Hope Bancorp, Inc.
Q2 2021 Earnings Call Transcript

Published: 21 Jul 2021

[Operator:]

Good day, and welcome to the Hope Bancorp's 2021 Second Quarter Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Ms. Angie Yang. Please go ahead.

[Angie Yang:]

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.

[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. 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 noninterest income. Together with a modest reserve release this quarter, this resulted in a strong quarter of earnings with net income of $53.8 million or $0.43 per diluted share and pretax preprovision income of $64.5 million, an increase of 6% over the preceding first quarter.

[Alex Ko:]

Thank you, Kevin. Beginning with Slide 7, I will start with our net interest income, which had 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 5 basis points to 3.11%, which represents 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 7 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 the quarterly decline to our cost of deposits will be slower than we have seen in the past few quarters.

[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 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 noninterest income, driven by the continued sale of our SBA 7(a) 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 7(a) 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 health care 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.

[Operator:]

Thank you. We will now being the question-and-answer session. And the first question will come from Matthew Clark with Piper Jaffray. Please go ahead.

[Matthew Clark:]

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?

[Kevin Kim:]

Matthew, we are very closely monitoring the hotel/motel and retail portfolio. And we will remain prudent in managing the risks associated with these portfolios at acceptable levels. In terms of additional sales of hotel/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 sale of this large volume.

[Matthew Clark:]

Okay. And then just on the C&I 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 C&I?

[Peter Koh:]

Sure. This is Peter. The coverage on the C&I 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.

[Matthew Clark:]

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, thinking about '22?

[Kevin Kim:]

We believe that the current SBA premium levels will sustain for the time being. Even after September, when the government 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 is still -- will be a very attractive product to invest in. So we expect that premium levels will continue to be high.

[Matthew Clark:]

Okay. And last one from me...

[Kevin Kim:]

Up until year end, well into the next year.

[Matthew Clark:]

Okay. And then just last one. Your thoughts on buying back your stock given where you're trading on tangible book. Is it still too early as you work through some of this credit? Or is it something you could consider?

[Kevin Kim:]

Well, based upon our current stock valuation in the market and our strong capital position, we are very seriously considering capital deployment through share buyback in a very near future.

[Operator:]

The next question will come from Chris McGratty with KBW. Please go ahead.

[Chris McGratty:]

Kevin, I want to follow up on Matt's question, just on the buyback. Could you remind us what is under authorization? Whether you have to go through the approval process again and also kind of how you're thinking about your binding ratio because I agree the buyback at book value seems to be a good news?

[Kevin Kim:]

Well, we do not have any authorized amount at this time, but I don't think it is an issue. And our Board has always had a 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 this is a no-brainer question for us.

[Chris McGratty:]

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. Is that -- I know that's been -- the resi book 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 near-term?

[Alex Ko:]

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 is actually depends on our organic loan growth, but I think -- and also utilization of our line usage, we will use the mortgage loan purchase, one of the vehicle, to manage our balance sheet effectively by reducing the excess cash that we currently have.

[Chris McGratty:]

Okay. And then maybe if I could just sneak one, and just make sure I understand the guidance on Slide 14. So the loan growth flat to nominal, that's on a reported basis. That's not excluding the PPP, right? That's reported?

[Kevin Kim:]

Well, so 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 nominal.

[Operator:]

The next question will come from Gary Tenner with D.A. Davidson. Please go ahead.

[Gary Tenner:]

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 buffer?

[Kevin Kim:]

Well, we have both CRE and C&I originations very strong in the second quarter. And in terms of CRE, we are really trying to focus on lower-risk areas in the current environment like, multi-family, 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 lines -- business lines have been consistently performing well, including the second quarter of this year.

[Gary Tenner:]

Okay. And in terms of the guidance for, again, 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?

[Kevin Kim:]

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.

[Gary Tenner:]

Okay. Great. And then just last question for me. In terms of PPP, could you give us the average balances in the quarter for that loan segment as well as remaining fees to be recognized?

[Alex Ko:]

Sure. The average balance for PPP for the second quarter was a $662 million, and the fee that we recognized for the second quarter was -- it broken into like a three categories, as you know. Actually, just fee itself is two categories; the 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.

[Gary Tenner:]

Sorry, Alex, the $5.6 million total included the 1% coupon?

[Alex Ko:]

Yes. Coupon is the $1.7 million, and the normal amortization is $2.1 million. And the forgiveness related is $1.8 million, which a total to $5.6 million.

[Gary Tenner:]

Great. And just what the -- what is the remaining fees to recognize from PPP?

[Alex Ko:]

Sure. We have a total of $15.6 million of net fee remaining as of June 30.

[Operator:]

Our next question will come from Steven Marascia with Capitol Securities Management.

[Steven Marascia:]

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?

[Alex Ko:]

Yes. Let me answer the tax question. First, we expect about 25% 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 a change from the $0.14 per quarter. Obviously, our earning power, which we expect as our credit quality is improving, the provision for loan losses was smaller. And as we have higher income from the loans and earning assets, our quality of the earnings will get stronger. So it will support for $0.14 or higher dividend payout. But also we do, as Kevin mentioned, share repurchase is one of the -- our consideration. So, it will be -- all those things will be considered together. But I feel very comfortable maintaining $0.14 per share is for the near future.

[Operator:]

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.

[Kevin Kim:]

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.

[Operator:]

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