting the accelerated recognition of net fees due to PPP loan forgiveness. During the second quarter of 2021, $164 million of PPP loans were forgiven versus $29 million in the preceding first quarter. The net fee realized from PPP forgiveness was $1.8 million in the second quarter versus $250,000 in the first quarter of 2021. In the second quarter, our net interest margin increased five basis points to 3.11%, which represent our fourth consecutive quarter of margin expansion. The improvement in our net interest margin this quarter was due to a combination of lower cost of deposits, and an increase in the weighted average loan yield. Excluding purchase accounting adjustment, our net interest margin increased by seven basis points quarter over quarter during the second quarter of 2021. The success we are having in gathering lower costing deposits has provided additional opportunities to bring our deposit costs down as we have $1.2 billion in time deposits maturing in the third quarter at a weighted average rate of 45 basis points. That said, we expect a quarterly decline to our cost of deposits will be slower than we have seen in the past few quarters. Now moving on to slide eight. Our non-interest income was $11.1 million for the 2021 second quarter, up from $8.8 million in the preceding first quarter. The primary driver of this increase was the resumption of the sale of our SBA 7 loans, which generated $2.4 million in net gains in the second quarter of 2021. The SBA 7 loans sold in the quarter were seasoned loans, and we recognize a gain on sale of loans approximately 8%. We currently have approximately $222 million of sellable SBA 7 loans, most of which are seasoned loans. Going forward for the near term, We expect to sell approximately $30 million of SBA 7A loans to the secondary market on a quarterly basis with the expectation of recognizing approximately $2.5 million of gain on sale each quarter. The gain on sale of SBA loans was partially offset by a decline in gain on sales of mortgage loans due to a lower volume of retail mortgage loans sold during the quarter, as well as a decline in the average premium recognized on the sale. During the second quarter, we sold $42.6 million of residential mortgage loans, compared with $67.8 million in the preceding first quarter. Moving on to non-interest expense on slide nine. Our non-interest expense was $73.1 million in the 2021 second quarter, representing an increase of 4% from the preceding first quarter. The largest contributor to the increase was a $2.1 million software impairment charge from the disposition of an existing licensed software platform. When the software impairment charges are excluded, we believe that our operating expenses should remain in this same range over the second half of the year. Now moving on to slide 10. I will discuss some of our key deposit trends. We continue to run off higher costing time deposits and replace them with lower cost deposits through our business development efforts. As Kevin mentioned, during the second quarter, we had a significant growth in non-interest bearing and money market deposits, while our time deposits decreased 16%. The growth in our lower cost deposit categories exceeded the runoff in time deposits, resulting in a 3% increase in total deposits. Now, moving on to slide 11, I will review our asset quality. As of the first quarter, we had an increase in credit-sized loans, and this was largely due to two larger loans. The first is a $35 million hotel-motel credit relationship, which was downgraded from the COVID watch grade to special mention. The property is in a good shape and good location, but has been slow to recover from the impact of the pandemic. We are well secured on this loan, and there are very strong borrowers that have the financial resources to withstand a prolonged recovery period. Accordingly, we do not anticipate any loss on this credit. Generally, for the hotel-motel loans currently in the special mention category. Many of the borrowers have demonstrated significant improvement in their revenue and cash flows over the past couple of months and have resumed making full principal and interest payments. Barring any setbacks to the economic recovery, we expect these positive trends are sustainable for most of our borrowers. And as a result, we expect to be in a position to begin upgrading many of the special mention and substandard rated hotel-motel loans during the second half of the year. The second larger loan contributing to the increase in CRE-SIZE loans is a $46 million construction loan that is taking longer to stabilize in the pandemic-impacted business environment following the completion of the project. Occupancy is now improving, and as the tenants are beginning their business operations, we fully expect this credit will eventually stabilize over the course of the economic recovery. Looking at non-performing loans, we had a $15 million increase from the end of the prior quarter. This was primarily due to two factors. The Lincoln loans 90 days or more on accrual status increased by $4.4 million, reflecting a timing issue in which a loan that matured during the second quarter was renewed early in the third quarter. This loan is now current and performing. Occurring TDR loans increased by $9.6 million due to maturity concessions granted for two credit relationships. Taking all these factors into consideration, we view our underlying asset quality as generally improving and are cautiously optimistic that we will see meaningful improvements by the end of 2021. We had $11.5 million in net charge-offs during the second quarter, or 35 basis points of average loans on an annualized basis. This includes $11.8 million in charge-offs related to the $119 million of hotel-motel loans that were sold, all of which was previously reserved for in prior quarters. If we exclude the hotel-motel sales impact, we