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spk05: Good morning and welcome to the HOPE Bancorp 2023 Second Quarter Earnings Conference Call. All participants will be in 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. Please note this event is being recorded. I would like now to turn the conference over to Angie Yang, Director of Investor Relations. Please go ahead.
spk03: Thank you, Alan. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2023 Second Quarter Investor Conference Call. As usual, we will be using a slide presentation to accompany our discussion this morning, which is available in the presentations page of our IR website. Beginning on slide two, let me begin with a brief statement regarding forward-looking remarks. The call today may contain forward-looking projections regarding future financial performance of the company and future events. These statements may differ materially from the actual results due to certain risks and uncertainties. In addition, some of the information referenced on this call today are non-GAAP financial measures. For a more detailed description of the risk factors and a reconciliation of GAAP to non-GAAP financial measures, please refer to the company's filings with the SEC, as well as the Safe Harbor, as well as, sorry, as well as the Safe Harbor statements in our press release issued earlier today. Hope Bancorp assumes no obligation to revise any forward-looking projections that may be made on today's call. Now, we have allotted one hour for this call. Presenting from the management side today will be Kevin Kim, Hope Bank Corp's Chairman, President, and CEO, and Juliana Belisca, our Chief Financial Officer. Peter Koh, our Chief Operating Officer, is also here with us as usual and will be available for the Q&A session. With that, let me turn the call over to Kevin Kim.
spk00: Thank you, Angie, and good morning, everyone, and thank you for joining us today. Now, let's begin on slide three with a brief overview of the quarter. For the second quarter of 2023, our net income was $38 million, and our diluted earnings per share were 32 cents. Our pre-provisioned net revenue was $60 million, an increase of 11% from the first quarter. Our asset quality remains healthy and we recorded net recoveries of $552,000 in the second quarter. The operating environment for regional banks continues to be challenging and we are focused on prudent risk management, maintaining high liquidity levels, and building strong capital. Our tangible common equity ratio increased to 8.04% at June 30 of 2023, up 13 basis points from March 31. Quarter over quarter, our risk-based capital grew and ratios expanded. Continuing on slide four for a more detailed review of our strong capital position. Our company's total capital was $2.1 billion at June 30, 2023, growing 2% quarter over quarter. At June 30, our common equity tier one ratio was 11.06% up 31 basis points from March 31st. And our total capital ratio was 12.64% up 39 basis points quarter over quarter. Adjusting for the allowance for credit losses and including hypothetical adjustments for investment security marks, all of our capital ratios remain high. Given the strength of our capital, our board of directors declared a quarterly common stock dividend of 14 cents per share payable on August 17th to the stockholders of record as of August 3rd. Moving on to slide five. During the second quarter, we continued to maintain a higher than usual level of cash and cash equivalents on our balance sheet and we believe this is prudent in the current banking environment. At June 30th of 2023, our cash and cash equivalents were $2.3 billion, compared with $2.2 billion at March 31st. At the end of the second quarter, our available borrowing capacity, together with cash and cash equivalents and unplatched investment securities, was $7.75 billion, equivalent to 50% of our total deposits and well exceeding our uninsured deposit balances. In May, we paid off $197 million of our convertible notes with existing cash. Now continuing to slide six, at June 30 of 2023, our total deposits were $15.6 billion, down modestly 1%, quarter of a quarter, and up 4% year-over-year. In navigating this cycle, Bank of Hope has benefited from the granularity of our deposits. Our average commercial account size is approximately $300,000, and the average consumer account size is approximately $50,000. Over a third of our balance is consumer deposits, which are up 3% year-to-date and 13% year over year. We believe this is reflective of the strength and longevity of our relationships with our depositors. At June 30 of 2023, the bank's uninsured deposit ratio was 36% compared with 38% at March 31st. Across the organization, we are focused on strengthening our deposit franchise and expanding our relationships with our clients. We have been steadily investing in our treasury management products and services, and the efforts of our team have been generating a steady pace of growth in the number of new TMS relationships, increasing the stickiness of our demand deposits. Now, moving on to slide seven. In the second quarter, we funded $491 million in new loans, including $332 million in commercial and industrial loan production. The decrease in loan production reflects current market dynamics, including declining customer demand in a high interest rate environment, as well as our disciplined pricing and conservative underwriting. The average rate on our new loan production was 8.37% in the second quarter, up 84 basis points from the first quarter. Moving on to slide eight. At June 30 of 2023, our loans receivable were $14.9 billion, a decrease of 1% quarter over quarter, and up 2% year over year. Second quarter pay-offs and pay-downs of $647 million exceeded the volume of new loan originations. Our portfolio is well balanced between the major loan types of commercial real estate, including owner-occupied commercial real estate and multifamily mortgage, commercial and industrial, and residential mortgage loans. Our commercial and industrial loan portfolio is well diversified by industry. Moving on to slides 9 and 10 for an overview of our commercial real estate portfolio. Our commercial real estate loans are well diversified by property type. and have low loan-to-value ratios across all segments. Less than 3% of the portfolio has a loan-to-value ratio over 70%. The vast majority of our commercial real estate loans are full recourse with personal guarantees. Office commercial real estate is a small segment of $464 million, representing 3% of total loans and with no central business district exposure. At June 30 of 2023, 99% of our office portfolio was pass graded. Our commercial real estate portfolio is very granular with very few loans over $30 million in size. We are well diversified geographically across the sub markets in our footprint with very small exposure to markets such as San Francisco or Manhattan. and no exposure to the central business district in downtown Los Angeles. With that, I will ask Juliana to provide additional details on our financial performance for the second quarter. Juliana?
spk08: Thank you, Kevin, and good morning, everyone. Beginning with slide 11, our net interest income totaled $131 million for the second quarter of 2023, representing a decrease of 2% from the first quarter. our second quarter net interest margin was 2.70%, down 32 basis points quarter over quarter. This reflects a higher cost of funds and an increase in average borrowing, partially offset by expanding loan yields and growth in average interest-earning cash and equivalents. The increase in average interest-earning cash and equivalents reflects our conservative approach to navigating current market volatility. Funded through borrowing, the elevated level of cash was a positive contributor to net interest income. Moving on to slide 12, our 2023 second quarter average loans of $15.1 billion decreased 1% lean quarter, and the average yield on our portfolio increased to 5.99%, up 24 basis points quarter over quarter. On slide 13, you can see that our average deposits were essentially stable at $15.8 billion in the second quarter. The average cost of deposits increased to 2.79%, up 42 basis points quarter over quarter. On slide 14, our non-interest income was $17 million in the 2023 second quarter, up from $11 million in the first quarter. Second quarter income included a $5.8 million cash distribution from a gain on an investment in an affordable housing partnership. Quarter over quarter, service fees on deposit accounts grew and customer swap fee income increased. Moving on to non-interest expense on slide 15. Our non-interest expense was $87 million in the second quarter of 2023, a decrease of 3% quarter over quarter. This reflected lower salary and benefits expense partially offset by an industry-wide increase in the SDIC annual base assessment rate of two basis points. Our efficiency ratio in the 2023 second quarter improved 325 basis points to 59.1%, down from 62.4% in the first quarter. Now, moving on to slide 16, I'll review our asset quality, which continues to be healthy. We recorded a provision for credit losses of 8.9 million for the 2023 second quarter, building our allowance for credit losses to 173 million at June 30th, 2023. Our coverage ratio increased to 1.16%, up from 1.09% at the end of the prior quarter. In the second quarter, we recorded net recoveries of 552,000, equivalent to one basis point of average loans annualized. Total non-performing assets of June 30th were 77 million, a decrease of 3% quarter over quarter, and equivalent to 38 basis points of total assets. Year over year, our non-performing assets are down 30%. At the end of the second quarter, our criticized loans ratio was 2.3%, up quarter over quarter and down year over year. Our criticized loans were $345 million in June 30th, 2023, up from $305 million in March 31st. Quarter over quarter, substandard loans decreased and our special mention loans increased. Looking at our special mention loans, we note that the borrower's financial performance is generally improving and or we have takeouts for the loans in place. Overall, we are not seeing any broader systemic issues of concern within the loan portfolio. With that, let me turn the call back to Kevin for a discussion of our outlook.
