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spk01: Good day and welcome to the Hope Bank Corp's 2021 Third Quarter Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Angie Yang, Director of Investor Relations. Please go ahead.
spk02: Thank you, Matt. Good morning, everyone, and thank you for joining us for the Hope Bank Corp 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 presentation 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 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 FCC, 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 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 one hour for this call, as usual. Presenting from the management side today will be Kevin Kemp, Hope Bancorp's Chairman, President, and CEO, and Alex Koh, 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?
spk07: 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. 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 45 cents 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. Newland 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 non-interest-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 owning 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 off 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 help 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 four. 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 higher 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 healthcare 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 PPPs and strategic loan sales and transfers, SBA loans in our portfolio would have increased 11% quarter-over-quarter. Our CRA 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 improved the 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 30th, modified loans decreased to below 1% of total loans, down from 2.4% as of June 30 of 2021. Our COVID-19 modifications have been maturing as scheduled. and we expect they will wind down to nearly zero by the end of the year. Now I will ask Alex to provide additional details on our financial performance for the third quarter. Alex?
spk03: Thank you, Kevin. Beginning with slide five, 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 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 $164 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 four basis points quarter over quarter to 3.07%. The increase in our net interest margin reflects an eight 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 six 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 yield and deposit cost. So at this point, we are not expecting to see much margin pressure in the fourth quarter. Moving on to slide six. 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 30th, 2021. Together with higher trending non-interest bearing demand deposits, we have steadily become more asset sensitive each quarter of this year. Now moving on to slide seven, our Non-interest 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, non-interest income decreased by $300,000. The primary drivers of the decrease included lower loan service fees, is a result of the higher level of SBA 7 loan payoffs 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 non-interest expense on slide eight. Our non-interest expense was $75.5 million, representing an increase of 3% from the preceding second quarter. The largest factor contributing to this increase was $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 employee costs were partially offset by a lower level professional fees, primarily resulting from a decline in legal fees, along with a non-recurring software impairment charge in the preceding quarter. Looking into the fourth quarter, we expect non-interest expense will trend downward from the third quarter to our more normalized range of $72 to $74 million. Now moving on to slide nine, I will discuss our deposit trends. We continue to run off higher costing time deposits and replace them with lower cost deposits through our business development efforts. During the third quarter, our non-interest 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 in time deposits, resulting in a 2% increase in total deposits quarter over quarter. The cost of our interest-bearing deposits declined six basis points quarter over quarter, and our total cost of deposits decreased four basis points. This decrease represents our eight consecutive quarters of declining deposit costs. Now moving on to slide 10, I will review our asset quality. Non-accrued loans and substandard loans decreased significantly by 51% and 36%, respectively, from the prior quarter. Non-accrued loans decreased by $57 million quarter-over-quarter due to three primary factors. First, we charged off a large relationship that had moved to non-accrual status in the first quarter of this year. Second, we had a couple of large payoffs of non-accrual loans this quarter. And finally, the transferable loans to helpful sale also contributed to the decrease in non-accrual loans. Substandard loans decreased by $137 million, quarter over quarter, as a result of the loan sales and transfers, as well as the charge-offs and the payoffs 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 a borrower being involved in a legal dispute. With regard to the loans transferred to Health for Sale, in the third quarter, as of today, we have completed the sales of $69 million of these loans since the quarter end and anticipate that the remaining loans transferred to Helpful Sale will be sold during the fourth quarter. The loans transferred to Helpful 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 1 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 non-accrued loans, non-performing assets, and non-performing 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 30th, 2021, we continue 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 prior quarter and the 63 basis point 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 total common stock outstanding by approximately 3.5 million shares compared with the end of the prior quarter. Let me turn the call back to Kevin.
spk07: 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 corporations 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 toward 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% are 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 non-interest 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 US economy, as well as our borrowers, continue to recover from the pandemic. All together, 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.
spk01: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Chris McGrady with KBW. Please go ahead.
spk06: Hey, good morning.
spk07: Good morning. Good morning, Chris.
spk06: 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?
spk07: 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 percent, I think it would be a good idea for us to consider another authorization sometime soon. David Chambers- Okay.
spk06: Great. 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 investment. So more broadly beyond the quarter, how should we be thinking about the cadence of expenses from here?
spk03: Yeah, as we reported this quarter, we had a little bit increase on non-interest 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 nine months. And I don't expect the 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 the 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 to $74 million of run rate is what I would expect.
spk07: 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 percent 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 non-interest expenses within our more normalized range of $70 to $74 million.
spk06: That's great, Kevin. If I could just make one end of the clarification, the $43 million of charge-offs in the quarter, I'm interested in how that kind of mapped to the large non-accrual, 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 you know, figure out where the loss content was within the three things you called out. Thanks.
spk04: Hi, this is Peter. I can address that one for you here. So we did have an elevated level of charge-offs 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 were 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-ups was due to the larger relationship that we discussed.
spk06: Okay. Thank you.
spk01: Again, if you have a question, please press star then 1. Our next question will come from Gary Tenner with DA Davidson. Please go ahead.
spk05: Thanks. Good morning. This is a bit of a follow-up, I suppose, to the last question, but in terms of the property types, you know, that were sold in the quarter, you know, if I look at your data you provide, on your tables in terms of the real estate loans by property type, other than it appearing that there was some hotel-motel involved in the sales and transfers. It doesn't quite jump out at me in terms of what other property types were represented there. So could you talk to that point at all?
spk04: 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, a smaller portion of the hotel-motel we continued 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, you know, we looked at the two primary categories where we felt that there was risk stemming from the pandemic, which is the hotel and the retail. 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 you know, reducing levels of reserves and things like that. But to answer your question, yeah, it was mostly from the hotel and the retail sectors.
spk05: Okay. And obviously a good portion of your commercial real estate funding is 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 in the space. You just needed to kind of de-risk some specific credits.
spk04: That's correct. So 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 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.
spk05: Great. Thank you for that. In terms of loan sales going forward, will you be continuing to sell both the SBA and single-family production?
spk07: Yes. We will continue to sell 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 a in excess of $280 million of a guaranteed portion of SBA loans. So we are, you know, 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.
spk05: Okay. And then last question for me in terms of the multifamily business that, that, show good strength this quarter. Can you tell us specifically the yields in the production in that segment this quarter?
spk04: 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.
spk05: Okay, thank you. Thank you.
spk01: Again, if you have a question, please press star then 1. Our next question is a follow-up from Chris McGrady with KBW. Please go ahead.
spk06: Yeah, thanks for the follow-up. The question is, you know, you've had a lot of success on the deposit diversification over the last couple years. I'm interested in kind of your thoughts about sustainability of these really strong growth, and particularly non-interest-bearing. I know there's some new verticals. But any thoughts on just deposit growth over the next several quarters?
spk03: Yeah. We had a great success, especially on the non-interest-bearing deposits. And when we look at the composition of that big increases, we see in two types, one from the institutional from CBZ deposits as well as lots of retail deposit increase. And we believe that retail deposit is mainly coming from the government subsidized or PPP, those loans. Maybe there is some temporary nature. So there will be some runoff. I don't think there will be a dramatic runoff for those retail sites. And going back to the CBZ or institutional non-interest bearing deposit, we see it's very stable. So we do not expect a meaningful runoff for that institutional noninterest bearing deposit. So both two 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.
spk06: All right, great. Thank you.
spk03: Maybe, Gary, can I get back to you? The most family, the yield, we just found out it was around a 3.03% yield.
spk01: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk07: 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.
spk01: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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