Hope Bancorp Inc (HOPE) 2018 Q1 法說會逐字稿

Good afternoon, and welcome to the Hope Bancorp first quarter earnings conference call.

(Operator Instructions) Please note that 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, Michelle.

Good morning, everyone, and thank you for joining us for the Hope Bancorp 2018 First Quarter Investor Conference Call.

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 into the webcast, you should be able to view the slides from the computer screen as we progress through the presentation.

Beginning on Slide 2, I'd like to 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, forecast, 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 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 quarterly report on Form 10-Q for the quarter ended March 31, 2018, 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 2018 first quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures.

Now, as usual, we have allowed 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.

With that, let me turn the call over the Kevin Kim.

Kevin?

Thank you, Angie.

Good morning, everyone, and thank you for joining us today.

Let's begin with Slide 3. We got off to a strong start in 2018 and produced a quarter that reflects the increasing diversification of our business mix together with the benefits of the recent tax reform.

We generated $51 million in net income during the first quarter, which represents a 185% increase over the preceding fourth quarter, or an 18% increase if we exclude the tax reform adjustments from the fourth quarter.

Compared with the first quarter of 2017, net income increased 41%.

On an EPS basis, we reported $0.38 per diluted share compared with $0.13 in the preceding fourth quarter, and $0.27 in the year-ago first quarter.

Moving on to Slide 4. Despite the first quarter typically being a slower period for loan production, we had a solid quarter of originations.

New loan originations totaled a record $764 million, surpassing our fourth quarter production of $664 million and representing a 30% increase over originations in the year-ago first quarter.

In addition, for the first time ever, we surpassed the more than $1 billion in new loan commitments made during one quarter, totaling $1.12 billion.

Our strong production resulted in net loan growth of $190 million in the first quarter of 2018, or 6.8% growth on an annualized basis.

As we did throughout 2017, we continued to see an improved mix of loan productions, favoring our non-CRE categories.

Commercial real estate loans, including our SBA CRE originations, comprised 45% of total production in the quarter.

Commercial loans, including our SBA C&I production, accounted for 31%, and consumer loans, comprised primarily of residential mortgage loans, accounted for 24%.

In fact, the 2018 first quarter is the first quarterly period in which our non-CRE categories accounted for greater than 50% of our loan production, and I believe this exemplifies the progress we are making in diversifying our business platform.

Over the course of the last 6 quarters since our merger completion, our loan portfolio has slowly been transitioning to one that is less CRE concentrated.

As of March 31, 2018, commercial real estate accounted for 75% of our total loan portfolio, down from 77% as of September 30, 2016.

In terms of market trends, CRE loan demand continues to be relatively weak, and during the first quarter, our CRE portfolio was essentially flat.

There were fewer quality deals available in the market, and we are seeing intense pricing competition for these deals, primarily from the larger mainstream banks.

We remain disciplined in our pricing and underwriting criteria, which is helping us to generate higher average yields in this portfolio despite the competition, although it is impacting the overall growth.

However, we were still able to generate solid overall loan growth due to the productivity we are getting from the investments we have made in the commercial and residential lending areas.

We had $237 million in new C&I originations in the first quarter.

This resulted in a 3% growth in our commercial loan portfolio, despite a decline in the outstanding balances of our warehouse lines of credit, which can be volatile on a period-end basis.

As of March 31, 2018, we had $2.67 billion in total credit commitments outstanding to commercial customers versus $2.34 billion at December 31, 2017.

The overall utilization rate on our lines of credit was 48% at the end of the quarter compared with 53% at the end of the preceding fourth quarter.

The decline in the utilization rate versus the preceding quarter end is attributed to a large new warehouse line customer that we closed at the very end of the first quarter, for which, there was not enough time for any of the credit line to be drawn upon during the quarter.

However, we certainly expect this new customer will be driving higher average balances in warehouse lines beginning in the second quarter.

