Good day, and welcome to the Hope Bancorp 2021 Q4 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 touch-tone phone. To withdraw your question from the queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Angie Yang, Director of Investor Relations. Please go ahead.
Thank you, Kate. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2021 Q4 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. Beginning on slide two, 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 performance of the company, including any impact as a result of the COVID-19 pandemic, 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 may be made on today's call.
The company cautions that the complete financial results to be included in the annual report on Form 10-K for the year ended December 31, 2021 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 2021 Q4 earnings release for 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 Chief Executive Officer. Alex Ko, Senior Executive Vice President and Chief Financial Officer.
Peter Koh, who was promoted to Senior Executive Vice President and Chief Operating Officer effective the beginning of 2022, 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 three with a brief overview of our financial results. We delivered an outstanding financial performance in the Q4 of 2021, with a continuation of many of the positive trends that we experienced throughout the year. Another record level of loan originations, further reduction in our deposit costs, additional expansion in our net interest margin, and continued expense management, leading to an improvement in operating efficiencies. As we indicated on our last earnings call, following the significant de-risking of our balance sheet in the second and Q3s, our exceptionally strong loan production resulted in a higher level of loan growth that is more reflective of our traditional performance.
This led to a strong increase in revenue and pre-provision net revenue for the Q4.
Our net interest income for 2021 Q4 increased 2% over the preceding Q3, while our non-interest income increased 23% quarter-over-quarter. Altogether, with a 2% quarter-over-quarter decrease in non-interest expense, we delivered a significant improvement in our core performance with pre-provision net revenue coming in at $72.2 million in the Q4, up 10% from the preceding Q3. Moving on to slide four. Despite the continued challenges presented by the pandemic and supply chain disruptions, for a second consecutive quarter, we produced record loan originations as the larger, more productive commercial banking teams we have built continue to capitalize on high-quality lending opportunities. Total loan production was a record $1.24 billion in the Q4, an increase of 23% compared with the preceding Q3.
This resulted in annualized loan growth of 15.9% in the Q4. excluding PPP loans outstanding increased 4.9% quarter over quarter or 19.6% annualized. We continue to see higher levels of commercial loan production resulting from the increasing contributions we are getting now from new banking talent added in the past couple of years, our success in developing relationships with larger corporate clients, and the expansion of our lending in attractive vertical markets such as telecom and healthcare. We had $538 million of commercial loan production in the Q4, which was an increase of 57% over the preceding Q3. As a result, our commercial loan portfolio increased by 9% from the end of the prior quarter, which continued to improve the diversification of our loan portfolio.
Our CRE loan production increased 6% quarter-over-quarter, resulting in 2% growth in this portfolio during the Q4. The higher levels of CRE loan production are partially attributable to the continued expansion of our multifamily lending. Multifamily loans accounted for 15% of our total CRE loan originations this quarter, and as a result, our multifamily portfolio increased 8% from the end of the prior quarter, furthering our progress in creating a more diversified, lower risk commercial real estate portfolio. In addition to multifamily, another area where we are seeing strong CRE demand is in warehouse properties, given the growing need for inventory storage and fulfillment facilities. Warehouse CRE loans accounted for 22% of our total CRE originations in the Q4, resulting in a 7% increase from September 30, 2021.
The broader business development capabilities we have built have enabled us to generate record loan production while substantially eliminating originations of hotel-motel loans in order to continue working down this concentration in our portfolio. Our SBA loan production totaled $55 million in the Q4, which is lower than the preceding Q3, as overall demand for SBA loans across the industry declined following the end of the fee waiver and payment relief in September. We generally saw good trends in loan pricing in the Q4, with the average rate on commercial loans increasing from the preceding Q3 and commercial real estate loan rates being stable. Overall, the average rate on our total loan production was 2 basis points higher than the prior quarter.
Notably, the Q4 was our third consecutive quarter in which variable rate loans accounted for greater than 50% of the mix of new loans, despite the high level of demand for fixed rate loans in the low interest rate environment. Now I will ask Alex to provide additional details on our financial performance for the Q4. Alex?
Thank you, Kevin. Beginning with slide five, I will start with our net interest income, which totaled $133.3 million for the Q4 of 2021, an increase of 2% from $130.3 million in the preceding Q3. This increase was due to a 2% increase in interest income resulting from higher average balances of loans and investment securities, and a 6% decrease in interest expense. During the Q4, $107 million of PPP loans were forgiven, versus $236 million in the preceding Q3. The net fee realized from PPP forgiveness was $3.7 million in the Q4 versus $3.2 million in the Q3. Our net interest margin increased 6 basis points quarter-over-quarter to 3.13%.