spk00: Thank you, Juliana. Moving on to slide 17, I will wrap up with a few comments about our outlook for the second half of 2023. Given the lower level of loan demand from our customers, competitive market pricing, and an elevated pace of paydowns and payoffs, in a high interest rate environment, we now expect that our total loans will be generally stable in the second half of the year relative to June 30th. With the expectation of higher for longer interest rates in the second half of the year, we anticipate that our net interest income will modestly pressure through the balance of the year. We expect our non-interest income to be essentially stable on a quarterly basis relative to the second quarter and excluding the affordable housing gain. We will continue to tightly manage our expenses and expect non-interest expenses to be essentially stable on a quarterly basis relative to the second quarter, excluding earned interest credits, which are fully subject to interest rate changes. And we expect our asset quality to continue to be healthy. The current operating environment presents challenges, but with our conservative approach to balance sheet management, we are well positioned to capitalize on the opportunities afforded to Bank of Hope as the largest and strongest Korean American bank in the nation. With that, we would be happy to take your questions and add any additional color as requested. Operator, please open up the call.
spk05: 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 are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Chris McGrady of KBW. Go ahead.
spk04: Oh, great. Good morning. Maybe, Juliana, I'll start with you. The net interest income guidance, I'm interested in a few of the assumptions. I guess terminal betas, any migration you see further in the deposit mix. And then also I'm interested in the CD growth. Like, what's the maturity schedule look like for your CDs?
spk08: Thanks. Hi, Chris. Our terminal deposit beta assumptions are for total deposits. approximately 60%. The mixed shift has started to stabilize, the rate of change has started to stabilize in between the DDA and the interest-bearing accounts. And for our CDs, we have, they're predominantly 12-month CDs. That's the most popular product, although we are actively originating shorter-duration CDs at this point in time. And that maturity schedule There's an elevated level of maturities in the second half of the year in response to the maturities related to the promotions that were done last year. But other than that, they are more well evenly distributed.
spk04: Okay, thank you. 68 was the number right on the total bid? I heard that.
spk08: No, I said approximately 60%. Oh, 60, 60. Okay, got it.
spk04: Yeah. Maybe a follow-up. Follow up on the margin. How do we think about, given your comments about the mix getting a little bit more stable, like do you have the margin for the month of June that you could share?
spk08: Yeah, the June margin was 2.70%. And yeah, and our month to date change in our cost of deposits is less than 10 basis points.
spk07: Actually, three basis points total, less than 10 on interest bearing.
spk04: So, $2.78 for June, $2.70 for the quarter. $2.70 for June, I said. Oh, okay. I have a bad connection.
spk08: $2.70 for June. And our total deposits spot rate through July 20th is up three basis points from June spot rate.
spk04: Okay. Got it. And then maybe one more if I can jump back out. The ECR, the new line for that, can you just remind us how much of your non-interest bearing deposits have ECRs and how we should think about that line if the Fed moves this week for Q3?
spk07: So that line cost will go up if the Fed moves this week. And in terms of the... Yeah. Yeah.
spk01: the mid 363 million or so okay thanks a lot our next question comes from matthew clark of piper sandler go ahead hey juliana um thank you all um juliana can you clarify the spot rate do you have the can you give us the rate i'm just not sure if we're comparing to the the month or the quarter? Can you just give the spot rate on deposits at the end of July or 20th, whatever number you want to give us?
spk08: Yeah, no, good question. Thanks. Our total deposit cost spot rate as of June 30th was 2.97%, and as of July 20th is 3%.
spk01: Got it. Thank you.
spk08: So change is three bips.
spk01: Yep.
spk08: Okay. And just for context, We're nearly through the whole month now, but last quarter the spot change was 24 VIPs. So the rate of change is stabilizing or slowing.
spk01: Yep. Got it. Okay. And then on the reserve build, can you give us a sense for what drove a lot of that? That was a decent step up this quarter. We haven't seen that elsewhere as much. And then, you know, what underlying businesses or industries drove the increase in special mention?
spk08: So, for special mention, the change was through a variety of C&I loans, but not a particular industry concentration. And the reserve increase quarter of a quarter was an outcome of our CECL model, which, as you know, has changes related to qualitative, quantitative factors and specific reserves. and the macroeconomic forecast. So that whole mix enabled us to build our reserve, which we think is a prudent way to manage reserves at this point in the economic cycle.
spk01: Okay, great. And then just last one from me. On your kind of outlook for deposits, you know, embedded in your assumptions, It sounds like there's less of a mix change going forward. But do you assume balances stabilize from here?