Turning to residential mortgage originations, which makes up the vast majority of our consumer loans, we continued to see very strong production from this business.

Although the first quarter is a seasonally slow period for mortgage lending, we still had our second highest level of production ever with $179 million in originations, down slightly from the record $193 million in the preceding 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.

Our consumer portfolio, which predominantly consists of the residential mortgage loans, increased 19% from the end of the prior quarter, and 95% over the past 12 months.

Looking at our SBA loan production volumes, which is included as part of the CRE and C&I volumes, we funded $78.2 million in SBA loans during the first quarter, up from $66.7 million in the preceding fourth quarter.

As with last quarter, almost all of our SBA production was sellable 7(a) loans as demand for 504 loans is currently very weak.

Overall, the average rate on new loan originations was 4.64% for the first quarter, up 22 basis points from 4.42% in the preceding fourth quarter.

We are seeing higher average rates in all of our lending areas, reflecting the rising interest rate environment.

Now, moving on to Slide 5. We also had a very strong quarter in terms of our deposit gathering.

Our total deposits increased 6% in the quarter, with solid growth across all of our major deposit categories, with the exception of savings accounts.

We had made deposit gathering a top priority, and I'm very pleased with the contributions we are getting from all areas of the company, from our branch network to our commercial banking teams.

We were also successful in targeting some non-Korean markets with our deposit gathering, which is an area that we are putting more focus on.

Given the solid loan demand we are seeing and the outlook for multiple rate increases over the remainder of the year, we made a decision to be more competitive in our CD pricing only in the year, in order to build up liquidity and give us some runway for funding the loan production over the course of the year.

This has proven to be a wise decision, as CD rates in our market have already surpassed the promotional rate we were offering earlier in the year when we built up liquidity.

While we did see an increase in our deposit cost in the first quarter, we believe the liquidity we added will help us better manage our deposit costs as we move through the year, and provide us with the funding we need to capitalize on the solid loan demand we are seeing.

With that as an overview of our business development efforts, I will ask Alex to provide additional details on our financial performance for the first quarter.

Alex?

Thank you, Kevin.

As I review our financial results, I will limit my discussion to just some of the more significant items in the quarter.

Beginning on Slide 6. I will start with our net interest income, which has declined by $6.3 million compared with the preceding fourth quarter.

This was due to a combination of 2 fewer days of interest accrual in the first quarter, lower discount accretion income and higher deposit cost.

Our net interest margin declined by 18 basis points to 3.66%.

The decline was primarily due to lower discount accretion income as well as an increase in deposit cost.

As a reminder, in both the third and fourth quarters of 2017, our margin was positively impacted by approximately $3 million of accretion income that was onetime in nature.

Without the benefit of any onetime contribution, our discount accretion on acquired loans totaled $9 million in the first quarter, down 30% from $12.8 million in the preceding fourth quarter.

Excluding purchase accounting adjustment, our net interest margin declined 6 basis points to 3.39%.

The decline was primarily due to an 11 basis point increase in our cost of deposits.

This was partially offset by a 6 basis point increase in our average loan yield on a core basis, excluding purchase accounting adjustment due to the repricing of our variable rate loans and higher rates on new loan originations.

With the increase in interest rates by the Fed in late March, we would expect that our loan yield will increase in the next quarters, as our variable rate loans are repriced.

However, much of this increase is expected to be offset by an increase in our cost of deposits due to the current competitions in our deposit market.

Therefore, we do not expect our net interest margin to change significantly from what we reported in the first quarter of 2018.

Now, moving on to Slide 7. We had 2 significant variances in noninterest income that accounted for a 21% increase from the preceding fourth quarter.

The most significant variance was a $3.1 million increase in other income, which tends to fluctuate quarter-to-quarter.

The increase this quarter reflects $3.5 million of income recorded to reflect a change in the value of certain equity investments held by the company.

The second significant factor was our net gain on sale of SBA loans, which increased by $824,000 and a total $3.5 million for the 2018 first quarter.