Excluding the impact of purchase accounting adjustment, our net interest margin increased 7 basis points quarter-over-quarter to 3.09%. The increase was due to a more favorable mix of earnings assets as we redeployed more of our excess cash into the loan and security portfolios, as well as a 3 basis point reduction in our cost of deposits. Looking at the Q1 of 2022, we expect our net interest margin will be relatively stable compared with the Q4 of 2021. Moving on to slide six. From a long-term perspective, we are in an asset sensitive position. Considering the projected interest rate hikes in 2022, we are well-positioned to benefit in a rising interest rate environment.
Variable rate loans as a percentage of total loans accounted for 41% of our portfolio as of December 31, 2021. In addition, our non-interest-bearing deposits increased significantly during 2021, up by nearly $938 million or 19% year-over-year. This has had a positive impact in increasing our asset sensitivity position during the year. Now moving on to slide 7. Our non-interest income was $13.1 million for the Q4, up from $10.6 million in the preceding Q3, as we saw increases in nearly all of our fee-generating areas. The largest increase was net gains on sale of SBA loans, which was up 47% compared to prior quarter.
This was due to a higher volume of sales, as well as an increase in the average net premium on the sale of SBA loans. Moving on to non-interest expense on slide eight. Our non-interest expense was $74.2 million, representing a decrease of 2% from the preceding Q3. The most significant variance was a 5% decline in our salary and benefit expense, which was primarily due to more normalized bonus reserves, stock compensation expense, and an increase in deferred loan origination cost, which had the effect of reducing our salary expense for the quarter. Our efficiency ratio for the Q4 improved 2.9% to 50.7% from 53.6% in the preceding Q3.
Non-interest expense as a percentage of average assets improved to 1.67% for the 2021 Q4 from 1.7% for the Q3. Now moving on to slide nine. I will discuss our key deposit trends. Our total deposits were essentially unchanged from the end of prior quarter as growth in money market deposits offset a seasonal decline in non-interest-bearing deposits and continued reduction in our time deposits. The small decline in non-interest-bearing deposits was due to fluctuations in the end of period balances of some of our large clients in corporate banking group, where seasonality is a factor. Underscoring the seasonality aspect, the average balance of non-interest-bearing deposits for the Q4 increased 2% over the preceding Q3. Subsequent to year-end, the deposit balances of these clients have started to build back up.
The cost of our interest-bearing deposits and total deposits each declined 3 basis points quarter-over-quarter. These decreases represent our ninth consecutive quarter of declining deposit cost. Now moving on to slide 10. I will review our asset quality. We saw continued improvement in asset quality in the Q4. Most notably, criticized loans declined by $51 million or 9%. The further decline in criticized loans reflects our continued progress in working with borrowers following their COVID modification period. Non-performing assets declined by approximately $1.9 million, which was primarily due to the disposition of one large OREO property. At year-end 2021, our OREO portfolio was just $2.6 million, representing a significant reduction from $20.1 million at the end of 2020. Accruing TDRs increased by $12.9 million from the prior quarter.
The increase was due to one large, well-secured commercial real estate loan, which payments are current under the modified terms. Delinquent loans less than 90 days past due ticked up as of year-end. Approximately $9 million of this increase reflect administrative delays in the renewal of one large maturing loan. This loan has been renewed and is current. In addition, we have another $8.5 million of mortgage loans, which have already become current or have been paid off subsequent to year-end. In aggregate, our delinquent loans are down by $17.5 million as of today. Following the portfolio de-risking actions in 2021, our loss experience has improved, and we recorded net recoveries of $2.3 million in the Q4. We recorded a provision for credit losses of $1.5 million in the Q4.
The allowance for credit losses coverage ratio as of December 31, 2021, was 1.02% of loans, excluding PPP, compared with 1.05% as of September 30, 2021. The decrease in our ACL coverage ratio mainly reflects an improved macroeconomic forecast, asset quality improvements, and a meaningful reduction of problem loans. Now moving on to slide 11. Let me provide an update on our capital position and returns. We continue to maintain a meaningful amount of excess capital to be utilized for future growth. Tangible common equity per share increased $0.18 from the prior quarter and $0.70 year over year. During the Q4, we completed the repurchase of the previously announced $50 million stock buyback.
With our continued strong financial performance and capital position, we announced a new stock repurchase program yesterday, authorizing the company to repurchase up to $50 million of its common stock. With that, let me turn the call back to Kevin.
