Good day, and welcome to the Hope Bancorp 2022 Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Angie Yang, Director of Investor Relations and Corporate Communications. Please go ahead..
Thank you, Andrew. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2022 fourth 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, 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 2, 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 of Hope Bancorp otherwise referred to as 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 maybe made on today’s call.
The company cautions that the complete financial results to be included in the quarterly report on Form 10-K for the year ended December 31, 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 fourth quarter earnings release for management's reasons and purposes for using non-GAAP figures and 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 Dave Malone, Interim 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?.
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.
Despite the operating environment becoming more challenging during the fourth quarter, we delivered solid financial results, which reflect the benefits of the lower risk, more diversified loan portfolio that we have built and continued improvement in asset quality.
Given the market's expectations for the economic conditions to weaken further in 2023, we became even more selective in terms of new loan production favoring businesses that are less impacted by consumer spending trends and are more recessionary resistant.
Importantly, the lower risk, more diversified loan portfolio we have built continues to improve with our criticized and classified loans consistently decreasing over the course of the year.
In the fourth quarter, we reported net income of $51.7 million, or $0.43 per share, while our pre-provision net revenue or PPNR was $78.1 million, both net income and PPNR were slightly lower than the preceding quarter, primarily associated with an increase in deposit costs attributed to the highly competitive market for deposits.
However, with our solid financial performance as well as a positive shift in AOCI, we generated a 2.2% increase in book value per share and a 2.9% increase in tangible book value per share, while also increasing our risk-based regulatory capital ratios. Moving onto Slide 4.
In the fourth quarter, we funded $793 million in new loans, which is lower than the preceding quarter, as it reflects a more selective approach to new loan production and our overall goal to target higher yielding floating loan assets, as well as a lower level loan demand resulting from higher interest rates, particularly for commercial real estate loans.
The fourth quarter also tends to be a seasonally slower period for C&I loan production, which has become a major driver of our overall loan production volumes.
As a result of the lower level loan fundings, we had a slight decline in total loans from the end of the prior quarter, although for the full year total loans increased in excess of 10% or 12.2%, excluding PPP loans, which is in the top range of our estimated target.
Consistent with the trend that we have seen over the past several quarters as a result of the investments we have made to build our C&I lending capabilities, C&I loans continue to account for the majority of our new loan production.
In the fourth quarter, C&I loans represented 54% of our total loan fundings, and the average rate of new C&I loans increased 162 basis points over the preceding quarter, largely reflecting increase in SOFR rates.
In line with our focus on developing relationships with larger, stronger commercial enterprises, our corporate banking group accounted for 79% of our C&I loan fundings in the fourth quarter. We experienced the strongest contributions this quarter from our healthcare and telecom teams.
And from a geographic perspective, we are starting to see growing contributions from the new additions we have made to expand our middle market lending in the Southeast and upper Midwest areas of the United States.
In terms of commercial real estate loans, we have $324 million of fundings, which reflects a decrease from the preceding quarter due to lower loan demand. We attribute this decrease to industry-wide trends as a result of the higher interest rates.
In addition, we are targeting lower risk property types and focusing on obtaining wider spreads as part of our cautious approach to risk management, while at the same time improving our profitability.
With the targeted segments and increased loan pricing, the average rate of our new CRE loans increased 100 basis points compared with the preceding quarter. Overall, we saw increasing trends in loan pricing in all asset classes during the fourth quarter.
Combined with the higher mix of C&I loan production, this resulted in our average rate on total new loan production increasing by 134 basis points over the preceding third quarter to 6.71%. Moving onto Slide 5. Demonstrating our ongoing transformation to a lower risk loan portfolio, C&I loans increased by 21.4% over the course of 2022.
At the same time, commercial real estate loans grew by just 3.4% during the year, all-in-all resulting in loan growth of 10.4% for the full year.
As a result, C&I loans as of December 31 of 2022, accounted for 33% of total loans, an increase from 30% a year earlier, and commercial real estate loans decreased to 61% of total loans down from 65% at year-end 2021. We have also had success in improving the diversification within each of the buckets of our loan portfolio.
In particular, our hotel/motel portfolio represented just 10% of our CRE loan portfolio compared with 14% a year earlier. At the same time, our multi-family portfolio increased to 14% of our total loan portfolio at year-end of 2022 from 8% as of year-end 2021. These results are due to two primary factors.
