Hope Bancorp Inc (HOPE) 2017 Q3 法說會逐字稿

Good day, and welcome to the Hope Bancorp Third Quarter 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, Andrew.

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

These statements are based on current expectations, estimates, forecasts, projections and management assumptions about the future performance of the company as well as the businesses and markets in which the company does and is expected to operate.

These statements constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.

These statements are not guarantees of future performance.

Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements.

We refer you to the documents the company files periodically with the SEC, as well as the safe harbor statements and 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 September 30, 2017, could differ materially from the financial results being reported today.

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 Alex Ko, our Chief Financial Officer.

Chief Credit Officer, Peter Koh, is also here with us today and will participate in the Q&A session.

Now, before I turn the call over to management, I would like to announce that our CEO, Kevin Kim, has been appointed to the CSBS Bankers Advisory Board.

The Conference of State Bank Supervisors, or CSBS, is a nationwide organization of banking regulators from all 50 states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands.

The CSBS has a long-standing Bankers Advisory Board to benefit from the perspective and the experience of state-chartered banking institutions.

Members of the Bankers Advisory Board are recommended by their home state commissioners and appointed by the CSBS chairman in consultation with the CSBS executive committee.

Kevin Kim will be the only banker representing the state of California.

On behalf of everyone at Bank of Hope, we congratulate him on his appointment to the Bankers Advisory Board.

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.

We had a solid quarter with positive trends across most areas of the company.

Relative to the preceding second quarter, we had higher revenue, improvements in our net interest margin and stable expense levels.

This was partially offset by higher provision expense.

We generated a record $44.6 million in net income during the third quarter or $0.33 per diluted share.

This represents a 10% increase when compared with $40.7 million or $0.30 per diluted share in the preceding second quarter.

While revenue trends were positive, our overall new business development in the third quarter was lighter than expected, considering the strength of our pipeline as we entered the third quarter.

The volume of commercial real estate transactions in our market has softened a bit with growing uncertainty about the administration's deregulation and tax reform, geopolitical concerns and the adverse impact of asset inflation, all of which seem to be pressuring the inventory of potential transactions, as well as negatively impacting the completion of deals.

We booked $728 million in new loan commitments during the 2017 third quarter and funded $611 million in new loans.

This resulted in organic loan growth of $147 million in our end-of-period loan balances versus June 30 of 2017.

I'm pleased to report that the overall mix of production continues to trend toward the higher level of diversification that we are targeting.

Commercial real estate loans comprised 59% of total production in the quarter, commercial loans accounted for 21% and consumer loans, comprised primarily of residential mortgage loans accounted for 20%.

With the lower contribution of commercial real estate production this quarter, the size of our CRE portfolio was relatively unchanged from the prior quarter.

Substantially, all of the growth we had in the total loan portfolio in the third quarter came from commercial loans, which increased 4%, and mortgage loans, which increased 15%.

We had $119 million in new C&I originations by our commercial lending teams in the third quarter.

Overall, we now have $2.37 billion in total credit commitments outstanding to commercial customers.

The utilization rate on our lines of credit was 53% at the end of the quarter, which is up from 50% at the end of the preceding second quarter.

Looking at our SBA business, we funded $67.9 million in SBA loans during the third quarter with nearly $50 million being sellable 7(a) loans.

While the pipeline for our SBA business was very strong entering the third quarter, we saw a good deal of borrower hesitation in light of growing economic uncertainties and concern about asset inflation.

This had an adverse impact on the volume of loans that closed during the quarter.

On the other hand, our residential mortgage group had its most productive quarter since the merger.

We had $119 million of direct mortgage originations, up from $71 million last quarter.

We have added some new members to our loan production team, which contributed to the higher production levels.

With a larger team in place, we believe this higher level of production is sustainable, although we still expect to see the typical seasonality in the fourth quarter.

