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spk07: Good day, and welcome to the Hope Bank Core 2022 Third Quarter Earnings Conference Call. All participants will be in a listen-only mode today. Should you need any 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 telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded today. I would now like to turn the conference over to Angie Yang, Director of Investor Relations. Please go ahead.
spk01: Thank you, Joe. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2022 Third Quarter Investor Conference Call. As usual, we will be using a slide presentation to accompany our discussions this morning. If you have not done so, 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 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 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, 2022 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 2022 third 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, and Alex Koh, Senior Executive Vice President and Chief Financial Officer. Peter Koh, Senior Executive Vice President and 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?
spk04: 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 delivered a strong performance in the third quarter, which reflects the improved earnings power of our franchise and ability to perform well in a variety of economic environments. Despite the macroeconomic headwinds of inflationary pressures and concerns about a potential recession, We generated an increase in earnings per share and pre-provision net revenue compared with the prior quarter, with all of our PPNR profitability metrics improving as well. We reported net income of $53.7 million, or 45 cents per share in the third quarter, up from 43 cents in the preceding second quarter, while our pre-provision net revenue increased 12 percent to $82.6 million, a record level for the company. Most importantly, due to strong loan production, margin expansion, enhanced efficiencies, and meaningfully improved asset quality, we are generating profitable growth with our pre-provisioned net revenue return on average assets increasing to 1.79% from 1.65% in the preceding quarter. while our pre-provision net revenue return on average equity increased to 16.26% from 14.66% in the prior quarter. Moving on to slide four. In the third quarter, we funded $1.35 billion in new loans, which was 5% higher than the preceding quarter, a 34% increase over the third quarter of 2021, and another record level for the company. Our strong loan production in the third quarter resulted in 6.5% loan growth quarter over quarter, over 11% year to date. As expected, given the investments we have made to build our corporate banking group, commercial lending was the largest contributor to our overall loan production, accounting for 55% of our total loan fundings in the third quarter. We dispersed a record $747 million in new commercial loans during the third quarter and the average rate of new commercial loans increased 97 basis points over the preceding quarter. Within the corporate banking group, we are getting strong contributions across industries and geographies, resulting in well-diversified loan production. In the third quarter, we had particularly strong contributions from our Texas region, which focuses on general middle market lending, our healthcare group, which joined us in mid-2021, and our teams that focus on financial institutions and telecom industry. In terms of commercial real estate, while we expected to see a softening in demand due to higher interest rates, it did not soften as much as we thought. We had $534 million of commercial real estate loan production in the third quarter, which was down slightly from the preceding second quarter and accounted for 40% of total originations. But the average rate of new CRE loans increased 99 basis points over the preceding second quarter. Overall, we saw increasing trends in loan pricing in all asset classes during the third quarter. Combined with the higher mix of commercial loan production, this resulted in our average rate on total loan production increasing by 111 basis points compared with the preceding second quarter. Moving on to slide five, the investments we have made over the years to build our corporate banking group and establish expertise in new asset classes and vertical markets have resulted in a material transformation of our loan portfolio to a significantly lower risk profile. If we look back to three years ago, at September 30 of 2019, commercial loans represented 22% of our total loan portfolio. As of September 30 of 2022, commercial loans have increased by $2.5 billion, nearly doubling in volume, and now represent 33% of our total portfolio. Our corporate banking group, has been the primary driver of increasing volumes of commercial loan fundings and a continued shift in our client base towards larger, stronger commercial enterprises, as well as a more diversified CNI portfolio. We have also seen a significant transformation of our CRE portfolio during this same time period. Commercial real estate loans accounted for 71% of our total portfolio at September 30 of 2019. Having increased by less than $1 billion over the course of three years, CRE loans as a percentage of total loans declined to 61% as of September 30, 2022. More importantly, we are making good progress in creating a more diversified, lower-risk portfolio. We continue to see solid results from the multifamily lending team we have built, which accounted for 46% of our total CRE loan originations in the quarter. As a result, multifamily continued to grow as a percentage of our total CRE loans, representing 13% as of September 30th, 2022. In contrast, our hotel-motel portfolio at the end of the third quarter represented just 11% of our CRE portfolio. down significantly from 19% three years ago. Now, I will ask Alex to provide additional details on our financial performance for the third quarter. Alex?