The first being the success we are having with our efforts to target more lower risk CRE property types, and the second being the growing benefits of the investments that we have made over the years to enhance our C&I lending capabilities. Now, I will ask David to provide additional details on our financial performance for the fourth quarter.
David?.
Thank you, Kevin, and good morning, everyone. Beginning with Slide 6, I will start with our net interest income, which totaled $150.5 million for the fourth quarter of 2022, representing a decrease of 1.7% from the proceeding third quarter.
While we had recognized a 2.1% increase in our average earning assets in the fourth quarter, this increase in interest income from higher earning assets was offset by an increase in deposit cost. Our net interest margin decreased 13 basis points quarter-over-quarter to 3.36%.
The average yield on earning assets -- on interest earning assets increased 70 basis points quarter-over-quarter resulting from the repricing of variable rate loans, as well as higher pricing on new loan production. However, this increase was offset by an 83 basis point increase in our average cost of deposits.
The increase in our average cost of deposits was the result of the attrition that we experienced and non-interest bearing deposits in the quarter, combined with increases in the rates on all of our interest-bearing deposit categories.
Moving forward, based on current expectations for interest rate movements, we expect our net interest margin will continue to be pressured in the first quarter of 2023, largely due to our expectation for rising deposit costs as maturing time deposits renew at higher rates and also due to our projection for higher average time deposit balances in the first quarter.
Continued increases in loan yields are expected to offset some of the increase in deposit costs, but overall, we are expecting margin compression through the first half of 2023. The amount of compression will be dependent on a variety of factors relating to balance sheet composition as well as the interest rate environment. Moving onto Slide 7.
Our new loan production in the fourth quarter was comprised of 65% variable rate loans and variable rate loans represented 46% of our total loan portfolio as of December 31st, 2022. Now moving onto Slide 8. Our non-interest income was $12.1 million for the fourth quarter, representing a decrease of 9% from the proceeding third quarter.
The primary driver of this decrease was lower gains on sales of SBA loans attributed to a lower volume of loan sold, and a decreased in swap fee income. Additionally, we also realized gain of $375,000 from the sale of equity investments in the third quarter, which was not recurring in the fourth quarter. Moving onto non-interest expense on Slide 9.
Our non-interest expense was $84.5 million, which was relatively consistent with the proceeding third quarter. We experienced a decrease in salaries and benefits expense, primarily resulting from lower incentive compensation expense. We also had a swing in OREO expense to OREO income largely reflecting fair value adjustments.
These positive variances were offset by small increases in other areas of non-interest expense. Looking at the first quarter of 2023, non-interest expense is expected to trend higher due to projected increases in salaries and benefits, as well as earnings credit rates associated with certain segments of our deposit base.
As a percentage of average assets, we expect our non-interest expense will remain in the current range of 1.79% to 1.81%. Now moving onto Slide 10, I will discuss deposit trends. Our total deposits increase 1.5% from the end of the prior quarter.
The increase in deposits combined with a relatively flat loan portfolio reduced our net loan to deposit ratio to 97.2% at the end of the fourth quarter from 99.2% at the end of the proceeding quarter.
We experienced a decreased and non-interest bearing deposits during the fourth quarter with nearly 40% of this decrease coming from our commercial depositors, moving their excess liquidity into interest bearing accounts.
A portion of the outflow from non-interest bearing deposits can also be attributed to seasonal fluctuations that we typically see in the fourth quarter related to property tax payments and normal year-end trends in operating cash flows among some of our larger commercial depositors.
To offset the decrease in non-interest bearing deposits and to improve our overall liquidity, we increased our balance of time deposits. Looking forward to 2023, we expect our non-interest bearing and core deposits will return to a more stable to growing trend as we make progress with deposit strategies that are currently being implemented.
Now moving onto Slide 11, I will review our asset quality. We recognize positive trends across the portfolio in the fourth quarter. Total non-performing assets at December 31st, 2022, decreased 28% quarter-over-quarter to $69 million and reflected reductions in non-accrual lungs, delinquent loans 90 days or more on accrual status and accruing TDRs.
