Hope Bancorp Inc (HOPE) 2017 Q1 法說會逐字稿

Good day, and welcome to the Hope Bancorp Q1 2017 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, Chad.

Good morning, everyone, and thank you for joining us for the Hope Bancorp 2017 First 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.

As stated in our 2017 first quarter earnings news release issued late yesterday, the company has not yet filed its annual report on Form 10-K for the fiscal year ended December 31, 2016, with the SEC.

While the company currently does not expect to report in its Form 10-K, any material changes to the financial results from those previously reported in the January 24, 2017, press release for the company's financial results for the 3 and 12 months ended December 31, 2016.

There can be no assurances that changes will not be made as the audit process is completed.

Certain statements regarding the timing and substance of public disclosures regarding the company's financial condition, results of operations and internal controls over financial reporting 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 the company, as well as businesses and markets that the company operates in 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.

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 approval of the shareholders of U & I Financial and other customary closing conditions.

There is no such assurance that such conditions will be met and the proposed transactions will be consummated within the expected timeframe or at all.

If the transaction is consummated, factors may cause actual outcomes to differ materially from what is expressed in integrating the 2 organizations and in achieving anticipated synergies, cost savings and other benefits from the transaction.

We refer you to the documents the company filed 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 quarterly report on Form 10-Q for the quarter ended March 31, 2017, could differ materially from the financial results being reported today.

Now, as usual, we have allotted 1 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.

Our 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.

Before we begin the discussion of our first quarter financial results, I would like to begin with a few words of gratitude to our friends in the investment community for your patience and understanding as we continue to work diligently with our independent audit firm to complete the 2016 audit.

While we still do not expect to report any material changes to our financial results, it is essential that we remain focused and continue to work through all the processes together with our auditors.

Based on where we are in the final stages of the audit, we now anticipate that Hope Bancorp's 2016 annual report on Form 10-K will be filed on or before May 12, 2017.

More than ever, during this delayed filing period, we believe we have benefited from the strong relationships we have with our shareholder base, and your loyalty and confidence in Hope Bancorp is truly appreciated.

Thank you.

Now, let's focus on the purpose of our call today.

During the first quarter, we saw some encouraging signs of progress in capturing the synergies we projected for the BBCN and Wilshire merger of equals.

However, a number of unusual expense items and elevated credit costs adversely impacted our bottom line results.

We generated $37 million in net income or $0.27 per diluted share.

Excluding merger-related expenses of approximately $950,000, our core earnings per share was $0.28 in the quarter.

As we indicated on our last call, we believed that this -- we would start to generate a higher level of loan production than we experienced in the second half of last year following the merger, and we were pleased that we delivered in this regard.

We originated $587 million in new loans during the first quarter, up 26% from $465 million in the prior quarter.

This represents the total amount of funds that was dispersed to our customers during the quarter.

If we look at the total volume of loans booked during the quarter, which includes loans like a construction loan that has been closed but not yet funded, then the loan volume amounts to $700 million.

So a very strong performance indeed, particularly, in light of the fact that the first quarter is seasonally the slowest quarter of the year.

This strong performance in loan originations, however, is not readily evident in our end-of-period loan balances.

We have some large decreases in the utilization rate of our warehouse lines of credit very early in the quarter due to a decline in the refinance market and anticipation of rising interest rates.

The sizable fluctuations in warehouse line balances during that quarter, which was down $107 million at quarter end, skewed our end of period average loan balances for the quarter, which ultimately impacted our revenue generation.

Excluding the variance in warehouse lines, our end-of-period loans would have increased 1%.

We were pleased that our loan originations reflect a more balanced reduction of CRE and C&I that we have been targeting.

Commercial real estate loans comprised 67% of total production and commercial loans accounted for 23%.

Residential mortgage loans accounted for 10%.

We also saw improved loan pricing in the quarter.

The average rate on new loan originations was 4.26%, up 11 basis points from the last quarter.

Our commercial loan production continues to ramp up.

We had $152 million in new commercial originations in the first quarter, up from $138 million in the prior quarter.

The largest contributors to the production this quarter came from our East Coast markets and our Corporate Banking group.

Overall, we now have $2.32 billion in total credit commitments outstanding to commercial customers and the utilization rate on our lines of credit was 50% at the end of the quarter.

While the first quarter is also a seasonably slower quarter for SBA originations, we had a nice ramp-up in SBA loan production versus the preceding quarter.

