Hope Bancorp Inc (HOPE) 2016 Q4 法說會逐字稿

Good day and welcome to the Hope Bancorp fourth-quarter 2016 earnings conference call.

(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. Please go ahead.

Thank you, Allison. Good morning, everyone, and thank you for joining us for the Hope Bancorp 2016 fourth-quarter investor conference call. Before we begin, I'd like to make 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. In addition, certain statements regarding the proposed transaction between Hope Bancorp and U&I Financial Corp., including the expected timeline for completing the transaction; future financial and operating results; benefits and synergies of the proposed transaction; and other statements about the future expectations, beliefs, goals, plans, and prospects of the management are statements that may be deemed to be forward-looking statements.

These statements are based on current expectations, estimates, forecasts, and projections, management assumptions about the future performance of each of the Company and the combined Companies, as well as the businesses and markets in which they do and are expected to operate. These statements constitute forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995.

We wish to caution you that such forward-looking statements reflect our expectations based on current expectations, estimates, forecasts, and projections, and management assumptions about the future performance of Hope Bancorp. 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.

The closing of the proposed transaction is subject to regulatory approvals, the approvals of the shareholders of U&I Financial, and other customary closing conditions. There is no assurance that such conditions will be met and the proposed transactions will be consummated within the expected time frame or at all. If the transaction is consummated, factors may cause actual outcomes to differ materially from what is expressed in integrating the two organizations and in achieving anticipated synergies, cost savings, and other benefits from the transaction.

We refer you to the documents the Company files periodically with the SEC, as well as the Safe Harbor statements in the 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, 2016 could differ materially from the financial results being reported today.

As usual, we have allotted one hour for this call. Presenting from the management side today will be Kevin Kim, Hope Bancorp's President and CEO; and Doug Goddard, our Chief Financial Officer. Chief Credit Officer, Peter Koh, is also here with us today and will participate in 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. In the first full quarter of operations following the merger of the former BBCN Bancorp and Wilshire Bancorp, we've delivered a solid performance generating $40.6 million in net income, or $0.30 per diluted share. This includes $3 million of merger-related expenses largely related to the implementation of Phase I of our branch consolidation plan and the completion of our systems conversion. Excluding the merger-related expenses, our net income would have been approximately $42.4 million, or $0.31 per diluted share.

With the systems integration completed mid-November, and the first phase of the branch consolidations completed at the end of December, we have phased in approximately 50% of the projected cost savings for the merger. The second phase of the branch consolidations plan will be completed during the first half of 2017, and we believe we are well on track to fully realize all of the cost savings during the second half of the year.

Most of our major line items fell within our expectations for the fourth quarter, with the exception of loan growth, which came in lower than expected. We had $465 million in loan originations in the fourth quarter, which resulted in our total loans outstanding remaining essentially unchanged from the end of the prior quarter.

Our loan production was impacted by a number of factors. First, we generally saw a reduction in loan demand in our core markets, which was particularly acute in the commercial real estate market following the election. Given the jump in interest rates, particularly in the yield on the 10 year, we saw a number of customers taking a more cautious wait-and-see approach to making near-term investments in commercial real estate until there is more certainty on the type of economic and interest rate environment we will have going forward.

The number of transactions in our markets appear to pause somewhat in the last two months of the quarter. And many deals that were in the process were not completed during the quarter, as either the buyer or the seller hesitated or decided to back out.

Second, of the deal flow that we did see, much of it was in segments of our portfolio where we are closely monitoring and managing the growth rate. So there were a number of deals that we were particularly selective and withheld from completing as we took a more cautious approach to our portfolio management strategy.

And third, we held firm in our pricing on new deals, particularly fixed rate loans, given the rising interest rate environment. This obviously had an adverse impact on overall loan production. The average yield on new loan originations was 4.15% in the fourth quarter, up from 4.03% in the third quarter. And fixed-rate loans accounted for just 42% of new loan originations, relatively in line with the preceding three quarters, but down from 53% in the year-ago fourth quarter.

On the commercial loan side, demand was solid and we did a good job of developing new relationships. Last quarter, our commercial loan originations included $100 million warehouse line-of-credit commitment, which was fully utilized as of September 30 of 2016.