spk08: I think that, well, we definitely have some deposit goals and initiatives and programs in place to grow our balances. But what I can tell you is that month to date, relative to June 30th, our balances are up close to $200 million. So we are certainly having positive trends in our deposits that are going on as kind of the volatility that happened in the banking industry earlier in the year starts to recede more into the background.
spk07: Perfect. Thank you.
spk05: Again, if you have a question, please press star, then 1. Our next question comes from Gary Tenner of DA Davidson. Go ahead.
spk06: Thanks. Good morning. Just a follow-up on the question about CD maturities. Juliana, could you tell us what the rate is on those CDs that are maturing back after this year?
spk08: One second. So the average rate on the CDs maturing in the third quarter will be 4.13%. And in the fourth quarter will be 4.39%.
spk06: Okay. Thank you. And then just given where the stock is trading still, you know, 75% of tangible book, any thoughts on buyback or utilizing the buyback?
spk00: Our capital ratios are all strong and we'd like the growth that we saw this quarter, but, uh, At this time, I don't think we are anticipating solid repurchases anytime soon.
spk06: Great. And then last question. In terms of the multi-tenant retail, just because it's the largest of your commercial real estate segments, can you talk about kind of what amount of those loans are scheduled to reprice and mature back half of this year in 2024?
spk08: Well, we don't have the very specifics by property type handy with us right now, but we can follow up with you offline on the very specifics of that one particular property segment.
spk06: Well, and then maybe, Juliana, just in general, as you think about commercial real estate and repricing and maturing over a similar time period, how far out are you going in terms of kind of stressing and analyzing properties? the credits? Are you going out into 2024 at this point or really just back after this year in terms of kind of getting a better sense of where those borrowers lie with their ability to service at higher rates, et cetera?
spk02: Yeah, this is Peter. Maybe I'll take that one. So I think overall CRE portfolio is performing pretty good up to now. I think as we're looking at sort of that refi risk that I think you're referencing here, I think in the very initial stages, maybe early this year, we went through pretty much a deep dive and tried to stress that portfolio in terms of higher interest rates and things. And I think at this point, we feel pretty confident right now that the majority of our customers are able to refinance, I think partly due to just the lower LTVs and improving cash flows that we have seen post-pandemic. that gives them ability to refinance with us, even at the higher rates. So there are one-off cases where there are, you know, potential workouts and things, but for the vast majority of our customers, we're seeing that that refi risk is pretty low.
spk08: And Gary, just to add to the maturity of CREs that are coming up, you specifically asked about multi-tenant retail, and of those, in the remainder of 2023, it's at $72 million. and then another 127 million in 2024, but our total CRE maturities in 2023 will be 470 million, and then in 2024, 742 million.
spk07: Thank you.
spk05: As a reminder, if you have a question, please press star, then 1. Our next question comes from Chris McGrady of KBW. Go ahead.
spk04: Thanks for the follow-up. In terms of the balance sheet size, can you just remind us what level of cash is coming off the bond portfolio monthly or quarterly? And then, Kevin, you alluded to just the excess cash that's being held. Do you see this being the right amount of cash for the foreseeable future? Do you think you'll work that down? Is that part of the margin? kind of stability narrative I'm hearing?
spk00: Yeah. Deposit outflows in response to the bank failures earlier this year have been stabilized and we are starting to see some of those deposits actually coming back to the bank. And we also have product campaigns in place. And when deposit growth accelerates and the deposit situation normalizes, we think we will return to more normalized levels of liquidity. But for the time being, we think an elevated level of cash is prudent, and I think that's the case industry-wide. So we will hold the higher level of cash for the time being. That will gradually decrease as our deposit situations improve.
spk08: And to your other question, the average cash flow coming off our bond book is about $15 to $20 million a month. And we're targeting purchasing $20 to $30 million of investments with that cash flow. So replacing our investment securities, but also building that book up by about $10 million per month. So for a longer term kind of larger size investment securities book in terms of our optimal balance sheet mix kind of post this banking industry acceptance.
spk07: Okay, that's helpful. Thanks a lot.
spk05: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk00: Once again, thank you all for joining us today, and we look forward to speaking with you again next quarter.
spk07: Bye, everyone. The conference is now concluded. Thank you for attending today's presentation.
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