We funded 74 -- $75.3 million in SBA loans during the first quarter, with $52 million being sellable 7(a) loans.

This compares with $63 million in originations in the preceding fourth quarter with $42 million being sellable 7(a) loans.

Our residential real estate lending group produced $58 million of direct mortgage originations.

Again, the first quarter is a seasonally slower period for the purchase market, and with the refinance market being impacted by rising interest rates, our overall origination volume was light in the quarter.

Additionally, our loan production in the first quarter was more heavily weighted towards the 5/1 and 7/1 adjustable rate mortgages that we retained on our balance sheet.

This resulted in fewer loans being sold into the secondary market and lower-than-expected gain on sale for the quarter.

As we move into the seasonally stronger quarters for the home-buying market, we certainly expect to see a higher level of residential mortgage originations.

However, we expect the mix may be more heavily weighted towards our portfolio loans for the near term, which may limit the growth in gain on sale of residential mortgage loans.

Now, before I turn it over to Doug, I would like to comment on our deposit balances.

Notwithstanding the closure of 12 branches at year end of 2016, we saw a positive mixed shift in the quarter, with noninterest-bearing deposits increasing $64 million and money market accounts increasing $80 million, which enabled us to run off some of our higher cost time deposits.

The growth in core deposits, despite the branch consolidations, underscores the strength of our customer relationships and deposit franchise.

With that, let me turn the call over to Doug to provide additional details on our financial performance in the first quarter.

Doug?

Thank you, Kevin.

As I begin the review of our first quarter results, I will limit my discussion to just some of the more significant items in the quarter since we provided quite a bit of detail in our press release.

Excluding the impact of purchase accounting adjustments, our net interest margin was 3.49%, up 4 basis points from the prior quarter.

The increase was primarily driven by a 4 basis point increase in our core loan yields as a result of the 2 Fed rate increases since December.

With increases in the prime rate, we get an immediate bump in our loan yields, while increases in the prevailing interest rates ultimately flow through to our deposit costs, although with a bit of a lag.

Until the next increase from the Fed, it is possible that increases in our deposit costs could erode some of the lift we saw in the March of this quarter.

However, with the current trend in interest rates, we feel comfortable that we have seen the trough in our net interest margin and the future quarter-to-quarter variance will be stable to modest improvements, depending on the timing of additional increases in the Fed funds rate.

Moving to noninterest income.

We had lower gain on sale of SBA loans relative to the prior quarter, which is typical for the first quarter.

We sold $45 million of SBA loans in the quarter with an average premium of 8.85%.

This compares with $50 million of SBA loans in the preceding quarter with an average premium of 8.59%.

Our gain in residential mortgage loans was also lower by about $1 million, primarily due to the lower overall production and the mixed shift that Kevin discussed.

The one major positive variance we had in the quarter was $1 million increase in other income, which was primarily driven by higher swapped income.

Turning to noninterest expense.

Our merger-related expense was the largest difference for the prior quarter, coming in at $947,000, down considerably from $3 million last quarter.

We also saw declines in our occupancy and furniture and equipment expense, demonstrating the cost-savings from phase 1 of our branch consolidation plan.

After the one-time benefit we had in our FDIC assessment last quarter, our assessment was approximately $1 million in the first quarter, which reflects our new run rate following the favorable rate adjustment we received late in 2016.

Our advertising and marketing expense increased by approximately $1 million from the prior quarter.

This was driven by the seasonal impact of a new LPGA sponsorship that we have started.

Over the remainder of the year, quarterly advertising and marketing expense should return to the range of $2.5 million to $2.8 million.

Our credit-related expense increased by approximately $1 million.

This tends to be a volatile line item and was impacted this quarter by the higher level of charge-offs this quarter relative to more recent quarters.

The last significant unusual item impacting our expenses this quarter was a $1.2 million valuation loss that we recorded on the sale of the former headquarters of Foster Bank.

This drove the increase in our other noninterest expense this quarter.

Moving on to asset quality.

A number of previously identified problem loans moved to charge-off during the first quarter, driving higher provision expense.

In total, we had $6.3 million in net charge-offs this quarter, with the largest single component being $3 million charged off on a $9 million commercial loan relationship.

This credit had been on nonaccrual status for several quarters, and when the borrower failed to comply with the terms of the workout, we charged off the loan.

We had $2.3 million in specific reserves that had been previously established with this credit.