would have recognized a net recovery for the second quarter of 2021. Now, moving on to slide 12. We recorded a negative provision for credit losses of $7 million in the second quarter. The negative provision was due to the impact of improving economic forecast, lower loan balances, and the sale of the hotel-motel loans that de-risked this portfolio. The provision brought our allowance for credit losses to 1.41% of total loans or 1.47% excluding PPP loans. Now moving on to slide 13, let me provide an update on our liquidity position and capital ratios. Our overall liquidity position remains very strong as of June 30, 2021. Our primary source of funds continue to be customer deposits, and we continue to see significant increases in non-interest bearing demand deposits. We maintained a robust capital position with our total risk-based capital ratio, Tier 1 common equity ratio, and Tier 1 risk-based capital ratios all increasing from the prior quarter. As of June 30, 2021, we continued to maintain a meaningful amount of excess capital above the amount required to be considered well capitalized. And given our strong capital and the liquidity positions, we maintained our quarterly dividends at 14 cents per share. With that, let me turn the call back to Kevin.
spk09: Thank you, Alex. Now moving on to slide 14, let me provide a few comments about our outlook for the remainder of 2021. We expect many of our positive trends to continue in the second half of the year, including further but more modest reductions in our cost of deposits and maintaining a higher level of non-interest income driven by the continued sale of our SBA 7 loans. Utilizing our access cash balances is expected to have a positive overall impact to the net interest margin. But we expect to see a reduction in PPP fee income in the second half of the 2021, which may result in net interest margin being relatively flat or having small compression in the next quarter. We also expect to see continued improvement in our hotel, motel and retail commercial real estate portfolios, which should keep our provision expense relatively low during the second half of the year. and well below the levels we posted last year. We expect our loan production to accelerate in the second half of the year, as we typically see from a seasonality perspective, particularly as the economic recovery gains strength. However, we have considerable headwinds challenging our growth. First, as I mentioned at the beginning of the presentation, The interest rate environment has significantly lowered demand for residential mortgage loan refinancings, and the lack of housing inventory is impacting purchase originations. These conditions are expected to persist through the rest of the year, and as a result, both production of residential mortgages and warehouse line utilizations are now expected to be below our budgeted projections for 2021 that we had at the beginning of the year. Second, as a byproduct of the highly competitive lending environment, payoffs have trended higher than anticipated and we now expect they remain at higher levels through the end of the year in light of the fact that we have $260 million of first round PPP loans that we expect will be forgiven during the third and fourth quarters of this year. And while not originally budgeted for in 2021, we have resumed the sale of SBA 7A loans to the secondary market, and we completed a $119 million loan sale of our higher risk, criticized and classified Hotel Motel loans. All in all, we now expect flat to nominal net loan growth for 2021. As the operating environment normalizes, we believe that we will return to our usual high single digit loan growth next year. One of the reasons that we are confident in our ability to return to historical levels of loan growth is the success we have had in attracting new banking talent to the company. Since completing the MOE and becoming a larger regional bank, one of our goals has been to recruit more bankers with experience and relationships outside of our historical Korean American markets. We have invested in products and services, including our treasury management platform, to demonstrate that Bank of Hope has the tools and resources to effectively support the business development efforts of bankers with proven expertise in targeting small and middle market enterprises. We have been very successful with our diversification initiatives, which has enabled us to build our corporate banking group and attract new teams that have provided deep expertise in large vertical markets, including more recently the telecom and healthcare industries. This effort has been a key factor in the growth of our commercial client base over the past few years and has been a major driver of the positive shift in the mix of our deposits and improved the diversification in our loan portfolio. We continue to have a good pipeline of new banking talent and we expect to have more additions over the second half of the year that will further strengthen our commercial banking capabilities, add expertise in new areas, continue to expand our market base and contribute to the further diversification of our loan portfolio in the coming years. It is a very competitive market for banking talent and we are very pleased that we have been able to build Bank of Hope's reputation as an attractive place for mainstream commercial bankers to continue building their careers. While some of the headwinds to net loan growth are expected to persist near term, we have a robust pipeline that is supported by strong macroeconomic forecasts. And we believe our success in executing on our strategic initiatives has positioned us well to deliver enhanced profitability for 2021 and create value for our shareholders in the future. With that, we would be happy to take your questions and add any additional color as requested. Operator, please open up the call.
