Q2 2023 Hope Bancorp Inc Earnings Call
Participants
Angie Yang; Senior VP and Director of IR & Corporate Communications; Hope Bancorp, Inc.
Julianna Balicka; Executive VP & CFO; Hope Bancorp, Inc.
Kevin Sung Kim; Chairman, President & CEO; Hope Bancorp, Inc.
Peter J. Koh; Senior EVP & COO; Hope Bancorp, Inc.
Christopher Edward McGratty; Head of United States Bank Research & MD; Keefe, Bruyette, & Woods, Inc., Research Division
Gary Peter Tenner; MD & Senior Research Analyst; D.A. Davidson & Co., Research Division
Matthew Timothy Clark; MD & Senior Research Analyst; Piper Sandler & Co., Research Division
Presentation
Operator
Good morning, and welcome to the Hope Bancorp 2023 Second Quarter Earnings Conference Call. (Operator Instructions) 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.
Angie Yang
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 begin -- 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 2, 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 -- 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 1 hour for this call. Presenting from the management side today will be Kevin Kim, Hope Bancorp's Chairman, President and CEO; and Julianna Balicka, 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.
Kevin Sung Kim
Thank you, Angie, and good morning, everyone, and thank you for joining us today. Now let's begin on Slide 3 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 $0.32. Our pre-provision net revenue was (inaudible) 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, 2023, up 13 basis points from March 31. Quarter-over-quarter, our risk-based capital grew and ratios expanded. Continuing on Slide 4 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 1 ratio was 11.06%, up 31 basis points from March 31, 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 $0.14 per share, payable on August 17 to the stockholders of record as of August 3.
Moving on to Slide 5. 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 30, 2023, our cash and cash equivalents were $2.3 billion compared with $2.2 billion at March 31. At the end of the second quarter, our available borrowing capacity, together with cash and cash equivalents and unpledged investment securities was $7.75 billion, equivalent to 50% of our total deposits and while exceeding our uninsured deposit balances. In May, we paid off $197 million of our convertible notes with existing cash.
Now continuing to Slide 6. At June 30, 2023, our total deposits were $15.6 billion, down modestly 1% quarter-over-quarter and up 4% year-over-year. In navigating this cycle, Bancorp 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 1/3 of our balances, the 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, 2023, the bank's uninsured deposit ratio was 36% compared with 38% at March 31.
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 7. 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 8. At June 30, 2023, our loans receivable were $14.9 [billion], a decrease of 1% quarter-over-quarter and up 2% year-over-year. Second quarter payoffs and paydowns 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 Slide 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, 2023, 99% of our office portfolio was past 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 submarkets 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 Julianna to provide additional details on our financial performance for the second quarter. Julianna?
Julianna Balicka
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 borrowings, 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 borrowings, 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% linked 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 noninterest 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 noninterest expense on Slide 15. Our noninterest 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 FDIC annual base assessment rate of 2 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 [office] to $173 million at June 30, 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 1 basis point of average loans annualized. Total nonperforming assets at June 30 were $77 million, a decrease of 3% quarter-over-quarter and equivalent to 38 basis points of total assets. Year-over-year, our nonperforming assets were down 30%. At the end of the second quarter, our credit-sized loans ratio was 2.3%, up quarter-over-quarter and down year-over-year.
Our criticized loans were $345 million at June 30, 2023, up from $305 million at March 31. Quarter-over-quarter, substandard loans increased 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.
Kevin Sung Kim
Thank you, Julianna. 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 June30.
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 noninterest 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 noninterest 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 Bancorp 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.
Question and Answer Session
Operator
(Operator Instructions) The first question comes from Chris McGratty of KBW.
Christopher Edward McGratty
Maybe, Julianna, to 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?
Julianna Balicka
Chris, our terminal deposit beta assumptions are for total deposits, approximately 60%. The mix shift has started to stabilize -- the rate of change started to stabilize in between the DDA and the interest-bearing accounts. And for RCEs, we have -- they are predominantly 12-month CDs, that's the most popular products, 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.
Christopher Edward McGratty
Okay. That [68] was the number right on the total bid...
Julianna Balicka
No, I said approximately 60%.
Christopher Edward McGratty
Oh, 60, 6 0, got it. Maybe 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?