Excluding this one credit, our new commercial loan originations increased by nearly 85% to $138 million from $75 million last quarter. Overall, we now have $2.4 billion in total credit commitments outstanding to commercial customers, and the utilization rate on our lines of credit was [52]% at the end of the quarter.

In terms of SBA lending, we found that the same dynamics that impacted our commercial real estate lending also impacted our SBA loan production in the quarter, which came in at $63 million, with $42 million being sellable 7a loans. We saw a general trend of lower deal flow post election, less attractive deals that we elected not to complete, and deals falling out of the loan pipeline due to a transaction being delayed or cancelled following the Presidential election.

Our residential real estate lending group produced $74 million of direct mortgage originations and another $16 million of new warehouse line outstandings. The fourth quarter is typically a seasonally slower quarter for residential mortgage production, and the increase in mortgage rates also had an impact.

The former BBCN's residential mortgage business was predominantly a refinance business as a new platform, while the former Wilshire's longer established business was a more balanced mix of purchase and refinance loans. With mortgage rates increasing during the quarter, demand for refinance transactions dropped significantly following the election. Given the less favorable environment for refinancing, we are expecting the growth in production of direct residential mortgage loans may slow somewhat from current levels until there is a more clarity on our new President's policies and agenda.

All in all, of the $465 million in new loan originations, commercial real estate loans accounted for 58%, C&I loans accounted for 31%, and consumer loans accounted for 11%.

We saw an elevated level of loan pay-offs this quarter, which reflects in part a full quarter's operation as a combined Company, and this offset growth in our loans receivable. We had $313 million of loan pay-offs in the fourth quarter, which was almost $100 million higher than last quarter. Loan pay-downs amounted to $104 million in the fourth quarter versus $142 million in the preceding quarter.

Now I would like to make a general comment on our overall progress with integrating our business units. We are in the final stage of a transitional period of combining two strong lending forces and formulating a strong credit culture that will carry the Bank through the years ahead.

I am very pleased to say that our front-line leadership remains fully intact and our credit admin policies are now set. Now that our focus has moved beyond integration and with clearer overall business development guidance from corporate headquarters, we believe our front line is now on track to begin delivering the synergies from the combined entity.

Looking forward into 2017, we expect loan origination volumes will fully return to anticipated levels as a combined Company by the second quarter, and contribute to annualized loan growth of high-single digits on an organic basis. With that, let me turn the call over to Doug to provide additional details on our financial performance in the fourth quarter. Doug?

Thank you, Kevin. As this was our first full quarter of combined operations following the merger, compared to just two months of combined operations of the third quarter, much of the quarter-to-quarter variance, and particularly line items, can be attributed to the extra month of combined operations. So as I review our results, I'll focus my discussion on those items where there were other factors driving the variance.

Excluding the impact of purchase accounting adjustments, our net interest margin was 3.45%, down just three basis points from the prior quarter. The decrease was primarily driven by a four basis point increase in our core deposit costs.

Moving to noninterest income, the major variance was driven by the resumption of our usual practice of selling most of our SBA 7a loan production during the quarter, which contributed $3.7 million in net gain on sales. The average premium on SBA loan sales in the fourth quarter was 8.6% and within the normalized range that we typically see. The other major variance from the prior quarter was approximately $950,000 less in net gain on security sales following the repositioning we did in the investment portfolio post merger following the third quarter.

Turning to noninterest expense, our merger-related expense was the largest difference from the prior quarter, coming in at $3 million, down from $11.2 million last quarter. The accrual for our FDIC assessment was unusually low this quarter at $468,000. We received a favorable rate adjustment during the fourth quarter. Going forward, we expect our quarterly FDIC assessment to be approximately $900,000.

The other major variance was in our OREO-related line items, which swung from income of $423,000 in the third quarter to $1.4 million of expense in the fourth quarter. We typically see a high level of volatility in this line item.

Turning to the balance sheet, both total loans and total deposits were essentially flat in the quarter. With respect to deposits, our money-market accounts were up by a little more than $80 million, which was offset by declines in time deposits.