The remainder of the charge-offs primarily related to smaller loans aggregating $3.6 million with no significant concentrations within any one particular industry or market.

These smaller impairment charge-offs were caused by various circumstances like business closures or property vacancies, leading to their nonperformance in the first quarter.

Due primarily to the charge-offs, our nonperforming assets declined by approximately $6 million in the quarter.

Within the broader portfolio, we saw generally positive trends as our total criticized and classified loans declined by approximately $21 million.

We recorded a provision for credit losses of $5.6 million in the quarter, which kept our allowance to total loans ratio essentially unchanged from the prior quarter.

With that, let me turn the call back to Kevin.

Thank you, Doug.

Looking ahead to the remainder of 2017, we are optimistic that our bottom line results will be more reflective of the true earnings power of our franchise.

As the combined organization gains more experience working together, we are seeing an increase in productivity in our business development efforts.

Moving into the seasonally stronger quarters, we remain confident that loan origination volumes will fully return to anticipated levels as a combined company.

And by the end of the second quarter, we should be back on track to delivering annualized loan growth going forward of high single digits on an organic basis.

With higher revenue growth and a return to more normalized operating expense levels and credit costs, we should see an improvement in our level of profitability.

We also continue to be on track to close our acquisition of the U & I Financial Corp.

sometime in the third quarter.

With a larger and more solidified presence in the Pacific Northwest and being the only Korean-American bank serving this large community of Asian-Americans, we believe we will be well positioned for this market to provide an important source of incremental growth.

Finally, I would like to comment on the announcement made this morning of the appointment of David Malone as Senior Executive Vice President and Chief Operating Officer of Bank of Hope.

David Malone is well regarded as one of the most accomplished bankers in Southern California.

But more importantly, he has been a tremendous asset to the board as well as to the management team during the most transformative phase of growth for our bank.

With David taking on responsibility of all support and administrative functions, I will be dedicating the majority of my time on business generation in a more active role, working more closely with our frontline executives to grow the bank.

We believe this will further strengthen our prospects for achieving higher levels of growth and profitability in the years.

Over the last 3 years, as a leading member of our board, David has come to know quite well our executives, the bank, our customer base and the markets in which we operate.

And as a result, we believe he will smoothly transition to a critical member of our leadership team in a relatively short time frame.

I certainly have enjoyed working with him to date as a member of the board, and I look forward to working with him as a member of our executive management team.

With that, let's open up the call to answer any questions you may have.

Operator, please open up the call?

(Operator Instructions) Our first question will come from Aaron Deer with Sandler O'Neill and Partners.

I know most of the challenged growth in the quarter came from paydowns and sounds like the warehouse usage as well.

But just curious in terms of your outlook, you sound reasonably confident that you've got a good pipeline.

But I'm wondering, did the impact ahead of your corporate lending group, does that had any impacts on your outlook there?

And where do you stand in either refilling that position or just hiring more C&I lenders in general?

Well, let me first respond to your question on our Corporate Banking group.

As we have discussed in the past, our Corporate Banking group is implementing multiple initiatives, and one of which is expanding the function of legacy BBCN's syndicated lending group.

And we have added a seasoned banker with experience from the mainstream banks to oversee this expansion.

And after the departure of Mark Lee, who used to be our head of corporate banking group, this banker has been promoted to our Chief Corporate Banking Officer.

And I think his leadership and his expertise, I think we are in a good position to increase our capabilities and build our capabilities in this business unit.

And in addition to the leverage lending capacity, we have also utilized the existing resources of legacy Wilshire in its entertainment lending platform, and I think we have been performing pretty nicely in there.

In terms of your question on the pipeline and the outlook on our loan growth, if you look at the loan production pipeline and volume, they increased in the first quarter, even though it was seasonally the lowest quarter of the year, and with an increased pipeline heading into the second quarter, I think we are very confident that we will continue to make progress and deliver a solid level of growth over the next few quarters, so that as we previously guided the high single-digit loan growth on an annual rate would be achieved on a going-forward basis.

Okay.

I appreciate the color there.

And Doug, if there's something that you could maybe give some thoughts on the loan yields or the rate on new loans relative to that and existing portfolio.

Just trying to understand expectations given that the, if I recall correctly from the press release, the new yields are coming on like 37 basis points below the existing spread on the loan.

But can you kind of talk about the dynamic there and what that means for the yield going forward?

Yes, there is a lot of pieces there.