Julianna Balicka
Yes, the June margin was 2.70%. And -- yes, and our month-to-date change in our cost of deposits is less than 10 basis points -- actually less than 10 on interest-bearing.
Christopher Edward McGratty
So 2.78% for June, 2.70% for the quarter. I mean...
Julianna Balicka
2.70% for June I said.
Christopher Edward McGratty
I have bad connection.
Julianna Balicka
2.70% for June, and our total deposits spot rates through July 20, is up 3 basis points from June, spot rates.
Christopher Edward McGratty
Okay. Got it. And then maybe one more if I could jump back out. The ECR, the new line for that. Can you just remind us how much of your noninterest-bearing deposits have ECRs and how we should think about that line if the Fed moves this week for Q3?
Julianna Balicka
So that line cost will go up as the Fed moves this week. And in terms of -- the $363 million or so.
Operator
Our next question comes from Matthew Clark of Piper Sandler.
Matthew Timothy Clark
Julianna, 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 month or the quarter. Can you just give us some color on deposits at the end of July 20, whatever number you want to give?
Julianna Balicka
Yes. No, good question. Thanks. Our total deposit cost spot rate as of June 30 was 2.97%. And as of July 20, it's 3% -- so change to 3 bps. And just for context, we're nearly (inaudible) now, but last quarter, the spot change was 24 bps. So the rate of change is stabilizing or slowing.
Matthew Timothy Clark
Yes. Got it. Okay. And then on the reserve build, can you give us a sense for what drove a lot of that as a decent step-up this quarter. You haven't seen that elsewhere as much? And then what underlying businesses or industries drove the increase in special mention?
Julianna Balicka
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-over-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.
Matthew Timothy Clark
Okay. Great. And then just last one for me. On your kind of outlook on -- for deposits embedded in your assumptions. It sounds like there's less of a mix change going forward. But do balances -- do you assume balances stabilize from here?
Julianna Balicka
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 30, 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 to happen in the making industry earlier in the year starts to receive more into the background.
Operator
(Operator Instructions) Our next question comes from Gary Tenner of D.A. Davidson.
Gary Peter Tenner
Just a follow-up on the question about CD maturities. Julianna could you tell us what the rate is on those CDs that are maturing back half of this year?
Julianna Balicka
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%.
Gary Peter Tenner
Okay. And then just given where the stock is trading still 75% of tangible book. Any thoughts on buyback or utilizing the buyback?
Kevin Sung Kim
Our capital ratios are all strong, and we like the growth that we saw this quarter. But at this time, I don't think we are anticipating -- repurchases anytime soon.
Gary Peter Tenner
Great. And then last question. In terms of the multi-tenant retail just because I spoke 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.
Julianna Balicka
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.
Gary Peter Tenner
Okay. Well, and then maybe Julianna, 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 the credits? Are you going out into 2024 at this point? Or really just back half of 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?
Peter J. Koh
Yes. 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 a 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 potential workouts and things, but the majority -- vast majority of our customers, we're seeing that, that refi risk is pretty low.
Julianna Balicka
And Gary, just to add to the maturities of CREs that are coming up. You specifically asked multi-tenant retail and of those in the remainder of 2023 was $72 million and then another $127 million in 2024. But our total CRE maturities in 2023 will be -- for $70 million and then in 2024, $742 million.
Operator
(Operator Instructions) Our next question comes from Chris McGratty of KBW.
Christopher Edward McGratty
In terms of the balance sheet size, can you just remind us what level of cash is coming off of the bond portfolio monthly or quarterly. And then Kevin, you alluded to just the excess cash that's being held -- like do you see this being the right amount of cash for the foreseeable future? Do you think they work that down? Is that part of the margin kind of stability narrative?
Kevin Sung Kim
Yes. Deposit outflows in response to the bank figures 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.
Julianna Balicka
And to your other question, the average cash flow coming off our bond book is about $15 million to $20 million a month. And we're targeting purchasing $20 million 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 sized investment securities book in terms of our optimal balance sheet mix kind of post this banking industry [reception].
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Kevin Sung Kim
Once again, thank you all for joining us today, and we look forward to speaking with you again next quarter. Bye, everyone.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