Moving on to asset quality, we saw a generally good trend across the portfolio, with declines in criticized loans and non-performing assets, and a lower level of net charge-offs. The decline in non-performing assets was primarily driven by a $5.5 million decrease in OREO, reflecting an effort of the fourth quarter to clean up our special assets portfolio post merger.

We had a $9 million increase in delinquent loans, but this was mainly due to administrative delays for loans in the renewal process. We continue to closely monitor any potential impact on our customers as a result of the bankruptcy filing of Hanjin Shipping. To date, it appears that there has been minimal impact.

We have one large multi-relationship customer who is related to Hanjin, whose status is being impacted by the bankruptcy proceedings. At this time, it appears as though the outcome will be favorable. However, we have moved this credit from special mention to substandard until the outcome is finalized. And this one credit relationship accounted for the majority of the change in those credit classifications this quarter.

Reflecting the favorable credit trends, low level of charge-offs, and the current loan balance, our provision for credit losses was just $800,000 in the fourth quarter. With that, let me turn the call back to Kevin.

Thank you, Doug. As we announced yesterday, we were very pleased to reach a definitive agreement to acquire U&I Financial Corp., the holding company of UniBank in Seattle, which was our only Korean-American competitor in the Pacific Northwest. While the size of this transaction is much smaller than our recent merger of equals, the combination with UniBank is a very important milestone.

First, this merger makes Bank of Hope the only Korean-American Bank with operations in the Pacific Northwest, which has shown a steadily growing Asian-American community. In terms of Korean Americans, we estimate that there may be close to 150,000 scattered throughout the Greater Seattle area, and over 500,000 Asian Americans; however, the vast majority of this population is using mainstream banks. This means there are tremendous opportunities for us to gain deposit market share. Moreover, we believe we have established a formidable competitive barrier that will be a considerable challenge to overcome for any of our niche peers who may want to enter this market.

Second, the Pacific Northwest has been a very ripe SBA lending market. As most of you should know, Bank of Hope is one of the top SBA lenders in the nation, and this transaction further strengthens our competitive position in this region of the country.

Third, Seattle serves as an important port in the trans-Pacific trade lane. With our strong heritage in international trade finance, our goal is to better position the Bank for the long term to capitalize on what we believe will be increasing business opportunities for us in this part of the country in the years to come. And finally, this merger continues our momentum as the only super-regional Korean-American Bank and the only one with a true national footprint.

Now UniBank operates four branches in Seattle area, three of which are located near Bank of Hope branches. And as many of you may expect, we anticipate a relatively high level of cost savings in the range of approximately 60% for this transaction. The economics of the transaction are very attractive, and we expect the acquisition to be immediately accretive to tangible book value and earnings. On the basis that the transaction is completed by the early part of our 2017 third quarter, we would expect earnings contribution of approximately $0.01 in 2017 before transaction costs, and $0.02 in 2018.

Outside of the acquisition of U&I Financial, our focus in 2017 will be on fully realizing all of the synergies projected for our merger of equals. The integration has gone smoothly so far, and we look forward to demonstrating our full earnings capacity after all of our cost savings are achieved.

We will also continue to focus on diversifying both our loan portfolio and our overall business mix. We have a number of new business lines that continue to gain traction, such as residential mortgage, credit cards, equipment leasing, and wealth management. As we continue to gain more experience and generate more awareness with these offerings, we believe they will start making meaningful contributions to our financial results.

Overall, 2016 was certainly a monumental year for our organization, with the formation of the only super-regional Korean-American bank in the United States, and one that can not be replicated by our niche peers in terms of size or market dominance. We believe this organization is far better positioned than ever to deliver strong and sustainable financial performance and further enhance the value of our franchise for our customers, employees, and shareholders. With that, let's open up the call to answer any questions you may have. Operator, please open up the call.

Thank you.

(Operator Instructions)

Our first question will come from Matthew Clark of Piper Jaffrey.

Hi, good morning all.

Good morning.

Good morning.

First, wanted to ask how much the FHLB special dividend was this quarter as a part of the core margins?

Approximately $900,000.

Okay, got it. And then I see the core loan yield remain steady at 4.8%, I think, link quarter. Just curious with the step up in pay-offs what the prepaid penalty income might be or was in the third and fourth quarter?