spk05: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Matthew Clark with Piper Jeffery. Please go ahead.
spk02: Hey, good morning. Maybe first on the hotel loan sales, wondering are there plans to kind of further reduce your concentration in hotels and maybe even retail CRE? I'm just trying to get a sense for whether or not those two portfolios might shrink over time through runoff or potential sales, or whether or not you're willing to start to dip your toe in the water and grow those exposures going forward?
spk09: Matthew, we are very closely monitoring the hotel, motel, and retail portfolio, and we will remain prudent in managing the risk associated with these portfolios at acceptable levels. In terms of additional sales of hotel and motel loans, there could be additional sales, but additional sales would be one-off, determined on a case-by-case basis, and I don't expect that we will have another sales of this large volume.
spk02: Okay. And then just on the CNI reserves down to 73 basis points, can you give us a sense for what's driving that? How much lower can that ratio go? And what do you believe is the appropriate coverage longer term for CNI?
spk03: Sure. This is Peter. The coverage on the CNI portfolio is reducing. We are seeing a lot of our customers actually showing a lot of improvement. So as we are able to substantiate that improvement through this economic recovery. I do anticipate that there could be further releases in that sense from the commercial C&I side. In terms of where we end up, I think that's still a little bit too early to tell, but so far I think everything is pointing in the right direction in that sense.
spk02: Okay. And then on the SBA gains or the premiums, associated with that line item. It sounds like premiums are healthy. I don't think that's a big surprise, but as you get beyond October or the end of September and into next year, I guess, how do you think about gain on sale premiums in that business when that enhanced government support goes away? you know, thinking about 22?
spk09: We believe that the current SBA premium levels will sustain for the time being. Even after September, when the government's additional subsidy ends, we sell only the guaranteed portion of the SBA loans. And looking at the excess liquidity in the market and the few investment opportunities, SBA products still will be very attractive products to invest in. So we expect that premium levels will continue to be high.
spk02: Okay.
spk09: And last one for me, well into the next year.
spk02: Okay. And then just last one, your thoughts on, you know, buying back your stock, given where you're trading on tangible book, is it still too early? Um, as you work through some of this credit, um, or is it something you could consider?
spk09: Well, based upon our current stock valuation in the market and our strong capital position, You know, we are very seriously considering capital deployment through share buyback in a very near future.
spk02: Okay. Thank you.
spk05: The next question will come from Chris McGrady with KBW. Please go ahead.
spk07: Hey, Kevin. How are you? I want to follow up on Matt's question just on the buyback. Could you remind us what is under authorization?
spk09: um whether you have to go through the approval process again and also kind of how you're thinking about your your binding ratio um because i because i agree the buyback at book values seems to be good use well we do not have any authorized amount at this time but uh i don't think it is uh an issue and our board has uh always uh had share buyback as a consideration as part of our capital management strategy. And as I said, the current, our stock valuation in the market is so low. I think that this is a no brainer question for us.
spk07: Okay. And then in terms of the loan growth question, given some of the intentional strategies and the headwinds, Some of your peers have bought open market purchases of residential mortgages to add some duration. I know the ResiBook has been a portfolio of growth for you, but is that at all being considered to kind of stem the decline in the loan book in the near term?
spk06: Sure. As you know, we actually utilize our excess liquidity by purchasing mortgage product. I think $96 million we purchased for this quarter. But going forward, as part of the excess liquidity strategy, which actually depends on our organic loan growth, and also utilization of our line usage, we will use the mortgage loan purchase one of the vehicles to manage our balance sheet effectively by reducing the excess cash that we currently have. Okay.
