Hope Bancorp, Inc.
Q1 2021 Earnings Call Transcript

Published: 28 Apr 2021

[Operator:]

Good day, and welcome to the Hope Bancorp 2021 First Quarter Earnings Conference Call. I would now like to turn the conference over to Angie Yang, Director of Investor Relations. Please go ahead.

[Angie Yang:]

Thank you, Sarah. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2021 first quarter investor conference call. As usual, we will begin with the 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.

[Kevin Kim:]

Thank you, Angie. Good morning, everyone, and thank you for joining us today. Let's begin on Slide 3 with a brief overview of our financial results. During the first quarter, we continued to deliver solid financial performance, while making additional progress on the strategic initiatives to enhance the long-term value of our franchise, most notably, improving our loan and deposit mix, while maintaining disciplined expense control. Given the significant reserve we built last year and with our loan portfolio performing consistent with our expectations, we expect considerably lower levels of provision expense this year, which will positively impact our level of profitability.

[Alex Ko:]

Thank you, Kevin. Beginning with Slide 7, I will start with our net interest income, which is total $122.6 million, an increase of 2% from $120.8 million in the preceding fourth quarter and representing our third consecutive quarter of increasing trend. The growth in net interest income this quarter was due to a 25% reduction in interest expense as a result of the lower cost of deposits. In the first quarter, our net interest margin increased 4 basis points to 3.06%, which represents our third consecutive quarter of margin expansion. This continued improvement in our net interest margin was driven primarily by lower deposit costs. Excluding purchase accounting adjustment, our net interest margin increased by 5 basis points quarter-over-quarter during the first quarter of 2021. The success we are having with gathering lower costing deposits has provided additional opportunities to bring our deposit costs down as we have $1.6 billion in time deposits maturing in the second quarter at a weighted average rate of 65 basis points. This will provide an opportunity to continue to expand our net interest margin through the next quarter.

[Kevin Kim:]

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 to deliver consistently strong performance, driven by our continued progress in reducing our cost of deposits, expanding our net interest margin, maintaining disciplined expense control and seeing reduced credit costs, in line with improving economic conditions. As we progress through the year, we expect to see a higher level of loan growth, which should enable us to favorably remix the balance sheet towards higher yielding earning assets, generate more revenue growth, realize more operating leverage and produce further increases in our profitability. Our loan pipeline is increasing and we are seeing more loan demand as our customers become increasingly confident in a stronger economic recovery in the second half of the year. This should lead to a higher level of loan production in the coming quarters. Additionally, we have recently expanded our corporate banking group to include a team that will focus on the newly initiated healthcare vertical. The team we added is a highly experienced, highly productive group with expertise in developing full banking relationships with hospitals, assisted-living facilities, medical groups, outpatient centers and other healthcare-related businesses. We are already seeing the pipeline in this vertical build and we expect to see it make meaningful contributions to our loan production and core deposit gathering in the second half of the year. And, as we grow this vertical in the future, it will provide another vehicle towards our strategic goal of continuing to improve the mix of our loan portfolio. In summary, we are off to a great start this year. We are executing well on all of our initiatives to enhance the value of our franchise. We are seeing positive trends in business development efforts and our loan portfolio is performing as expected with the help of our modification program. We expect the continuing economic recovery will lead to steady improvements in both loan growth and asset quality as well as support lower provision levels this year versus 2020. Accordingly, we believe we are well-positioned to deliver strong financial performance and enhanced profitability over the rest of the year. With that, we would be happy to take your questions and add any additional color as requested. Operator, please open up the call.

[Operator:]

Our first question comes from Chris McGratty with KBW. Please go ahead.

[Chris McGratty:]

Kevin, maybe just starting with you, I mean, you guys have done a great job remixing the deposits almost 40% non-interest-bearing and running down the CDs. I guess, I'm interested, how much more you think you could remix going forward? And ultimately, I'm trying to solve for how much do we think net interest income is going to grow because of these efforts and the improving loan growth? Thanks.

[Alex Ko:]

For sure. Chris, this is Alex. Let me start to respond to that. We have, as you mentioned, a pretty good improvement on especially non-interest-bearing demand deposits. That's from the institutions that we have been working for many, many years. And now, we are actually getting more and more deposits. So, I think it will continue and maybe in excess of 40%, I do not know exactly. But given the rate that we see, I mean, the interest rate and liquidity, I think it will continue a little bit to expand our non-interest-bearing income position. And in terms of impact to net interest income, obviously that's almost kind of deposit cost fees, even though some of the non-interest bearing deposit we paid some ECR, but that's a relatively lower rate. So, I think it will definitely help to boost our net interest income going forward.

[Chris McGratty:]

Okay. And then, your comment about the service charge run rate, the new run rate, I guess lower than $2 million a quarter. I know those are typically pretty high-margin businesses. How do we think - maybe the question is about expenses - how do we think about any potential offset on the expenses or what's a fair run rate on expenses? Thanks.

[Alex Ko:]

Sure. I don't expect our run rate for the expense will materially different from what we have in this quarter. Given our salary and benefit-wise, I think it will be pretty much similar level. And we will have some, again, the gains on our savings on our previously announced branch rationalization, but it will be pretty much offset with others. So I would say, it will be pretty much similar level of what we have reported in this quarter.