So that 37 basis point spread is not quite as large because our actual yield on the portfolio is about 15 to 20 basis points higher than the coupon on the portfolio because of discounts and fees and various things.

So the actual spread between what's in our portfolio, what we're originating is closer to 15 basis points.

So that's on its own a very, very slow erosion of the loan yield.

On the other side, the repricing of the variable rate proportion of our portfolio is more than offsetting that currently.

The last Fed increase in the middle of March.

We got some of the benefits in this March and they spot another $2 million to come in the next quarter, just from that increase.

If I net all that out for you, I will stick with what I said last quarter, which is with this increase we're pretty much too stable to a very slow uptick in the core margin and down the road more increases could help us.

The next question comes from Matthew Clark with Piper Jaffray.

I wanted to ask about the run rate of operating expenses.

Obviously, a lot of moving parts and a little bit of noise this quarter, but just knowing that you have cost saves coming through, just curious what your thoughts are on the run rate going forward, could we be closer to $60 million?

Does that seem reasonable or am I being a little too optimistic?

Well, I'll be a little slow to give you the exact number because we have a lot of initiatives going on, and we're not afraid to make investments, if it's going to drive ROE and growth in our earnings.

But there is a lot of noise in the current quarter, and we looked at all the pieces of that because clearly, we would like to have lower expenses and higher earnings.

Nothing in there deterred us from our projection that with the next round of branch closures we should have a, excluding merger cost, efficiency ratio in the low mid-40s.

Okay.

So that's still the target by the third quarter, right?

Correct.

And then your security deals were up nicely.

How much of that was just reinvested and how much of that was premium am?

I'm just curious what the premium am was this quarter versus last?

Well, you've got me to sort out details.

It was a little bit of each, honestly.

Okay.

Tax rate, a little bit light this quarter.

I assume that's related to the change in accounting.

Just curious what the...

Not too much actually.

The change in accounting was a very minor impact.

It was actually a total of $73,000 in the quarter.

The lower tax rate, so that's a little piece of it.

The rest of it is really when we blend the 2 financials from the former Nara and the former BBCN -- Nara, my gosh, former Wilshire and former BBCN.

Wilshire had a higher percentage of tax-advantage investments, both in the securities portfolio and in some of the other asset categories.

And so when we do that for the full year, the blended rate of the combined bank is a little lower than the average rate for BBCN.

Say that, throughout the $73,000 for the accounting change on top of that.

Okay.

So around 39, sounds like it's a good...

Yes.

I mean, the normal is going to be 39.25, 39.5 in that range, absent discrete items, the flow through like the accounting change.

The nature of that accounting change, you've probably studied it, it does make that tax rate more volatile than the old days.

It can go up and down by what happens with option activity.

So it's harder to predict an exact ratio.

Okay.

And then on the SBA production, premiums there looked fairly steady.

On the production, it seems like it came in a little stronger in a seasonally slow quarter.

Is 45 to 50 kind of a better range to think about on an ongoing basis?

For that we -- because of the seasonality, we guide that on an annual basis, we expect about $200 million on an annual basis, and it can vary from quarter-to-quarter.

And in terms of the secondary market, we have not seen any substantial changes that would signal a change in direction in one way or the other.

Premiums seem to be holding up pretty nicely, and in fact, the premiums that we realized in the first quarter were a little higher than the premiums that we had in the preceding fourth quarter of 2016.

The next question will come from Chris McGratty, KBW.

Kevin, on the elevated paydowns, a lot of banks are facing this kind of temporary headwind.

I guess, how should we think about what is the factor that drives the slowdown?

Is it purely a function of rising interest rates?

I'm struggling with kind of what the driving factor will be to let that number moderate to let net loan growth improve.

Well, the payoff and paydowns were most notable in our warehouse line balances.

And like we said, the warehouse line balances are the advanced lines that we offer to the retail mortgage lenders.

And because of the slowdown in the refinance market, I think that pretty much impacted the warehouse line reductions during the first quarter.

And that is particularly significant because it resulted in reducing our interest income from this and actually the warehouse line that we had as of the last year and was about $350 million and it went down by more than close to $200 million at the beginning of the year.

And at the end of the first quarter, the balance went back up to $244 million.

So payoff and paydowns, I think it is pretty much normal other than the warehouse lines that we experienced and that was directly related to the refinance market of the mortgage loans.

Okay.

That's great color.

If I can ask a quick question on credit.