spk05: Thank you, Kevin. Beginning with slide six, I will start with our net interest income, which totaled $153.2 million for the third quarter of 2022, an increase of 8.2%, from the preceding second quarter. The strong growth in net interest income was largely driven by a 4% quarter-over-quarter increase in average loans receivable, a 59 basis point increase in the average loan yield, and expansion of our net interest margin. Our net interest margin increased 13 basis points quarter-over-quarter 3.49%. The expansion in our net interest margin was driven by a favorable shift in our mix of earning assets, as well as higher loan yields resulting from the repricing of variable rate loans and the higher pricing on new loan production. Overall, the yield on interest earning assets increased by 56 basis point quarter over quarter. These benefits were partially offset by an increase in deposit costs, resulting from higher rates paid on interest-bearing deposits. With a lag in deposit costs catching up to the increasing yield on interest-earning assets, we may see slight margin compression in the fourth quarter, potentially offsetting to a small degree to the year-to-date margin expansion. Moving on to slide seven, we remain in an asset-sensitive position as of September 30, 2022, and our position to benefit from higher interest rates. Of our new loan production in the third quarter, 57% represented variable rate loans. And as of September 30th, 2022, variable rate loans increased to 46% of our total loan portfolio. Now moving on to slide eight. Our non-interest income was $13.4 million for the third quarter, an increase of 5% over the preceding second quarter. We had a lower gains on sale of SBA loans reflecting a lower volume of loans sold and the lower net premiums on SBA loan sales. We also recorded lower gains on sale of residential mortgage loans due to a lower volume of loans sold. These decreases were mostly offset by higher deposit account service charges, an increase in swap fee income, and reduction in fair value losses on equity investment. Moving on to non-interest expense on slide nine. Our non-interest expense was $83.9 million, compared with $80.4 million in the preceding second quarter. We had decreases in most expense areas, but these were offset by increases mainly in two areas. First, we had an increase in salary and benefit expense, largely reflecting higher incentive compensation accruals in light of our strong financial performance. And second, other non-interest expense trended higher, reflecting an increase in earnings credit expense on deposit accounts. With our strong revenue growth outpacing our increase in expenses, our expense efficiency ratio improved to 50.4% from 52.1% in the preceding second quarter. Now moving on to slide 10, I will discuss our key deposit trends. Our total deposits increased 3.1% from the end of the prior quarter. While our business development efforts continue to result in the consistent addition of new commercial deposit relationships, we had one particularly sizable outflow from a large corporate client as they capitalized on a significant acquisition opportunity to expand their business. Given that much of our loan pipeline included in the low risk variable rate commercial loans that we have been targeting, we determined that the longer term benefits of adding these loans and the new commercial relationships outweighed the consideration of time deposits that were utilized to support the strong loan growth in the quarter. Overall, the cost of our interest-bearing deposits increased by 71 basis points quarter over quarter due to higher rates across all of our deposit categories. This resulted in a 46 basis point increase in our overall cost of deposits. At this point in the rising rate cycle, management of our deposit costs and mix is a top priority as we remain focused on generating profitable growth. We have a number of deposit strategies in place, which we expect will help in increasing our core deposits and mitigating the pressures of rising deposit costs. Now moving on to slide 11, I will review our asset quality. Our enhanced credit administration processes and tightened underwriting criteria contributed to a continuation of positive trend in our portfolio in the third quarter, with reductions in all categories of non-performing assets and criticized loans. Total non-performing assets at September 30, 2022 decreased to $97 million and reflected reductions in non-accrued loans, delinquent loans 90 days or more on accrued status, accruing TDRs, and other real estate owned. At quarter end, total non-performing assets represented 51 basis points of total assets, down from 61 basis points at the end of the second quarter. Total crisis loans declined by another 17% in the third quarter and represented our fifth consecutive quarter of steady reduction. Our loss experience remains minimal. We had just $219,000 in net charge-offs during the third quarter, or 0.01% of average loans receivable on an annualized basis. Here to date, we have net recoveries of $18.6 million. We recorded a provision for credit losses of $9.2 million, which primarily reflects the strong growth in the loan portfolio during the third quarter and addresses future economic headwinds. At September 30, 2022, Our allowance for credit losses coverage ratio remained at 1.04% of loans, while our coverage of non-performing assets increased to 166% from 137% at June 30, 2022. Now moving on to slide 12. Let me provide an update on our capital position and returns. The accelerated interest rate hikes during the third quarter continued to result in unrealized losses in our investment security portfolio, which negatively impacted tangible common equity to tangible asset ratio by approximately 35 basis points in the 2022 third quarter. Our tangible common equity to tangible asset ratio remained strong at 8.09% as of September 30th, 2022. And changes and unrealized losses do not have an impact on regulatory capital ratios. As announced yesterday, our Board of Directors declared a quarterly cash dividend at 14 cents per share, which remains the same as last quarter. During the quarter, we did not repurchase any stock and continue to have available $35.3 million of our $50 million stock repurchase program. As of September 30, 2022, all of our capital ratios remained at strong levels to support our continued balance sheet growth. With that, let me turn the call back to Kevin.