This increase reflects a higher inventory of SBA loans entering the first quarter as well as other strong quarter of SBA production.

During the first quarter, we sold $48.6 million of SBA loans, up from $36.6 million in the preceding fourth quarter.

We would expect to see similar level of sales in the second quarter, as we had a large inventory of SBA loans held for sale at March 31, 2018.

Moving on to noninterest expenses on Slide 8. Our noninterest expense decreased by $4.6 million compared with the preceding fourth quarter.

We had 2 significant contributors to the decrease.

First, we had a $1.4 million decline in professional fees, as the special project implemented over the past few quarters and legal fees decreased from previous quarter.

And our other expense declined $2.8 million, which represented a return to a normalized level following the impairment charge we recorded last quarter on our low income housing tax credit investments.

The declines in these 2 areas were partially offset by an $819,000 increase in our data processing and communications expense, which should return to a normalized level after the onetime rebate from certain vendors that we received in the preceding quarter.

Our efficiency ratio for the first quarter was 48.9%.

We believe that our efficiency ratio for the full year will continue to be higher 40%, with our longer-term target of the mid-40% range being achieved in future years, as we continue to add scale and more fully observe the additional cost related to surpassing the $10 billion asset threshold.

Now moving on to Slide 9. Since Kevin already discussed the major trend we saw in loans and deposits, I will review our asset quality.

During the first quarter, we saw a number of previously identified problem loans migrating to nonaccrual status, while charge-offs and new inflow into problem loans remained very low.

Our nonaccrual loans increased $21.4 million.

The inflow was comprised of a number of smaller credits that are unrelated by industry or property type, and the downgrades were primarily driven by the continuation of the workout processes with these borrowers.

Each of these credits have adequate reserves set against them.

Our total criticized loans, on the other hand, declined by $27.7 million, which we believe reflect generally stable loan portfolios, with a small amount of new problem loans that we are seeing in the pipeline.

Our total loss experience continued to be very low.

We have $580,000 of net charge-offs in the first quarter, which represents just 2 basis points of average loans on an annualized basis.

We've recorded a provision for loan losses of $2.5 million in the quarter, and our allowance to total loans ratio at March 31, 2018, was 77 basis points, which compares to 76 basis points in the preceding quarter.

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

Thank you, Alex.

We have gotten off to a good start in 2018, and we feel optimistic about our opportunities to continue our positive momentum as we move throughout the year.

Based on our first quarter performance and the state of our loan pipelines, we believe we will generate 6% to 8% loan growth in 2018.

With our residential mortgage and commercial lending efforts gaining traction, we have more ways to achieve our targeted level of loan growth, even if growth in our CRE portfolio remains at a more moderate level.

We are entering the seasonally strong quarters for the housing market, which should positively impact our mortgage loan production.

We are also in the process of training our branch personnel so that we can source more residential loan opportunities from our existing customers from the branch network.

We believe this will start to become a more meaningful source of loan originations during the second half of the year.

We also expect to see a steady increase in our SBA loan production as a result of investments we are making in this area.

We opened a new loan production office in New York City during the first quarter, and we just hired a new Houston market SBA production manager this week.

Going forward, the key challenge for the company will be managing our deposit costs.

We believe the liquidity we added in the first quarter gives us the opportunity to be a little more conservative in our CD pricing, and look to meet our funding needs through lower-cost sources.

However, we will remain flexible with our deposit strategy, and if we need to implement additional CD campaigns in order to fund good lending opportunities, we will certainly do that.

In summary, we believe we are well positioned to build on the momentum of a strong first quarter and continue to drive earnings growth as we move through 2018.

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 comes from Aaron Deer with Sandler O'Neill.

So I understand the strategy behind front-loading some of this funding, but I'm curious with -- where do you stand now with kind of where you're targeting your loan-to-deposit ratio?

And what -- and how do you view your asset sensitivity, given your growth expectations?

And where your incremental funding costs are coming on?