At quarter-end, total non-performing assets represented just 36 basis points of total assets down from 51 basis points at the end of the third quarter. Total criticized and classified loans decreased by 8% in the fourth quarter. For the full year, total criticized and classified loans decreased by 48% due to two primary factors.
First, we experienced steady improvement in asset quality as more borrowers demonstrated sustained improvement in their financial performance as they recovered from the impact of the pandemic. And secondly, we continued to be proactive in derisking the portfolio of loans that were deemed to be higher risk via loan sales.
Overall, our loss experience remains relatively low. We had $6.4 million in net charge-offs during the fourth quarter or 17 basis points of average loans on an annualized basis. For the full year, we recognize net recoveries of $12.2 million.
In the fourth quarter, we recorded a provision for credit losses of $8.2 million, which primarily reflects a decline in projected macroeconomic variables.
At December 31st, 2022, our allowance for credit loss is coverage ratio represented 1.05% of total loans, while our coverage of non-performing assets increased to 234% from 166% at September 30th, 2022. Now moving onto Slide 12. Let me provide an update on our capital position and returns.
With our solid financial performance, all of our capital ratios, with the exception of our Tier 1 leverage ratio, improved from the end of the prior quarter. Our tangible common equity to tangible asset ratio remained strong at 8.29% as of December 31st, 2022, up 20 basis points from September 30th.
As announced yesterday, our Board of Directors declared a quarterly cash dividend of $0.14 per share, which remained the same as last quarter. During the quarter, we did not repurchase any stock and continued to have $35.3 million of our $50 million stock repurchase program available for future repurchases.
With that, let me turn the call back to Kevin..
Thank you, David. Now moving onto Slide 13. Let me briefly summarize our financial performance for 2022 versus the outlook that we initially provided a year ago. In terms of loan growth, we guided that our reenergized focus on business development was expected to lead to high single digit to low double-digit loan growth for 2022, excluding PPP.
We achieved the higher end of our guidance with 12.2% loan growth excluding PPP.
We initially guided for stable net interest margin for the beginning of the year and then revised to continued margin expansion for the second half of 2022 and flat to slight compression in the fourth quarter, potentially offsetting to a small degree year-to-date margin expansion.
In 2022, we experienced margin expansion in the first three quarters of the year, which was partially offset by margin compression in the fourth quarter, aggregating to a 23 basis point increase in NIM for 2022.
In terms of profitability, we guided for enhanced net interest income expansion driven by rising interest rates and earnings as asset growth in the range of 13% to 16% for the full year. We achieved the lower end of this guidance with net interest income in 2022, increasing by 13% over 2021.
We said non-interest expense to average assets would range from 1.65% to 1.7% near-term, and later updated the guidance to 1.75% to 1.8% for the full year, and we achieved the middle range of this guidance with 1.78% non-interest expense to average assets for 2022.
And finally, we projected that our criticized loan balances would trend down by approximately 20% to 30% by year-end. We basically achieved that by mid-year and revised this guidance to a reduction of 30% to 40% for the full year. We actually delivered a 48% reduction in total criticized loans from the year-end of 2021 to year-end of 2022.
All-in-all, we delivered solid financial performance, which was consistent with our guidance, not withstanding the volatility that we all experienced in 2022 with the pace of interest rate hikes having been faster than at any time in recent history. Now moving onto Slide 14. I will wrap up with a few comments about our outlook and priorities for 2023.
It is clear that 2023 will be a challenging year on numerous fronts. Given the current level of economic uncertainty, we will continue to maintain our selective approach to new loan production and continue to focus on generating higher yielding C&I loans that are more resistant to recessionary pressures.
As with 2022, we expect our strengthened and expanded C&I lending capabilities will be a major driver of new loan production in 2023.
With the larger contributions coming from the more recent additions that we have made to the corporate banking group and our increased presence in newer geographic markets, we are confident in our ability to generate strong loan production without compromising on our underwriting or pricing criteria.
As a result, and while maintaining our cautious approach to new loan production in the current environment, we expect to generate loan growth in the mid single digits in 2023. This lower level of projected loan growth will also enable us to focus more heavily on building a lower cost stable core deposit base.
The deposit strategies that we are implementing now are focused on further strengthening our retail foundation of individual and smaller business customers, as well as our larger corporate client base. However, for the near-term, we expect higher deposit costs will mitigate expansion of our net interest income.