spk04: Thank you, Alex. Now moving on to slide 13, I will wrap up with a few comments about our outlook. While the operating environment has certainly become more challenging, we expect to continue benefiting from the significant shift we have made to a more relationship-focused commercial banking model over the past few years. With the growth we had in the third quarter, Commercial loans now represent one-third of our total loan portfolio, which reflects the success we have had in building our corporate banking group. This has had a positive impact on our loan production volumes, our deposit gathering, and the diversification of our franchise. With each passing year, our CBG group has made a larger contribution to our growth and diversification strategies accelerating our progression to a lower-risk, high-performing regional bank. With the success we have had with the CBG initiative, we have also steadily built Bank of Hope's reputation as an attractive destination for experienced commercial bankers, which in turn has enhanced our ability to recruit banking talent to continue our expansion and target new industries and geographic markets. More recently, we have added teams in Florida, Chicago, Boston, and San Francisco with the Boston team focused on private banking and the San Francisco team focused on the tech industry. We expect to continue to see growth in commercial loans and deposits, further diversification, and stronger asset quality over the longer term given our reduced CRE concentration and the stronger, more liquid commercial enterprises that now comprise a larger percentage of our client base. In part due to the stronger commercial banking capabilities that we have built, we have been able to effectively manage through the macroeconomic headwinds that have accelerated throughout the year. Through the first nine months of 2022, we generated a loan growth of 11%, or 13% excluding SBA PPP loans, which has helped produce the margin expansion, efficiency improvements, and increases in profitability that we have seen, while we continue to maintain strong capital levels and asset quality. As we look forward to the final quarter of the year, we expect a higher rate to have an increasingly larger impact on CRA loan demand. While the fourth quarter tends to be a seasonally slower quarter for commercial loan production, our commercial loan pipeline continues to be relatively strong as the more recent additions to the CBG team ramp up their business development efforts. Particularly as the expected recession draws nearer, we are being ever more selective with the loans that we are adding to our portfolio and focusing on those that are more recessionary resistant have greater ability to absorb interest rate and macroeconomic risk, and ultimately contribute to profitable growth for the company. So while we fully anticipate continued growth for balance of the year, it would be prudent for us to expect loan growth to moderate meaningfully from the very strong third quarter, given all of these factors, mitigating the impact of the accelerated interest rate hikes on our deposit costs will remain a top priority for our leadership. And even with moderated loan growth expected in the near term, together with improved efficiencies that we are realizing as we continue the balance sheet growth and the ongoing improvements in our asset quality, we believe that we are well positioned to continue generating strong financial results for our shareholders. With that, we would be happy to take your questions and add any additional caller as requested. Operator, please open up the call.
spk07: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw a question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. And our first question here will come from Clark Wright with DA Davidson. Please go ahead.
spk02: Hi, sir. This is Gary Tenner, actually, from DA Davidson. Quick question in terms of what the September 30 deposit spot rates were, interest-bearing or total.
spk05: Sure, Gary. Deposit spot rate as of 9.30, total interest-bearing deposit spot rate was 1.84%. And if you want to have a total deposit spot rate was 1.21%. Thank you.
spk02: And so the commentary in terms of the NIM compression for the fourth quarter, as you think about kind of ongoing, you know, deposit growth and costs going higher. Does that NIM compression potentially accelerate in the first half of 2023 or, you know, maybe just characterize how you see the margin first half next year?
spk05: Yeah, Gary, that's a good question. Actually, we are trying to evaluate that hard, but given there's a lot of uncertainties and the variables, No, we are not actually giving a guidance for NEEM for 2023. We kind of limited giving our guidance for Q4 with a flat or small compression. As the lag in deposit pricing for our CD, it will catch up. So I don't think it will continue. But there is a lot of variables. and for 2023.