Most of our mortgage production continues to be weighted more toward the 5/1 and 7/1 adjustable rate mortgages that we retain on our balance sheet, which drove the strong growth we saw in our residential mortgage portfolio this quarter.

And given the overall higher level of production, we also recognized an increased in gain on sale of residential mortgages this quarter.

Our average rate on new loan originations has been steadily increasing over the last year.

The decline from the preceding quarter to 4.40%, primarily reflects a shift in the mix of new originations, with an increased contribution from our lower-yielding residential mortgage loans and lower contribution from our higher-yielding SBA loans.

While loan pricing continues to be very competitive in our market, the overall yield at which we are adding new CRE and commercial loans have been consistently positive over the last year.

Compared with the third quarter of 2016, our average rate on new originations increased by 37 basis points despite the higher mix of consumer loans in 2017.

On our last call, we discussed the formation of our Institutional Banking Group, or IBG, which targets loan and deposit relationships with larger commercial enterprises.

We're pleased to report that we are seeing positive initial results from this group.

During the third quarter, the IBG brought in more than $250 million in new deposits, primarily flowing into money market demand accounts.

The success in their deposit gathering allowed us to positively shift our mix of deposits toward lower-cost categories in the quarter.

That completes my overview of our business development efforts for the quarter.

Now, as previously announced, our former Chief Financial Officer, Doug Goddard, retired at the beginning of this month.

Fortunately for us, we had the benefit of having 2 experienced financial executives during our first year following the merger.

Alex has been an integral member of our financial team from the beginning, and we are fully confident in his ability to lead our team through the next phase of our growth.

With that, I would like to welcome Alex to provide additional details on our financial performance for the quarter.

Alex?

Thank you, Kevin.

As has been the practice in the past, I will limit my discussion to just somewhat more significant items in the quarter.

I will start with our net interest margin, which increased by 8 basis points to 3.83%.

The increase was mainly due to an 18 basis point increase in our average loan yield.

The increase in loan yield was due to the following 3 factors: first, the fourth quarter impact of June fed rate increase; second, an increase in merger-related accretion income of $1.3 million due to an increase in pay off of acquired loan; and third, the recognition of $2.6 million of interest income related to the recovery of an acquired loans that had been charged off.

The benefit of the increase in loan yield on our margin was partially offset by a 9 basis point increase in our cost of interest-bearing deposits.

The increase in our cost of interest-bearing deposit was mainly due to the runoff of the beneficial impact of purchase accounting adjustments on our time deposits.

Excluding the impact of purchase accounting estimate, our net interest margin increased 9 basis point in the quarter, mainly due to the higher-average loan yield.

Moving to noninterest income.

Most of the major items were relatively consistent with the prior quarter.

The largest variance on the positive side was $495,000 increase in gain on sale of residential mortgage loans due to a higher volume of loans sold in the quarter.

On the flip side, the largest variance was $700,000 decline in our other income and fees.

This was mainly due to a lower level of swap fee income and a lower level of recoveries from premerger, fully charged-off acquired loans, relative to the preceding second quarter.

Turning to noninterest expenses.

We had a few notable variances from the prior quarter.

Our salaries and employee benefit expenses increased by $1 million, due to mainly an increase in full-time equivalence of 85 people.

These hires were spread across the company, both in the back-office support and customer-facing roles, such as the build-out of the Institutional Banking Group and our residential mortgage production chain.

Our data processing and communication expenses increased $545,000, (inaudible) normalized level after the recognition of a large credit last quarter.

We had a $510,000 decline in OREO expenses due to a decline in valuation allowances.

And the largest variance was in our credit-related expenses as we reduced our off-balance-sheet provision for unfunded loan commitment by $2.8 million.

The reduction was mainly the result of updated information for our estimation of off-balance-sheet unfunded commitments.

Now I would like to update our guidances on expectations for higher noninterest expenses related to special projects that we discussed last quarter.