[Chris McGratty:]

Great. And then, if I could, just one more on the PPP fees. Could you just let us know what's yet to be realized?

[Alex Ko:]

Sure. The PPP fees that we have recognized for this quarter was about $2.8 million. And still to be further recognized is remaining at March 31 is about $18.3 million.

[Operator:]

Our next question comes from Matthew Clark with Piper Sandler. Please go ahead.

[Matthew Clark:]

Just on that last question on the $18.3 million, how much of that is for round two? And then, what kind of amortization schedule are you using there?

[Alex Ko:]

We are amortizing two years for those. You're talking about, Matthew, the PPP loan, right?

[Matthew Clark:]

Yes, I'm asking about the $18.3 million of remaining PPP fees. How much of that is going to come from round two? And over how many years you are amortizing that?

[Alex Ko:]

Yes. It will be amortized over the three years, but vast majority - almost $14 million out of that $8.3 million is coming out of the second round of PPP and the rest, $4.4 million, coming out of the first round of PPP. And those are the net fees.

[Matthew Clark:]

Great. And then, the average PPP balance in the quarter and end of period balance you had it?

[Alex Ko:]

Yes. Average balance for Q1 was about $583 million and period end balance was $715 million.

[Matthew Clark:]

Okay. Thanks. And then, on the pipeline, it sounds like it's increasing. Can you give us kind of order of magnitude how much that pipeline is up year-over-year or linked quarter?

[Kevin Kim:]

Well, let me address that. We have a strong pipeline and obviously it is much larger than it was at the beginning of the year. And we gave the guidance of mid to high-single digit growth at the beginning of the year and we believe that is still a good projection as of today. When we look at the strength of our pipeline, together with our initiatives to further expand our business development efforts by corporate banking group and SBA units as well as the launch of the portfolio mortgage products by our mortgage banking group at the end of March, I think the mid to high-single digit growth projection is still realistic.

[Matthew Clark:]

Okay. And then, just on expenses, that $1.4 million from FAS 91 for deferred origination costs this quarter was round two. I'm assuming your comments about keeping the run rate similar to first quarter assumes that $1.4 million is offset by some savings to keep it around $70.5 million.

[Kevin Kim:]

Yes. That's correct, Matthew.

[Matthew Clark:]

Okay. Okay. And then, just remind us, do you guys have an SBA portfolio that you - within your portfolio that you retain? I can't remember if you sell all your production on the SBA front or not. And if you do, what is that - what's the health of that portfolio look like as some of these subsidies covering off in October?

[Kevin Kim:]

Matthew, as of March 31, we have approximately $220 million in SBA loans held in our portfolio. And during the several quarters, we have kept all the SBA loans in our portfolio and have not sold during that time. And during that time, the premiums in the market have gone up significantly. And given the high premiums that have been available to us, I think we are in the process of re-evaluating our current strategy to portfolio SBA loans on our books, but we have not made the decision yet. So, we are seriously considering selling some of the loans and we have not decided when we will begin to do that. And if we do that, we have not decided yet whether we will sell only new productions of SBA loans or we will sell some of the loans in our existing portfolio.

[Operator:]

Our next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

[Gary Tenner:]

Thanks. Good morning. I just wanted to drill a little bit to the guidance on the provision level for the year, 160 times PPP the CECL day one, I think, brought you to about 98 basis points January 1 of last year. So, just - I know that you - obviously the provision came down quite a bit this quarter and you're projecting a year-over-year lower provision for the full year, which I think we'd all expect anyway. But just wondering what would kind of prevent you from maybe reversing a larger piece out over the next quarter or two, particularly as a lot of those hotel deferrals or modifications start to pay.

[Peter Koh:]

Sure. This is Peter. I can address that. As we're looking at the next couple of quarters here, some of the trends that we're seeing where we had a few downgrades in Special Mention and the Hotel space, we will continue to assess the portfolio as it recovers. But as we know unexpected, there is point to be some spotty recovery rates for some of the hotel portfolio, which I think is reflected in the first quarter. We may see some of that trickle into the second quarter just timing wise when we get the financials to be able to validate the information. But as you had mentioned, the economic forecast has drastically improved. And I think our models and our CECL methodology is also picking up on that. So, assuming that the economic forecast continues at the current pace, I do think that we will see some level of release towards the second half of the year is our expectation. And I think, in terms of just a normalized run rate for our reserve coverage, I think we'll be closer to the day one CECL accounting that level as well. Obviously we have to go through the time period in terms of measuring the recovery rates, particularly as it relates to the hotel portfolio, but as we know in the current marketplace right now, March - February-March, we saw some very good improving trends. We believe April will continue to show additional progress. And we are optimistic that through the spring and summer seasons, I think our borrowers in the hotel space particularly will be benefiting a lot from that. And I think that will be reflective of the - in the allowance reserve coverages eventually.

[Operator:]

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

[Kevin Kim:]

Okay. Once again, thank you everyone for joining us today. We hope everyone stays safe and healthy and we look forward to speaking with you again next quarter. Bye, everyone.

[Operator:]

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