I don't have the exact dollars immediately in front of me, but they're really a very minimal impact on our margin. It's simply not a very big part of our portfolio. I can get back to you with the actual numbers at a later date, but it is not a major variance item for us.

Okay, that's fine, then. And then just on the loan growth, you laid out a bunch of reasons as to why the balances were down this quarter. But just curious if there might be a portion of your combined loan portfolio that, where there might be customer overlap or there might be some concentrations by industry or type that you might be targeting to run-off over time. Just trying to [ring fence] if there's a portfolio that we should consider going forward that might mitigate some of the loan growth.

I believe that the loan origination during the third quarter and fourth quarter of 2016 was impacted by the transitional nature of our integration. And once the integration is over, and actually, we are in the final stage of a transitional period, I think that high single-digit annual loan growth is a very reasonable target on an organic basis, on a going-forward basis also. And I think we are not really concerned about the low level of productions during the past quarters, and I'm confident that we will return to more expected levels for the quarters coming.

Okay, and to clarify, you said beginning in 2Q is that right? That level?

Yes.

And then the just last one in terms of the cost saves on the latest acquisition, did you say 60% before? I missed it.

60%, six zero.

Okay got it, thank you.

Thank you.

Our next question will come from Chris McGratty of KBW.

Great, thanks for taking the question. Maybe we start with a question on the SBA business. I'm interested, Kevin, in how you're thinking about the legacy business and how it will react from a growth and gain-on-sale perspective in a rising rate environment?

Well, we have not seen any substantial changes in the secondary market that would be a signal to a change in direction one way or another. And premium in the secondary market seems to be holding up pretty well. So I do not anticipate any substantial changes in that area.

And SBA has been a very important business segment for Bank of Hope. Going back to BBCN and Wilshire, both legacy organizations had strong business in the SBA area. And with the acquisition of UniBank in the Pacific Northwest, I think our SBA will be a big factor for 2017. And actually, if I look at the pipeline of our SBA loans for the first quarter of 2017, it looks much better than the one that we saw in the fourth quarter of 2016.

Okay, that's helpful, thanks. Maybe a question, Doug, for you. Can you remind us where did the balance of accretable yield ended the year, and then the expectation for contributions for the next couple years?

Oh, that's not as easy as it sounds. Prior to Wilshire, we were down to about $12 million. Wilshire added about another $20 million. If you look at the run rate, you can see in our table from the earnings release, I think you could expect, if you take the fourth quarter and annualize it, it's probably a 20% per year decline.

Okay, and then maybe while we're at it, now that you've gotten through a full quarter of the integration, how should we be thinking about the size of the investment portfolio, either dollars or percentages from here? Any fine tuning that needs to be done or is this $1.6 billion of about what's right for --

I wouldn't think of fixed in terms of dollars but more in terms of percentage. I think we've brought it back within the range that we would consider normal as a percentage of total assets. I think we would probably expect that to be a growing portfolio with the rest of our balance sheet, but not with a wildly disproportionate change.

Okay, and maybe lastly if I could, on the acquisition, I haven't been able to dig in too much into the financials of the company you're acquiring. But in terms of fees and expenses, before the cost savings, could you just help us with what the run rates have been and we can layer in the 60% off of that? Thanks.

I'm sorry, you're asking for the remainder of expenses?

The expenses at the company you're purchasing to get the -- I'm just trying to get a sense of where that level is.

That 60% translates to about $5 million in saves.

Okay, and the fee income, Doug, component of--

Well, the noninterest income component of the bank was very much driven by SBA gain. So I would look at that in terms of our combined target. Absent SBA gain, it's a fairly low percentage in the target bank.

Okay great, thank you very much.

(Operator Instructions)

Our next question will come from Tim Coffey of FIG Partners.

Great, thank you. Good morning, everybody.

Good morning.

Doug, if we can stick on the details of the transaction, have you identified loan marks?

Well, obviously it's very preliminary, but they're not a troubled bank. They are a well run bank. They have slightly elevated non-performers, so a midpoint of their estimate would probably be about 5% for the loan mark.

Okay, and given the size of the cost saves, are you anticipating any fixed asset write downs?