We anticipate that our net interest income for the full year of 2023 will increase modestly with higher cost of deposits and borrowings, offsetting in large part higher interest income from the growth in our earnings assets.
We are also expecting the run rate of our non-interest income to trend lower in 2023 versus 2022 due to a reduction in net gains from SBA loan sales.
While premiums available in the secondary markets have somewhat stabilized, we believe that maintaining a greater portion of these higher yielding assets in our portfolio, while interest rates remain at these high levels will add greater long-term value by way of interest income.
Given the challenges of the current operating environment, we will also further strengthen our focus on disciplined expense controls, while we leverage the significant investments in talent and capabilities we have made in our franchise over the past few years.
We are looking deeply across the organization and our branch network for opportunities to further enhance efficiencies, while at the same time strengthening our presence in targeted markets.
While we are fully cognizant that 2023 will be a challenging year, we expect the pressures on our margins and profitability from the rising deposit costs will diminish as we progress through the year.
As a result of the significant investments that we have made in our organization over the past few years, we are a much stronger and much more diversified franchise today than we have ever been. We believe we are well-positioned to effectively manage through economic downturns and build, show the value for the long-term.
With that, we would be happy to take your questions and add any color -- additional color as requested. Operator, please open up the call..
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Matthew Clark with Piper Sandler. Please go ahead..
Hi, good morning. Maybe we could start -- maybe we just start on non-interest bearing deposits, the decline there.
If you could just give us some additional color on what drove that decline? And I guess, what gives you confidence that you're going to be able to stabilize those balances, if not grow them this year?.
Well, the outflows of non-interest bearing deposits have very close relationship to the higher interest rates. The people are more sensitive to the earnings opportunity with their funds at the bank. So, there was a somewhat meaningful migration from the non-interest bearing deposits to interest-bearing deposits.
But we believe much of the migration of those non-interest bearing deposits may have happened already with the expectation that interest rates are viewed to have reached its peak. So that's how I see the market as of today. Unfortunately, it's a function of what and when the Fed does with the rates then we do not have any control over the actions.
So, we are just focusing on what we can do internally, and we are implementing a number of deposit initiatives focused both corporate and retail core deposits that we believe will help protect and strengthen our lower cost deposit base..
So, there was nothing in there that was related to customers leaving the bank maybe that we might have been a little chunky..
No. No, I think a lot more to do with the macroeconomic and market interest rate environment..
Okay, great.
And then just on the interest-bearing deposit costs, we see the average for the quarter, but do you happen to have the end of the year kind of spot rate on either total deposits or interest-bearing?.
Yeah. We -- our spot rates on deposits as of December 31 was 2.16% and total interest-bearing deposits, 3.12%..
Okay. And if you have at the average monthly NIM in December..
Monthly NIM in December, let me see. .
3.28%..
Okay, great. And then just last one from me on the net charge-offs this quarter.
Can you just give us a sense for what drove that, if there was anything unusual there if that was kind of managing down criticized or if that's a more reasonable range going forward?.
Sure. This is Peter. Yes. The charge-offs this quarter were slightly elevated. We don't see any real systemic issues there. I think really just one-off cases. I think just part of our overall practice management to try to exit and resolve some of these loans. So, yeah, slightly elevated, but again, I think we're just one-offs..
Okay. Thank you..
The next question comes from Chris McGratty with KBW. Please go ahead..
Great. Kevin, you talked about just the normalization of the mix of deposits getting back. Could you just provide a little bit more color? CD, I assume you're talking about just greater CD mix and perhaps a downward pressure on DDA, but any context of what you're modeling specifically to get to that slight growth in NII for the year..
Maybe I can try to answer that. This is Peter. So, I think with that just overall deposit base because of the CDs, I think we had a high reliance on CDs in the fourth quarter. And as we look at some of our other opportunities and initiatives, I am seeing -- we are seeing a lot of opportunities in other areas as well.
I think including non-interest bearing accounts with some of our existing customer base and also I think money market or savings accounts as well.
So, we have a variety of different initiatives I believe that we can pursue this year that is a little bit different, I think, than what we just experienced, I think, in the fourth quarter where there was a heavy reliance on time deposits..