Thank you, Alex. Now, moving on to slide 12, let me summarize our achievements for 2021. New loan production accelerated throughout 2021 and positioned the company to return to historically strong growth rates. We continue to enhance the mix of deposits, which contributed to decreasing deposit costs throughout 2021. We completed a significant de-risking and rebalancing of our loan portfolio and expect to see meaningful improvements in our asset quality in 2022. Most importantly, we delivered strong core performance with our pre-provision net revenue increasing 11% over 2020. In all, we successfully completed another year challenged by the COVID-19 pandemic, and I believe we have emerged stronger than ever. Now moving on to slide 13, let me provide a few comments about our outlook and priorities for 2022.
With the increasing levels of loan production that we have consistently generated throughout 2021, we began the new year with greater momentum and expect that we will deliver strong, more traditional high single digit to low double-digit loan growth in 2022, excluding PPP. We expect the loan growth will continue to be well diversified, with increasing contributions from our corporate banking group and expanded industry verticals. The higher level of loan growth should enable us to continue remixing our balance sheet towards higher yielding earning assets and driving further growth in our net interest income. In 2022, we will continue to employ the strategies to strengthen our commercial banking platform. We have been successful in attracting talent from mainstream banks.
That has enabled us to expand our addressable markets, effectively target new and attractive industries, and add expertise in new areas like telecom, healthcare, and multifamily lending.
We recently opened our first full service branch in the Atlanta area, and toward the end of the year, we plan to open another branch in the Seattle area. Both markets have large and growing Korean-American communities, and we believe they can be good sources of loan and deposit growth in the coming years. We are very optimistic as we start 2022, given the positive trends and high level of execution that we are seeing throughout the company. We have seen excellent results from the investments we have made to strengthen our commercial banking platform over the past few years. We are generating record levels of loan production while maintaining the strong underwriting criteria that we have in place.
Following the significant de-risking of our loan portfolio in 2021 and a more active stance on working through our criticized assets, assuming no major disruptions in the economic recovery, we expect improving asset quality metrics with our criticized loan balances declining by approximately 20%-30% by the end of 2022. With the current expectation of rising interest rates, the improvement in our deposit base should enable us to have a lower deposit beta and see a more positive impact on our net interest margin than in the last cycle of rising interest rates. We are effectively managing expenses while still investing in talent and technology, which should help us to enhance operating leverage as our revenue increases from our continued balance sheet growth.
Although the impact of the pandemic continues to linger, we believe that we have never been in a better position to generate profitable growth and create additional value for our shareholders. With that, we would be happy to take your questions and add any additional color as requested. Operator, please open up the call.
We will now begin the Q&A session. To ask a question, you may press star one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question from the queue, please press star then two. The first question is from Matthew Clark of Piper Sandler. Go ahead.
Hi, good morning.
Morning.
Morning.
Maybe starting on with the buyback. What's your plan, you know, in terms of how active you might be? Do you think you might front end load it like you did last time? Or do you feel like it might be kind of spread out more evenly throughout the year?
Well, even looking at the current valuation in the market, we still believe it is an opportune time for us to utilize our stock buyback program. I think it will be active.
Okay. On the recovery on the previously charged off loan, can you quantify how much that was that drove the overall net recoveries just on a dollar basis, if you had it?
It was a sizable loan. I might have to get back to you on the exact figure, but it is a current workout situation in a sense, so we can't disclose the actual details there. It was one of the larger loans in the Q3, which was previously charged off.
Okay. I was trying to back into kind of a normalized net charge off ratio, but we can follow up. Okay, and then just on the reserve coverage at this point at 102x PPP, I guess, how do you feel about that ratio based on, you know, the pipeline and the expected mix change within your portfolio?
Sure. You know, our CECL day one allowance was around 96 basis points, and we're a little over 100 basis points right now. We're sort of nearing the day one CECL allowance. I think we still have some room, I believe, just looking at the kind of the mechanics behind our ACL methodology. I think there's still a little bit of room to reduce. There are various factors, including, you know, loan growth expectations and, you know, obviously the asset quality we anticipate will continue to show improvement. There will be some variables that will have to kind of play out. Again, you know, I think we have some room, but we are nearing sort of the day one CECL allowance there.
Okay. Just on the swap fees and equity income fees this quarter, can you quantify both of those and how they compared to the Q3? I'm just trying to get a sense for the sustainability of both those items.