Okay, Aaron.

To answer your first question, loan-to-deposit ratio.

As you see, we lowered our loan-to-deposit ratio this quarter, and we are targeting to be 98%.

And we feel comfortable this target 98% is very doable as evidenced -- deposit gathering efforts in Q1, we were very successful, a 6% increase.

And those increase, actually, comes from various sources, including CD and money markets.

And related to the asset-sensitive position, our bank, as the interest rate goes up, because we are slightly asset-sensitive position, and the management's position in the interest rate is, we are not going to take up much interest rate risk.

It has been our practice, and it will continue.

And given our slightly asset-sensitive position, once the price goes up -- I mean, the interest rate, we will have an increase on our net interest income, and we don't expect any fee income variances or heightened risk profile related to the interest rate risk, again, given our slightly asset-sensitive position.

Okay.

I guess, I'm just -- I understand that -- your asset repricing.

I'm just -- where I'm struggling is, if you're going to hold the loan-to-deposit ratio below 100, and it seems like that's going to require largely CD funding to support that, and you're talking about seeing an increased pricing competition in the market.

It just seems like the incremental funding cost for your loans are going to come on at a pretty high relative rate.

I'm just wondering if we're really going to see much of that asset sensitivity shine through in the margin?

Right.

Right.

So, Aaron, as you kind of indicated, we're in an asset-sensitive position, but we did actually take a proactive kind of a position.

Meaning, we were building up our liquidity early ahead, kind of in anticipation of the rate hike.

So for example, we did have a deposit campaign in the fourth quarter last year at an interest rate of 1.65%, and we continue to have this campaign throughout this Q1 as well at a higher rate, like a 1.9%.

And we see our competitors even offering more than 2%.

So I think we did take advantage of a proactive kind of deposit, a gathering effort, and we are not going to shy away to be more competitive in our funding loans through a core deposit.

So I agree with your point.

The funding side, the deposit price will continue to go up, but also, the asset side, we see the momentum of the production in Q1, and going forward, where we'll have higher rates, even though there was a competition.

So I think, again, our asset-sensitive position and interest rate risk profile through this rising interest rate environment, I don't think it is too extremely high.

Aaron, if I may add -- as to your question, whether we will benefit from our asset-sensitive position because you expect our funding cost to continue to rise, I think there are a lot of variables actually, which is hard to predict at this time.

But our strategy is to stay flexible with our deposit efforts, and how much we will be aggressive in bringing on CDs will be determined by our success in gathering lower-cost deposits.

And it also depends on the level of good loan opportunities we will have in the remaining months of the year.

So there are many variables, and then we will do our best to get the benefits of our asset-sensitive position.

But still, it is a challenging environment.

Understood.

And just to -- sorry to drill so hard in on this, but just looking specifically at the second quarter, I'm wondering about the timing of the deposit inflows?

It sounded like they came in pretty early, and if that added some excess liquidity to the balance sheet, are you going to see some -- maybe some benefit to the margin here in the second quarter as that gets deployed?

Or is it more a situation of some of this funding was more back-end loaded and so we might continue to see some of the pressure weigh on the margin in the second quarter?

It will give us the opportunity to be more flexible in our funding strategy, because we have built up some excess liquidity at this time.

We have more options to play with, and we are not as desperate as we were a quarter ago in bringing in deposits.

So hopefully, we will be able to succeed in bringing in lower cost deposits, and that is something that we will focus on.

And hopefully, we will be able to succeed in bringing in more lower-cost deposits and that will be reflected in our NIM in the second half of the year.

Our next question comes from Matthew Clark with Piper Jaffray.

In terms of your guide on the margin, I'm assuming you're talking about a relatively stable core margin, not the reported margin.

It obviously is a runoff of the purchase accounting accretion.

Is that fair?

Yes.

We really expect to be consistent.

And obviously, as we mentioned about the deposit, it depends on the deposit pricing.

But as of now, our anticipation will be stable.