We now expect this project-related fee will be approximately $6 million in aggregate and will be realized over 3 quarters through the 2018 first quarter.

In the current third quarter, our noninterest expenses included approximately $1.6 million in costs associated with these projects.

Looking at our balance sheet, Kevin already discussed the major trend we saw in loans and deposits, but I would like to just note that we had made slight modification to how we are reporting origination volumes.

The $611 million in new originations include $38 million in construction loans that were previously committed to in previous quarters but funded this quarter.

In the past, we had only included in our reported construction loan origination volumes that were booked and funded in the same quarter.

However, construction loans are also funded in the subsequent period.

This resulted in construction loans not being adequately reflected in our origination volumes.

While construction lending is not a sizable portion of our overall businesses, we did want to make it clear to you that we are making this change beginning this quarter.

Now moving on to other areas of our financial results.

Our FHLB borrowings increased $225 million from the end of the prior quarter.

This was mainly due to overnight funding we took on to manage period end fluctuations in our warehouse line of credit.

Moving on to asset quality.

Our nonperforming assets to total assets declined by 1 basis point to 89 basis point during the quarter.

While we saw small variances in nonaccrual loans and critical loans -- I'm sorry, criticized loans as well as delinquent loans, but nothing particularly meaningful.

Our total loss experience continued to be very low, with net charge-offs representing just 7 basis point of average loans in the quarter.

We recorded a provision for loan losses of $5.4 million in the quarter, which was largely driven by our qualitative adjustment.

As a result of increased provision for loan losses this quarter, our allowance-to-total loans ratio increased 2 basis point to 76 basis point from the end of the prior quarter.

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

Thank you, Alex.

Looking ahead, we expect to see a continuation of the positive trends we experienced in the third quarter.

Although the commercial real estate market remains somewhat sluggish, our pipeline looks strong heading into the fourth quarter.

We expect our C&I and residential mortgage lending to continue to drive growth in our loan portfolio.

Our expense levels will increase a bit due to our project-related costs in the next 2 quarters before we see a return to a lower efficiency ratio during 2018.

And given the general stability in our asset quality, our credit costs should remain well-controlled.

Collectively, this trend should result in a consistent level of earnings performance going forward.

A full year following our transformational merger, Bank of Hope has surpassed $14 billion in total assets.

I'm confident that the investments we're making in our organization today will support sustainable growth and profitability for many years to come.

And I look forward to keeping you apprised of our progress.

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

Operator, please open up the call.

(Operator Instructions) The first question comes from Aaron Deer of Sandler O'Neill + Partners.

I'd like to start on a question on the deposit cost.

Alex, could you repeat -- where was the core deposit costs for the quarter?

And how did that compare to the prior quarter?

And to the extent that you guys are feeling any deposit pricing pressure, are you seeing an increase in the betas?

And would you anticipate that deposit cost increases could accelerate from here?

Yes.

Let's start with the beta.

We have -- no, I'm sorry, the (inaudible) Rate increase about 75 basis point for the last -- since the December last year.

And our actual deposit cost increased from 76 basis points to 103, which is about 27 basis point increase or around 36 beta.

So we actually increased our deposit cost.

However, there was actually accretion impact for this quarter.

Just compared to prior quarter and this quarter, there was about 9 basis point increase in the interest-bearing deposit cost.

However, because of the purchase accounting, the discount accretion of the time deposit disappeared.

We historically had about $1 million, and that had a 7 basis point impact on the increase of our deposit cost.

But also I would like to note that there is a significant competition amongst our community.

So I would expect the deposit cost will increase slightly going forward.

Okay.

And then relatedly, I guess, from the other side of the balance sheet, I was hoping if you can provide the specific yields on new production on each of your 3 primary loan categories?

And how those are comparing quarter-over-quarter?

Yes.

Our loan yield actually increased by 18 basis point.

And there is a kind of purchase accounting related as well as a onetime nature embedded in that 18 basis point increase.