You gave a color on the charge-offs in the quarter, how should we be thinking about near-term expectation for charge-offs [increasing] levels.

Your classified came down a little bit.

You still had a little bit of a jump, I think, related to Hanjin.

I guess number 1, is there an update there one way or the other?

And 2, how should we be thinking about near-term charge-off rates?

Sure.

This is Peter.

I think related with the Hanjin concern that we had before, we know publicly that Hanjin had declared bankruptcy.

I think luckily for us, our customer base really did not suffer.

We did downgrade appropriately, but I think we are seeing a lot of improvement after the bankruptcy was actually filed and everything was actually cleared.

So we're looking pretty good on that front.

For the charge-offs, definitely, first quarter was an elevated quarter.

I think this was an unusually a little bit higher quarter.

We had one large C&I relationship as we had disclosed, that did have a $3 million charge-off.

Fortunately, we had $2.3 million of specific reserves on that credit.

I think going forward, we will have charge-offs with the size of the bank, and it will be slightly lumpy.

But definitely, I think first quarter was definitely unusually high.

So I foresee that coming down as well as the impact to our provisioning that also reflected the higher level of charge-offs this quarter.

So we would anticipate that to also to moderate downwards as well.

The next question is from Gary Tenner of D.A. Davidson.

I had a couple of question.

I guess, first on loan growth, again.

I think you had made the comment, Doug, that even if you kind of add it back or just for the mortgage warehouse, your annualized loan growth would have been around 4% in the quarter.

Can you talk about -- I mean, has there been any sort of headwinds customer-wise whether it speaks to any lenders that maybe left the bank or anything like that, that's having any sort of outsized negative impact on the retention of loans?

This is Doug.

No.

I would say no as a generality.

We do look at the trends in the loans.

We have shown to you every quarter.

We can look at them every week, every month and so forth.

There is always the one-off story about a deal that gets poached but to a lower rate or something like that.

But really I think what we're feeling, what we felt this quarter was a return to growth that was offset by the seasonality, what was going on on the mortgage industry and the warehouse line and the projection that we gave the last quarter that we thought we could come back to a pretty normal production and a run rate of growth at the end of the second quarter, we see that tracking from all the pieces we're looking at.

Gary, if I may add to what Doug said, we have a pretty strong pipeline that we see entering into the second quarter in comparison to the pipeline that we saw at the beginning of the year.

In terms of your question on the retention problem of lenders at Bank of Hope because our lenders are really experienced, capable and well-trained.

They are the targets all the time from our competitors.

But I think the market position that we have in the space that we operate is enough of an incentive for them to grow into this organization than to go to a smaller organization.

And at the same time, our leadership position today also makes us a little easier to recruit talented lenders from other institutions, including bankers from the larger and more mainstream institutions.

So it is always an ongoing process, people that try to recruit our good lenders from us.

But I think we're well positioned to retain good people, and at the same time, we always look at opportunities to add talented bankers and lenders to this organization.

Okay.

And then one other point of clarification, I think somebody made the comment about expectations for a high single-digit pace of growth for the remainder of the year in terms of loan growth.

I just want to make sure you're not -- you're saying that for the next 3 quarters not suggesting you're going to catch up to that for the full year side, is that correct?

Yes.

What I said was, on a going-forward basis, I think we will reach to a level of production where the delivery of a high single-digit loan growth annually on a going-forward basis would be achievable in a few quarters.

Okay.

And then the last question on the gain on sale piece.

It sounds like the expectation for the next few quarters at least is more portfolio production of mortgage.

So the gain on sale on SBA, if it's generally in this range...

No.

We're talking about gain on sale of residential mortgage loans, not gain on sale of SBA loans.

So the mortgage production is going to be for portfolio.

Yes.

Right.

More portfolio than the sale to the secondary market.

(Operator Instructions) Our next question comes from Steve Marascia with Capital Securities Management.

One of my questions was answered, but I do have another question and that is, given the strategic vision that you have for your company going forward, when do you anticipate that you might reach the [nature] of your ROA and ROE ratios?

I understand your question but I'm not quite sure we're going with it.

I think we get, let's say, in the third quarter and we've got an efficiency ratio in the mid-40s and we're growing the earning out of the balance sheet several months, I think we should have a much more normalized both ROA and ROE.

Ladies and gentlemen, this concludes 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, and we look forward to speaking with you again in 3 months.

And thank you, sir.

The conference is now concluded.

Thank you for attending today's presentation.

You may now disconnect.