Yeah, you know, swap fee income is fluctuated. This quarter we had about $600,000, and I would expect that we'll, you know, continue to the same level or a little bit increase going forward. But, you know, it will be a function of the interest rate, you know, the movement as well.
On the equity income in dividend gain revenue.
The equity income was also, you know, it was kind of a one-off item, 'cause we got, you know, kind of refund from the equity investment. I don't think it will continue going forward. It was also in the neighborhood of about $ half a million in this quarter. We might not recur that amount of income going forward.
Okay, thank you. Last one for me, just on the SBA, production and premiums. Should we assume this pace of production or loans sold into the secondary market will continue? How do you think about the outlook for premiums? I'm a little surprised that it went up this quarter, given the fact that the, you know, government has kinda backed away a little bit.
Well, the SBA loan premiums in the secondary market is holding up pretty well. I don't see much difference in the premium level from the Q4 to the Q1 of this year. In terms of the SBA loan sales income for 2022, I think we are planning to sell approximately $40 million per quarter, but obviously that will depend upon the premium rates offered in the secondary market. The SBA loan sales income will be between like $3.5 million-$4.5 million per quarter.
In terms of production, we still expect robust production in 2021 versus 2022. We had approximately $288 million of production in 2021. In 2022, we expect about quarter billion dollars, about $250 million of SBA loan production. Our SBA loan production will continue to be robust.
Thank you.
The next question is from Chris McGratty of KBW. Please go ahead.
Oh, great. Good afternoon. I wanna maybe dig into the rate sensitivity for a moment. Kevin, I think you mentioned in your prepared remarks much better positioning this cycle. I'm interested in kind of maybe some numbers behind what each 25 basis point might mean to the interest income, if you have that.
Sure, Chris. Let me start with, you know, a 25 basis point increase, and I don't know the exact timing, but let's assume in March. If we have a 25 basis points increase, I would quantify the remaining nine months as of impact. I would expect around like $5 million of additional net interest income or like a 95 basis point increase. That would be my expectation at this juncture. I also wanted to note our deposit beta. You know, we did have a quite high deposit beta in a interest rate rising environment, let's say, you know, later parts of 2017 and 2018. Our deposit beta was very high. But given the changes that we made or actual improvement that we made, i.e.
Much lower relying on the CDs and a much higher composition of non-interest bearing deposit accounts, I would expect our deposit beta for the interest rate increase in environment will be much lower. I think that will help our margin expectation and also NII.
Sure. That nine months, so that $5 million, just so I make sure I understand it, that would be on a nine-month basis. You know, assuming it were to occur on an annual basis, it would be, you know, closer to like $6.5-$7 million or around 4 basis points to margin. Is that the right math?
Yes. No, that's only nine months, so you can annualize to annual.
Okay. What is your expectation for model deposit betas? Also, I think what we're kind of as a sell-side struggling with is just deposit retention at the industry level or deposit growth from here, given all the stimulus.
Yeah. You know, deposit beta, you know, Chris, that's the area that we are actually spending a lot of hours as well, to make sure we can accurately quantify the beta. Maybe it might be helpful if I just give you a little bit color on our previous rising interest rate environment. Let's say 2018, our total deposit beta was around 70%. Why it was kind of high was because our reliance on the CD was pretty high. We see the real sensitivity on the deposit rate in the rising environment. CD is the most sensitive. You know, at that time, our loan to deposit ratio was not as like low as we see now, so we need to offer a higher deposit rate.
That's the kind of main reason why we had almost 70% deposit beta. Based on our new deposit mix, we have a much higher money market deposit as a percentage of a total deposit. And also the time deposit is less than 19%. It's good. We would expect like a mid 40% deposit beta. I don't know exactly whether it will be 40 or 45, but it is management's focus is that we'll be more disciplined in the deposit pricing, which will differentiate from our earlier experience, 'cause we were actually offering very high deposit rate, and it really hurt us.
I don't think that we will repeat that, and our deposit position as of today really supports management's intention to be disciplined pricing on deposit side.
Yeah, that's great color. If I could just squeeze one more in on margin from rates. If we get a second and third rate hike, are there any lift off points with regard to floors or any derivatives that would make you perhaps more asset sensitive on the second and third, or is that math you gave us before kind of steady state for each 2025?
Yeah. I don't think, you know, the derivatives would have a much impact. It's more kind of a deposit beta and also loan pricing. We have about 41% of our loans are variable and quite substantial portion is prime as well. Those will be immediately repriced. I think those are the two main driver for the margin expansion. As I said earlier, net interest margin, you know, Q1 we expect fairly stable. But going forward, you know, Q2 and the remaining of 2022, again, I think it's a function of the how many times and what basis point the rate increase.