First of all, nonaccrual loan from former Center Bank -- that, about $1.3 million we had a impact on the interest income.

And also purchase accounting adjustment, we did have a payoff of former Center and Wilshire loans.

We have about $2.6 million.

That did have actually impact on the loan yield about 10 basis point.

And also actually the core wise, we have a full impact of (inaudible) rate increase.

That, does actually helped about $2.3 million or 9 basis point increases.

So just adding all those together, purchase accounting related and also nonaccrual loan income, we expect about 9 basis point increase out of the 18 basis point increase comes from.

And the remaining, actually we believe is a core increase, comes from the rate increase that we observed in June.

Okay.

That's helpful.

I guess, in terms of the average on the portfolio.

I guess, what I'm more curious about is in terms of new production, I guess, particularly, given the mix shift that you guys are seeing as you are doing more on the C&I and on the residential side.

I mean, what kind of impact that's going to have on the average yield going forward based on the production?

So I'm curious, of the production in the third quarter, if you could give what the new loan yields were -- rates on that new production for each of the 3 categories?

So commercial real estate, C&I and residential?

Sure.

Let me start with mortgage loans that we have originated for the third quarter.

It does have a 3.36% of the loan.

But for the quarter, we have a higher increase on the mortgage loan, which did have actually lowered a little bit of our overall average loan yield.

Going forward, considering that we have added more people in mortgage department, we'd expect the mortgage loan will continue to increase.

And the CRE, actually, we have about [$350] million of CRE loan origination, which is obviously higher than mortgage rate, about 4.73% rate.

And SBA, we have the highest rate of 5.6%.

So in the mixture of the loan portfolio, as we expect more C&I loans and mortgage loans, we might see little bit loan yield decrease going forward.

(inaudible) This is Peter.

I just wanted to add on that as well.

I don't know if you're still there.

The C&I (inaudible) I think, most of those rates are going to be variable as well versus the CRE, which is relatively more sided with the fixed rates.

And so even though the initial yields are a little bit lower, I think there is some benefit there for having more variable rate loans.

The next question comes from Chris McGratty of KBW.

Just wanted to -- if I could follow up on the margin questions.

If we kind of balance the onetimer in terms of the interest reversal and the purchase accounting benefit with the benefits of the Fed, how should we be thinking about -- I know that the disclosures have changed a bit -- kind of the margin for the fourth quarter when you kind of boil it all down?

Sure.

Given we have some onetime nature or -- and the higher accretion income in Q3 compared to normal quarters, assuming there (inaudible) onetime and the higher accretion income in Q4, the reported net interest margin will decrease slightly maybe.

However, the core net interest margin we expect to be stable or slightly increased considering the rate that we currently offer.

And I don't think there will be a December -- the expected December fed rate increase will have a significant impact in our margin going forward because this (inaudible) is December expected.

That's helpful.

If I could on the expenses too.

Obviously, the control -- the cost control was pretty good this quarter.

You talked about the $6 million.

I think, last quarter was like $4 million to $5 million.

As you kind of look through what's already been in the run rate, just to make sure I got the comments appropriate, the level of dollars of expenses from here over the next couple of quarters, can you just help frame a little bit better in terms of -- we're going to be in the mid to high-60s -- $60 million a quarter, and then kind of leveling off to get the efficiency improvement maybe back half of next year?

I'm just trying to (inaudible) got it right?

Yes.

This quarter, actually, we have about $1.6 million included as a special project.

We would expect to continue next 2 more quarters.

That kind of aggregate about like [$6] million of total project-related.

Here what I mean by the project-related is our investments to -- like DFAST and other compliance and expenses that is related to the $10 billion-plus cost.

We're actually working on to be prepared, so we're investing (inaudible) expenses.

However, starting the second quarter of next year, we expect those investment will be substantially completed.

So about like $2 million reduction expected starting second quarter of 2018.

However, we will have some increase on the salary and the benefits as we grow.