spk07: And then maybe if I could just make one and just make sure I understand the guidance on slide 14. The loan growth, flat to nominal, that's on a reported basis. That's not excluding the PPP, right? That's reportage?
spk09: Well, we expect the PPP balance to reduce year over year. So excluding PPP, we will have some modest growth. But including PPP, I think it will be, you know, nominal. Got it. All right. Thank you, Kevin.
spk05: The next question will come from Gary Tenner with DA Davidson. Please go ahead.
spk08: Thanks, good morning. I just wanted to ask about the CRE originations in the quarter. Very strong, certainly, much more than last several quarters. Can you talk about kind of the areas within CRE that you're seeing the production come from?
spk09: Well, we have both CRE and CNI originations very strong in this second quarter. And in terms of CRE, we are really trying to focus on lower risk areas in the current environment, like multifamily gas stations and owner-occupied investment properties. And other than warehouse line relationships, I think we have a very stable utilization rates on other commercial lines, and that also helped a stronger originations in the second quarter. And our corporate banking commercial line, business lines have been consistently performing well, including the second quarter of this year.
spk08: Okay, thank you. And in terms of the guidance for, you know, the gain on sale of loans, would you expect to have some degree of sale of single family as well in addition to the planned SBA loan sales? Or should we assume for modeling purposes that that's the only gain on sale that you'll be generating next couple of quarters?
spk09: Well, gain-on-sale income would be primarily coming from sale of SBA loans. And the level of gains will be similar to the ones that we reported for the second quarter. At least for the third and fourth quarter, that's what we expect. And in terms of gain-on-sale of our mortgage loans, the first quarter number was – a lot higher than the second quarter number, and we don't expect the number to increase at all, if anything, from the second quarter number.
spk08: Okay, great. And then just last question from me in terms of PPP. Can you give us the average balances in the quarter for that loan segment as well as remaining fees to be recognized?
spk06: Sure. The average balance for PPP for the second quarter was $662 million. And the fee that we recognized for the second quarter was, you know, it broke into like three categories, as you know. Actually, you know, just fee itself is two categories. One, forgiveness, and second is just normal amortization on top of the third one that I was referring to, coupon rate. So all this together, we recognized $5.6 million of the total income we recognized. And the forgiveness related, I think we discussed during the earlier call, about $1.8 million was recognized from the early forgiveness of those loans.
spk08: Sorry, Alex, the 5.6 million total included the 1% coupon?
spk06: Yes, coupon is $1.7, and the normal amortization is $2.1 million, and the forgiveness related is $1.8 million, which totals to $5.6 million.
spk08: Great, and just what is the remaining fees to recognize from PPP?
spk06: Sure. We have a total of $15.6 million of net fee remaining as of June 30.
spk08: Thank you very much. Sure.
spk05: Again, if you have a question, please press star, then 1. Our next question will come from Steve Marcia with Capital Securities Management. Please go ahead.
spk04: Hello, everyone. Congratulations on a good quarter. Just two quick questions. What do you anticipate the tax rate going forward for the second half of this year? Will it maintain itself between 24% and 25%? And then the second question is, under what type of scenario might you potentially increase your dividend going down the road?
spk06: Let me answer the tax question first. We expect about 25 percent of effective tax rate is the run rate, at least for the rest of the year. And dividend-related, I think there's a number of moving parts or contributing factors for us to consider change from the 14 cents per quarter. Obviously, our earning power, which we expect as our credit quality is improving, the provision for loan losses will smaller and as we have a higher income from the loans and the earning assets, our quality of the earnings will get stronger. So it will support for 14 cents or higher dividend payout. But also we do, as Kevin mentioned, share repurchase is one of our considerations. So it will be All those things will be considered together, but I feel very comfortable maintaining 14 cents per share for near future.
spk04: Okay. Thank you.
spk05: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Please go ahead.
spk09: Thank you. Once again, thank you all for joining us today. We hope everyone stays safe and healthy, and we look forward to speaking with you again next quarter. So long, everyone.
spk05: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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