spk02: Thank you, Alex. And just last question, if I could, just in terms of capital, you know, total risk-based capital under 12%, it was up over 13% probably a year ago. Any thoughts on doing anything to augment the total risk-based capital number in terms of sub-debt or otherwise?
spk05: Yeah, sure. You know, we believe this, you know, capital ratio as of today is strong, and obviously we will assess the need for any augmentation of the capital as we move forward, especially there is a convertible bond debt that is scheduled, can be potentially to be put, but we are well aware of that. But given our strong core earning power, we maintained our dividend at $0.14 per share, even though we stopped repurchasing our shares. But again, we believe our capital ratios in all measures remain strong. But again, we need to assess on a regular basis for any augmentation of the capital going forward.
spk09: Thank you.
spk08: Again, if you have a question, please press star then 1 to join the queue.
spk07: Our next question here will be from Matthew Clark with Piper Sandler. Please go ahead. Hey, good morning, everyone.
spk06: Just following up on the interest-bearing deposit costs and, you know, I think your interest-bearing deposit beta this quarter is 50%, 40% so far for the cycle. What are you guys assuming for? your deposit beta through the cycle on an either interest-bearing or total basis.
spk05: Yeah, Matthew, you know, it's really difficult to have a 2023 deposit beta. Again, given volatilities and in the interest rate hike that we recently saw. So we will try to give a data guidances for next 2023 in the next quarter when we have a conference call. Okay.
spk06: And then just, go ahead.
spk05: Oh, no, go ahead.
spk06: Okay, understood. And then just shifting to your outlook on the loan to deposit ratio crept up a little bit to 100%. It does sound like loan growth is going to slow pretty dramatically here. But what are your plans for managing the loan to deposit ratio going forward? And what's your limitation?
spk05: Yeah, you know, Matthew, let me start with kind of some sort of assessment of our increased net loan to deposit ratio Q3. And we will give you some sort of guidance as well. As we mentioned during the earlier remarks, there was one kind of isolated large outflow. It was in excess of around $600 million of deposit. So without that, if we didn't have that outflow, because we believe that is isolated, and we expect, we still maintain a good relationship with that particular large depositors. and we expect that will come back, even though it went out due to their investment opportunity that they had in Q3. So if we didn't have that outflow, our loan-to-deposit ratio would have been in the neighborhood of 96%. So the bank, we have been managing our loan-to-deposit ratio 96%, 95% level throughout the quarter. So that is still our target loan-to-deposit ratio going forward, even though later on we might even further lower, but it will take a longer time perspective. So I think higher loan-to-deposit ratio for Q3 was relatively temporary basis.
spk06: OK. On expense growth, I think we can easily back into your guidance for the upcoming quarter. It looks like there was an uptick in earnings credits within other expense, which would probably continue here in 4Q. But I guess how are you thinking about inflationary pressures as we get into next year and whether or not the rate of increase in terms of comp is higher than years past or not?
spk04: Matthew, let me respond to that. First of all, on the loan demand side, obviously the fourth quarter is, this isn't really a softer quarter, but in addition to that, the significant pace of rate increases and also uncertainties about the timing and depth of the recession We believe that a lot of investors will be more reluctant to move forward with their planned investments, so that goes to the result of softer loan demand. In addition to that, higher interest rates make it more challenging for them to meet our stringent underwriting criteria. The loan growth in the third quarter was pretty robust, and our fourth quarter loan production will be at a lower volume relative to the fourth quarter. In terms of non-interest expense side, as you mentioned, the ECR expense will be higher in the fourth quarter than in the third quarter. And I think that is pretty predictable. So our non-interest expense in the fourth quarter will be higher than the non-interest expense of the third quarter. And we expect a little uptick in the total non-interest expense in the fourth quarter. If I add one more thing, Matthew, in terms of loan demand side in connection with that, you know, our loan growth for the year will be at the higher end of the high single to low double digit range as we previously guided. But there is a good chance for us to even to exceed that range on an XPPP basis for full year 2022.
spk06: Okay, thanks again.
spk08: Again, if you have a question, you may press star or 1 to join the queue.
spk07: This will conclude our question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk04: 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. Thank you.
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