So I think the run rate for the fourth quarter and Q1 2018 will be around like $65 million to $66 million.

And starting second quarter of next year, it will down to about like $64 million to $65 million.

Okay.

That's helpful.

And then maybe on the tax rate going forward.

You obviously -- is this a good run rate for the future tax rate, assuming we don't get anything out of Washington?

Yes.

Obviously, unless the corporate rate substantially decreases 20%, our expected tax rate for 2018 will not be substantially decreased, but we are actually doing some analysis of what kind of tax-saving strategy we can come up with.

So from the [38.43%] currently, I would expect that will decrease a little bit.

But it depends on the actual tax strategy that we come up with.

But I would expect to slightly reduce in 2018.

The next question comes from Matthew Clark of Piper Jaffray.

Wanted to follow up on your commentary around the commercial real estate environment and the related growth.

And thinking about loan growth overall, I think in the past you guys have targeted high single digits, but it seems like things may have changed, particularly since the deal was announced.

Just curious if I can get your updated thoughts on loan growth?

Okay.

Matthew, this is Kevin.

Let me first talk about the high single-digit loan growth guidance that we gave you last quarter.

We had given guidance for high single-digit loan growth on a going forward basis from the second quarter.

And over the past 2 quarters, including the second and third quarter of 2017, we have had approximately 4% growth in our loan portfolio which can be annualized to 8%.

So we believe we are on target, or we are on track with the annualized pace of high single-digit loan growth that we target.

And going back to the question of CRE concentration and how it would impact our CRE loan production, I don't think there is any impact on our CRE production coming from our CRE concentration.

Our new CRE loan production is driven mainly by our credit decisions.

And I don't think it is driven by any effort to manage our CRE ratios.

With the proactive monitoring and risk management programs we have put in place, we feel comfortable continuing to grow our CRE portfolio.

Okay.

Great.

And then on the provision a little higher than expected.

It looked like it partly related to the migration in criticized.

Can you talk to what migrated this quarter?

And your outlook from here?

Sure.

This is Peter.

The provision expense came out slightly higher, but I think if you look at the last 2 quarters, the second quarter and third quarter of this year, I think we're kind of on track in terms of what we would expect from an annualized basis.

We did have some increase in substandard loans this quarter, but none of that was really from any new loans.

These are all previously identified loans which we had already identified as special mention.

So we did have some migration from special mention to substandard.

And a majority of those loans are actually real estate secured loans, which have a well-secured collateral.

So we see very low loss potential from that new migration.

And ultimately, I think overall asset quality looks pretty clean still.

So we're proactively monitoring and managing the portfolio, and I think we're looking good.

(Operator Instructions) The next question comes from Gary Tenner of D.A. Davidson.

Kevin, I'm little confused by your comments on loan growth.

A moment ago you said that you -- on the second quarter call indicated you thought you'd hit an 8% growth rate for the remainder of the year and now you're kind of using the second and third quarter combined growth rate to suggest you're on pace for that.

But this quarter's growth was quite a bit less, and it looks like the commercial real estate growth outlook is not quite as strong given what you had discussed in terms of some kind of reduction in activity in that space.

So can you talk about, given where we are now, how things lay out for the fourth quarter?

And how maybe that is different from where you thought things were in July?

Well, we have a very strong pipeline entering into the fourth quarter.

So we expect a solid fourth quarter in terms of loan growth.

And when we discussed a -- the high single-digit loan growth in the second quarter, we were discussing the growth rate on a going-forward basis, not retroactively starting from the first quarter of 2017.

So I believe the fourth quarter production, although it is a seasonally less productive quarter, we believe the fourth quarter production will be much stronger than the third quarter production that we reported.

So in terms of our loan growth on a going-forward basis, the high single-digit growth expectation is still good, and we believe that is quite achievable number.

And you think it's achievable for this year on a full year basis, or no?

Yes.