Okay.

And then, where did your latest CD promo sit here at the end of the first quarter?

I think you mentioned in the fourth, it was around 1.65%?

Yes.

We did have a -- the previous -- we did have 2 CD campaigns, we just started last year Q4, at a rate of 1.65%, and we were able to raise about $170 million in Q1 2018.

And then, we continued another deposit campaign at a rate of 1.95% and the maturity is about a year.

Okay, I think the concern is that you're putting on new money at 4.66%.

I think your core loan yield's at 4.71%, and new money is going on at, call it, 1.95%.

Obviously, that suggests spreads under 3%.

So I think that's the concern.

Okay.

And then, just on the noninterest expense run rate, I think going into the quarter, you were thinking $68 million.

You did a little bit better than that here if you adjust for the special projects expense.

How should we think about that run rate going forward?

Yes, $68.4 million this quarter.

From here, I would expect slightly increase, maybe at a level of $70 million in Q2, or going forward.

And the main reasons for that expectation is just a general salary and benefit expenses to be increased slightly due to our frontline officers hired in Q1 2018.

For example, 32 additional hirings came in towards the end of March.

So we would see some increases on the salary and benefit.

But we'll continue to see the professional fee will be kind of decreasing as we kind of continue to work on the special projects and some other projects as we expected.

We are in the final stage, but there's other special project or compliance-related, such as (inaudible) those kind of additional investments we need.

We will continue to see those expenses.

So overall, I would expect the run rate for the noninterest expense will be around $70 million.

Okay.

And then, just on the efficiency ratio, I think, last quarter, we talked about 47%, 48%.

It sounds like high-40%s.

Is that -- are we widening the range?

Or maybe bumping up the range to 48%, 49% here for the year?

Is that your expectation?

As I indicated, still like a high-40%s is kind of consistent with what we have disclosed last time.

But again, it's really a function of the expenses for the salary and benefits, and also, if the margin kind of compressed on the NII portion, we will have an impact to the efficiency ratio.

But I don't think we are substantially changing our guidances on efficiency ratio from previous discussion.

Our next question comes from Gary Tenner with D.A. Davidson.

I just wanted to ask about the guidance on loan growth, the 6% to 8% range.

Nearly 7% this quarter in a quarter that was negatively impacted with mortgage warehouse seasonality.

So I would presume that, at least the next couple of quarters, will be better from that segment.

Is the outlook and guidance maybe a little conservative because of commercial real estate not being as strong?

Or high paydowns in that space?

Well, I think you're right in that, based upon what we achieved in the first quarter.

We could do better than 6% to 8% growth.

But our current guidance is still 6% to 8%, and I think we will be in a better position to adjust the guidance if we have to after the second quarter.

But entering into the second quarter, our loan pipeline is very strong, still very strong and comparable to where we were at the beginning of the first quarter.

So we feel optimistic.

But we are still keeping our guidance at 6% to 8% at this time.

Okay.

And could you tell us what your cost of interest-bearing deposits was as of March 31?

I think it is 80 basis points.

Let me check.

Total cost of interest-bearing deposit was actually 1.23%, including those time CDs.

1.23%?

And that's as of...

1.23% -- I'm sorry, I said 1.23%.

Right.

That was on average for the quarter.

Do you know what that number was as of March 31, at the period end?

I don't think we have that information.

But we can get back to you.

Our next question is from Chris McGratty with KBW.

Maybe just coming back to the margin, a little bit different question.

Is your guidance -- I guess, what does your guidance assume, with respect to the Fed and future -- Fed interest rate increases, and also the shape of the curve?

A lot of attention's been given to the flatness of the curve.

Just interested in what is included in the guide there?

Sure.

We have about 43% of loans are the variable.

And as our rate increases, we'll get the benefit.

But again, during the competition of the loan pricing as well as deposit pricing, even though we will get the benefit from the rate hikes, that might be partially or substantially offset by the deposit cost.