Other than the loan mark, no. It's an interesting profile bank actually in terms of the facilities and so forth. Absent branch closures, they actually have some undervalued properties on their books. So we don't see other write downs in significant ways other than the normal branch consolidation related, which we've included in an estimate of about $5 million of one-time transaction costs.

Okay, and then, Kevin, you had mentioned in your prepared remarks there were some portfolios that I think Hope Bancorp might have held back the growth there. Could you provide some color on what those portfolios were?

Well, the most deals that we passed were due to pricing rather than the type of properties. We were not really willing to originate at a certain pricing range. And obviously, the pricing differs from the property type to property type, but our pricing was the main issue for the deals that we intentionally or deliberately passed on.

Thank you for the clarification, and then just a follow-up and a general question. Certainly, the trade policies and the outlook on international trade, especially for the western region, has changed since the election. How are you thinking about your business with your clients that have international supply chains or what have you going forward?

I think it is a little too early to project at this time. But the new trade policy, I think, would induce more investment from Korean national companies to the US. And if that happens, I think it would positively impact our potential opportunities here in the US.

Okay, great. Thank you. Those are my questions.

Thank you.

Our next question will come from Gary Tenner of D.A. Davidson.

Thanks, good morning. Just wondering, Doug, get some clarification on the timing of the fourth-quarter branch consolidation and any benefit on the expense line in the fourth quarter. And then, also, beyond the one-time cost for the second phase of the branch consolidation, are there any other meaningful one-timers left in the MOE?

In terms of the one-time cost to the MOE, there's a tail of a little over -- of in the neighborhood of $1 million of miscellaneous. So as we look at merger-related expenses in 2017, it's probably $6 million aggregate including the new deal.

And that includes the one-time cost related to the second round of the branch consolidation?

Yes. And then, I'm sorry, in the fourth quarter, the timing of the branch consolidation and if there were any benefits to operating expenses in the fourth quarter from that? Some, but not large because of the timing of it. We did have some staff reduction during the quarter, and but most of that starts to hit the run rate in 2017. There's a lot of moving parts in the expense, obviously. We're building expenses in the area of risk management and in some of the initiatives and growth in other areas. But we do feel like we're hitting the targets on the cost reductions.

But because of all of the moving parts, I like to reduce that to the efficiency ratio. Excluding merger-related expenses, we still aim to be at a run rate of the low to mid 40%s on the efficiency ratio by the middle of next year.

Middle of 2017?

Yes.

This year.

This year, thank you.

Thanks, Doug.

I'm always behind.

(Operator Instructions)

Our next question is a follow-up from Chris McGratty of KBW.

Great, thanks for the quick follow-up. For 2017, Doug, can you help us with the effective tax rate?

With or without a price change from the government? The fourth-quarter tax rate is actually very normal. It's very, very close to 40% is a normal rate for us with the recurring tax advantaged items we have it's a combined bank. It's very close to 40%. (Multiple speakers)

And obviously, it's still preliminary, but I'm interested in your thoughts on, to the extent we do get corporate tax reform, number one, have you thought about the actual impact?

And then, number two, we're hearing some banks talk about how much of that actually falls to the bottom line versus gets competed away. Any high level comments on either of those factors? Thanks.

Very high level, sure. With a one-time -- with a change in the corporate tax rate, from federal tax rate there's two impacts. One, there's a one-time effect on your deferred tax asset.

So if we went to a 25% tax rate, for example, I think we would lose about somewhere between $15 million to $20 million on our tax asset, but we would add to our core recurring run rate. We'd earn that back in less than a year.

The effect is slightly muted. It's -- in our case, because we have a lot of operations in California and New York. So the state doesn't change. So the first pass is you get a one-time hit on your deferred tax asset and you get it back in about nine months on the tax rate.

As far as what happens to competition, I'm not sure my guess is a lot better than yours. Well, I do have a guess though, is there would be some pressure, but the industry would certainly try to keep some of that.

That's great, thanks a lot.

(Operator Instructions)

In showing no further questions, this will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you. Once again, thank you all for joining us today. We look forward to speaking with you in three months. Thank you.

Thank you.

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