Chris, if I may add, we do not view time deposits as our primary source of funding, obviously. And in the immediate quarter, as banks continue to compete for deposits, we expect continued inflows of our CDs into our mix. But we see opportunities to track lower cost core deposits.
And eventually, we are really trying to help build our core deposit customer base for the long-term. So, as we go toward the end of 2023, I think, we have a much improved deposit mix. For the immediate term -- immediate near-term and quarters, we still expect to see inflows of our CD..
Okay. Thanks, Kevin. The other question is on capital. I guess twofold question. Your stock sitting at tangible book. Obviously, the environment is uncertain. But thoughts on buybacks at or below tangible book.
And also, can you remind us on your current thoughts on the convert that's going to get put to you later the mid of the spring?.
Okay. Chris, given the volatility in the market, we think it would be prudent to maintain a conservative stance on capital for the near-term. And I would expect that any activity related to our convertible notes should precede any other capital actions.
And in terms of the convertible note, which we expect to be put by investors in May of this year, we have been very actively looking at various options to payoff that convertible notes. And we are currently in the final stages of our analysis. And I expect that we would be able to make an announcement closer to the end of the first quarter.
Having said that, considering our current valuation in the market, I can assure you that we are very actively monitoring opportunities to reenter the buyback market..
Okay. Okay. So, I guess, the range of outcomes for the convert would be replace it at a higher cost, potentially use excess cash, if you have any to paid off, that's kind of how you're thinking about the balance..
Yeah. Well, we don't know. I think it is a little immature to share whether the convertible notes will be fully refinanced or we will just refinance a portion of that..
Okay. Okay. Thanks Kevin..
[Operator Instructions] The next question comes from Gary Tenner with D.A. Davidson. Please go ahead..
Thanks. Good morning. Just wanted to ask about the expectations for, I guess, balance sheet growth in 2023. You talked about mid single digit loan growth.
Wondering if there's a piece of that, that could be funded by securities, cash flows or cash on the balance sheet? Or do you expect that kind of balance sheet growth and deposit growth is pretty well mocked up with that loan growth over the course of the year?.
We plan to fund our loan -- new loan production mainly with our deposits. And obviously, we are currently seeing approximately $50 million per quarter of cash flow being generated from our investment portfolio, but we currently plan on 100% reinvestment back to the investment portfolio.
So, we believe that mid-single digit loan growth will be funded by our deposit growth and our expectation for the deposit growth will be pretty comparable to our loan growth..
Okay. And then I think a couple of times you have mentioned deposit strategies that you're implementing. Can you give us any more color on what you're doing there? Are they kind of business line oriented? Or is it just greater kind of pressure on loan customers to bring deposits over? Just some more color there. Thank you..
Gary, this is Peter. Yeah. We would like to share more information. But I think for competitive reasons, we can't disclose too much. But I do just want to share we do have sort of a multi-prong approach to this. And I think the focus, as we mentioned before, really will be in terms of the core deposits.
And so, I think every category that you see there that would be considered core deposits we are building and currently implementing strategies around those..
Thank you..
Thank you..
[Operator Instructions] The next question comes from Tim Coffey with Janney. Please go ahead..
Great. Thank you. Good morning everybody. Thanks for the opportunity to ask a question.
Kevin, can you kind of provide some color on the pipeline that you're seeing right now?.
Yeah. Yeah. The pipeline for the first quarter of this year is down compared with the start of the fourth quarter of 2022, but I think that is normally expected due to seasonality factors. And the smaller pipeline is also due to the higher interest rate environment and the overall impact it has industry-wide on CRE loan demand.
And in addition to that, given the looming recession, we are also exerting greater pricing and credit discipline as we continue to be more selective in our lending practice and favor businesses that are less impacted by consumer spending and a more recessionary resistant. So, pipeline is smaller and that is not really unexpected..
Okay.
Are you seeing any stresses within your current borrowers from a higher rate environment?.
Well, we are really trying to focus on customers who are more recession resistant. And so far we have not seen any significant impact to loan demand for those type of customers. But obviously, high interest rates will impact all areas of lending, and we are very cognizant of that..
Okay. Great. Those are my questions. Thank you very much..
Thank you, Tim..
This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks..
End of Q&A:.
Thank you, Andrew. 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..
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..