So that's why we would expect to be consistent level of net interest margin projections.

Okay.

And maybe on the accretion income, it's about $8.5 million in the quarter.

I think in the slide, you said there was [$80 million] left of the mark.

How should we be thinking about contribution on a quarterly basis?

Is this about where we settle out for the near -- next few quarters, $7 million to $8 million?

Yes.

About like $0.5 million without any noise is based on the expected reduction.

We would expect total accretion impact will be about $8.5 million, which are about $0.5 million of reduction compared to Q1 2018.

Okay.

Great.

And then, maybe, finally, Kevin, maybe a capital question.

Given that you've now resolved the kind of internal controls, a couple of questions.

How are you thinking about capital return?

Dividends, buybacks, given where the stock is?

And also, would you consider doing an acquisition if the opportunity presents itself?

Well, in terms of capital utilization, our board is currently considering the options that we have and I think it is a little premature to share any specific information with you.

But what I can tell you is that our board is considering many options that we believe we have at this time.

In terms of M&A, we have -- we continue to monitor the opportunities as they become available in the marketplace, and obviously, we would be interested in anything that would be a good fit with our growth strategies.

But these types of transactions are hard to plan in advance.

So my answer is, we would be interested if we come across any opportunity that would be a good fit with our growth strategy.

The next question comes from Don Worthington with Raymond James.

A couple, I guess, follow-ups.

I want to get back to the deposit campaigns, and just clarify.

Were both the fourth quarter and the first quarter campaigns, were those primarily all 1-year terms?

Yes.

It's mainly 1-year terms.

Okay.

And then, it looks like you used some of that to pay down borrowings.

What type of borrowings were those that were runoff in the quarter?

We did have FHLB borrowings we did pay off.

Were those like overnight borrowings?

Or...

Yes.

We did have all mainly overnight borrowings, but due to the deposit increases, the need for these overnight borrowing didn't exist anymore.

So we did payoffs.

Okay.

Okay.

And then in terms of the valuation of equity investments, is there anymore color on that in terms of, were these like a couple of securities?

Or kind of what led to the upward valuation?

Sure.

It is actually one security equity investment on one of the publicly traded company.

We did have that investment for a long time, but we did, actually, had an impairment charge-off years ago.

But as a new accounting pronouncement, which requires equity investment needs to be mark-to-market, we revisited fair value of that particular one investment security.

And because it is publicly traded, we were easily to get the fair value of that investment, which was about $3.5 million increases from our OTTI or 0 book value we had to have.

So kind of getting the benefit of the new accounting pronouncements, we actually recorded as fair value changes for the quarter about $3.5 million.

Okay.

All right.

Great.

And then, what are you expecting for the tax rate going forward?

Is it still kind of in the 25% range?

Yes.

I would expect our kind of annual 2018, the tax, effective tax rate, will be in the neighborhood of 25%, maybe -- it might be a little bit higher, like 25.2% or 25.3%.

I know this quarter was higher than that, but since we are planning to have additional low-income tax housing credit, other strategies to lower our effective tax rate.

So I would say 25% or slightly higher than 25% will be the expected tax rate.

(Operator Instructions) The next question comes from David Chiaverini with Wedbush Securities.

A question on your residential mortgage production during the quarter.

Is this coming from your Korean-American customer base?

Or is this coming from mainstream?

Or a combination of both?

It's a combination of both.

Actually, the -- we have sources of originations from the LOs, the originators, and also, the branch network.

And so because we have customers through branch network, and also customers through our originators, it is both Korean and non-Korean customers.

And are you getting premium pricing on your Korean-American customer base on these mortgage loans?

No, not necessarily.

The customers that we have are not like the customers that other ethnic banks, especially Chinese-American banks have, with substantial down payments and high interest rates with some payment reserves.

We don't have customers like those.

This concludes our answer -- question-and-answer session.

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

Okay.

Thank you, Michelle.

Once again, I thank everyone for joining us today.

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

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.