We were talking about on a going-forward basis from the second quarter.

So we had very little increase of loan growth from the first quarter to the second quarter.

So -- and that was a -- that was not a typical quarter for us.

So our discussion was on a going-forward basis from the second quarter of 2017.

So if you are talking about the whole 12 months of calendar year 2017, the high single-digit number may not be applicable.

Right.

Fair enough.

Okay.

And in terms of the change in your disclosure on production or origination levels, can you give us, Alex, based on the 6 -- and I think you reported for this quarter, kind of with the apples-to-apple, it would have been last quarter -- on your new method?

Sure.

We included the subsequent drawdown in our origination.

In Q3, we did have $38 million construction loans, just to apple-to-apple comparison.

In the second quarter, we had $44 million of construction loans, that could have included.

Right.

So you would add that $44 million in second quarter to what you'd previously disclosed of the [725]?

Is that the right way to think about it?

Yes.

That's correct.

The next question comes from David Chiaverini of Wedbush Securities.

Question on the strong pace of new hiring.

Should we expect the ramp of new hires to continue at that -- at this elevated pace over the next couple of quarters?

And is this related to the special projects that you are talking about?

David, in terms of your question whether we expect to continue to hire this many people in the coming quarters, and the answer is, no.

We expect to continue to hire more people, but those people will be more likely to be the people in the frontline for business generation purposes.

In terms of our people backing the support functions, I think we have pretty much hired the people that we would need to enhance our risk management infrastructure.

Obviously, there will be more people coming in, in the future, but that is not anywhere near the numbers that we hired in the third quarter.

And then shifting gears to deposits.

Can you talk about the outlook for deposit growth and any new strategies you may be implementing to drive growth there?

Sure.

The deposit growth, as we discussed during the remarks, we did have a Institutional Banking Group brought in excess of $250 million this quarter.

Those deposits actually are core deposits.

And we expect those deposit from Institutional Banking Group will continue the next several quarters.

On top of that, we are fully utilizing our branch networks, kind of diversifying each different areas offering different rate.

So we would expect to see improvement from the retail, especially from the branch network, in addition to Institutional Banking Group's deposits.

So the cost that we actually have on the Institutional Banking Group's deposit was lower than the other broker CD or other rates.

So in terms of cost-wise, from the retail or branch side, we will offer a good rate to our VIP or good customers.

We'll be competitive.

So there might be a little bit uptick on the deposit cost to retain and sustain our growth on the loan side.

But we'll also supplement that with institutional bankings and also other funds available.

So there will be little bit increase on the deposit costs overall.

One thing that I would like to add to what Alex just said.

In addition to our retail banking efforts and Institutional Banking Group, we have increased our C&I productions.

And through the C&I relationships, we hope to be able to bring in a lot more deposits -- operating fund type of deposits with our enhanced capabilities in the treasury management services.

So hopefully, that will be a -- one of the contributor to enhance our deposit situation in the coming quarters.

Okay.

And my last question is housekeeping.

I think I may have missed it, but what was the core margin in the third quarter?

It will be excluding accretion and other onetime nature.

It was about 3.43%, which was compared to previous quarter slight increases.

3.4 -- I thought last quarter it was about 3.5.

In the first quarter, I thought it was 3.49.

So 3.43 sounds like it's a bit of a decline?

Yes.

There is 2 different natures of the onetime or exclusion.

Just pure, kind of purchase accounting exclusion versus there is a (inaudible) kind of payoff related.

So you're correct.

It was about 3.5, but excluding other -- compared to like apple-to-apple comparison because Q3, we did have additional onetime nature.

Just purely apple-to-apple comparison, it will be 3.42% in the last quarter compared to slight increase in this quarter.

(Operator Instructions) This concludes our question-and-answer session.

I would like to turn the conference back over to management for any closing remarks.

Once again, thank you, everyone, for joining us today.

And we look forward to speaking with you again next quarter.

So long.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.