Directionally wise, if the rate goes up, it will definitely help more in the positive expansion of the margin after Q1 and the remainder of 2022.
Great. Thank you very much. And Kevin, maybe just one on capital, to follow up on Matt's question. You know, you were active with the buyback, but your CET1 is still 11 and hasn't really changed in the last year. Could you just remind us the governing ratio and where you would like to run the bank, understanding the balance between loan growth which is improving and just opportunistic buybacks?
Well, we do not have any specific ratio that we are sharing with the investors. What I can tell you is that our board, you know, considers this capital situation on a regular basis, taking into account all the, you know, potential uses of capital that will be most beneficial for the shareholders. If your question is about whether after the $50 million current buyback program, we may have another one coming, I don't think it is a little premature at this time to tell you, but obviously we will consider all the possibilities.
Okay. Thank you very much.
Again, if you have a question, please press star then one. The next question is from Gary Tenner of D.A. Davidson. Please go ahead.
Thanks. Good morning. Just wanna go back to a couple of items, Alex, you just mentioned. In terms of the mid-40% deposit beta that you were talking to, is that the expectation for, you know, say the first 100 basis points of tightening? Or is that kind of where you're thinking from the initial move, you know, 40% on the first 25 basis points, or are we starting lower and then getting to the mid-40s over the course of 100 basis points?
Sure. You know, I should have maybe clarified because there's many assumptions, and it will result in different NII implication. We have a parallel shock and also, you know, 25 basis points, you know, day one shocks. The 43% is more our parallel shock ramp scenario, meaning, you know, it will increase by in a ramp scenario basis. That's what we are actually forecasting. The ramp scenario that we modeled is a 100 basis point, 1% increase, but it's a gradual over the period, as the ramp scenario defines.
Okay. Thanks for that. Just to clarify, as you were talking about the variable rate loan book, you know, almost $6 billion of your loans, you're saying that there's no meaningful amount of floors or in the money floors that will slow down any repricing in that book?
You know, yes, we do have variable rates loans with the floors, but that amount is less than $1 billion. It's only like 16% or $900 million. Out of that, you know, balances, you know, $834 million of loans have already an interest rate equal to floor. I don't think the floor would have a much impact on our margin or ramp forward.
Okay, thank you. Just one last one from me. That addition to accruing TDRs, the commercial real estate loan, what segment was it within CRE?
Yeah, it was just considered CRE retail.
Retail. Okay. That's it for me. Thank you.
The next question is from Timothy Coffey of Janney. Please go ahead.
Great. Thanks. Morning, everybody. Could you remind me how much you have in PPP loans?
Sure. Total PPP loans remained at $228 million in Q4.
Great. Thanks, Alex. How much do you have in remaining fees?
We recognized $5.2 million in Q4, and the remaining for the rest is only $6.7 million left.
Okay, great. Thanks. And then just kind of thinking about the guide or, you know, your outlook, for the next quarter and the next year on both sides, revenues and expenses, what's the right way to think about your efficiency ratio, right? 'Cause, I mean, you obviously saw good improvement this quarter. It seems like you would, ex rates, have an improved efficiency ratio going forward. Is it right to think that it's gonna be in the low 50s%?
Tim, let me first respond to that. Yeah, efficiency ratio is the ratio that we carefully monitor. Also at the same time that we look at the ratio with respect to the average assets.
In 2022, our goal is to maintain the efficiency ratio in the low 50s or around 50%. I understand it will be a challenge because we expect some of the expense line items will be ticking up, especially compensation expense and things like that. At the same time, those expenses that we expect to increase are largely related to the business generation. As we previously mentioned, a good chunk of the increase in the compensation expense will be for hiring additional bankers on the front line. Those expense increase will be directly tied to our revenue generation. A second point that I would like to point out is that in the rising interest rate environment, net revenue growth is expected from our asset sensitive position, as Alex explained.
Lastly, our continued balance sheet growth should also help us enhance our operating leverage. Our goal is to be close to 50% and, at the same time, the ratio of our non-interest expenses to the average assets will be under 1.7%.
All right. Yep. Fantastic. Those are my questions. Thank you.
Thank you.
As a reminder, if you have a question, please press star then one. There are no other questions at this time. This concludes our Q&A session. I would like to turn the conference back over to management for closing remarks.
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 in three months. Bye everyone.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.