Hope Bancorp, Inc. (HOPE) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Wilshire Bancorp, Inc. Q1 2016 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time [Operator Instructions] As a reminder, today’s conference is being recorded. I would now introduce your host for this conference call Mr. Edward Han. You may begin.

Thank you and good morning everyone. We appreciate you joining us today for our first quarter 2016 conference call. Again, I am Edward Han and joining me are J.W. Yoo, the company’s President and Chief Executive Officer, Alex Ko, our Executive Vice President and Chief Financial Officer and Peter Koh, our Executive Vice President and Chief Credit Officer. Yesterday, Wilshire Bancorp issued its first quarter 2016 financial results, which can be accessed either through the Investor Relations tab at wilshirebank.com, the SEC’s website or from the various financial news websites. This call is being webcast and will be available on archive for one year on the company’s website. Before we begin, I must remind you that during this call we may make certain statements concerning Wilshire’s future performance or events. Any such comments constitute forward-looking statements and are subject to a number of risks and uncertainties that might cause actual results to differ materially from stated expectations. These factors include but are not limited to, the ability to grow market share on markets including New York, New Jersey, Texas, Alabama, Georgia and Los Angeles. Success of new branches, marketing costs, loan growth and balance sheet management, credit quality, our ability to collect on past-due loans, deposit generation, net interest margin expectations, interest rate exposure, global and local economic conditions, successful closing of our pending merger of equals BBCN Bancorp and other risks detailed in our most recent reports on Form 10-K and Form 10-Q as filed with the Securities and Exchange Commission, as well as the our other filings with the SEC. Given these uncertainties undue reliance should not be placed on such forward-looking statements. Wilshire Bancorp is under no obligation to update this information as future events or developments take place that may change these forward-looking statements. Mr. Yoo will begin the call by providing an overview of the highlights of the quarter, then Mr. Alex Ko will review our financial results in more detail and Mr. Peter Koh will discuss our asset quality. Mr. Yoo will provide some closing comments and we will then commence the question-and-answer portion of the call. With that, I will now turn the call over to our Chief Executive Officer, Mr. Yoo.

Thank you, Edward. Good morning, everyone and thank you all for joining us today for this call. Coming off of a very strong quarter to ended 2015 in which we had a record level of loan production. We saw a decrease in loan demand across all of our business lines in the first quarter which had caused our earnings report sort of expectations. For the first quarter of 2016, we generated $13.2 million of net income or $0.17 per share. Our total loan production was $476 million in the first quarter. We believe there were number of factors that contributed to the slowdown in loan demand and production. First, it’s typical for the first quarter to be seasonally slower period for loan production. Second, after having more than $500 million in loan production in the fourth quarter, half of which was already related to December 2015. Our loan pipeline was relatively small and so in the first quarter - and it will take some time to rebuild it. We have seen this dynamic in the past, after particularly strong quarters of loan production that reduced our pipeline. Third, during the first couple of month of the quarter, we clearly saw the impact of a broader macroeconomic uncertainty and some market volatility causing borrowers to be more cautious in the short-term. And the fourth, we have seen a bit over slowdown in commercial real estate sales activity, which has reduced the number of quality lending opportunities that meet our underwriting criteria. Overall, the market felt a bit sluggish in the fourth quarter of 2015. However, since the start of the second quarter, we have received some of the macroeconomic concerns ease a little and our loan pipeline improved. As we enter the seasonally stronger period of the year, we expect to see a higher level of loan growth and the higher level of earnings. Now, let me turn the call over to Alex Ko, our Chief Financial Officer for further review of the first quarter financials.

Thank you, J.W., and hello everyone. I will begin by discussing our income statement. Net interest income before provision for loan losses were $38.9 million in the first quarter of 2016, a decrease of a little more than 1% from $39.4 million, last quarter. The main reason for the decline in net interest income was due to decline in non-interest income. Our net interest margin was 3.54% in the first quarter of 2016, a decrease of two basis points from the prior quarter. Although, the mix of average assets was more favorable compared to the prior quarter due to the efforts we have made to redeploy our assets liquidity. This benefit was offset by lower average loan yield. We estimated that decline in loan yield had an approximately minus 14 basis points impact to net interest margin, while the excess cash deployment in Q4 2015 had a positive impact in the interest margin this quarter of around 16 basis points. With this two mostly offsetting the decline in investment yields and increase in cost of liability together, which represent around four basis point decline to net interest margin led from overall two basis point decline to our net interest margin from Q4 2015 to Q1 2016. Our average loan yield declined to 4.61% for the first quarter compared to 4.8% for the prior quarter. The main reason for the decline in loan yield is due to loan originations and loan renewals in combination with loan pay offs and pay down. Due to high competitions for loans in our market, new loan originations and rates on loan renewals are lower than the average rate of our existing loan portfolio putting downward pressure on our loan yield. The average rate for new loan originations for Q4 2015 was around 3.91% and average rate for the renewals was 3.99%. In Q1 2016, the average rate for originations was around 4.07% and the average rate for the renewals was 3.76%. Lastly Q1 2016, we had a decline in loan fees and an increase in non-accrual interest reversals due to mostly to increase in inflows into a non-accrual status during the quarter. Our total cost of deposits increase 1 basis points to 62 basis points, as we have slight increases in interest rate across most deposit category as well as a decline in the average balance of non-interest bearing deposits. Turning to a non-interest income, we generated $8.5 million in the first quarter of 2016, down from $9.5 million last quarter. the decline was attributable to a lower gain on sale income as well as lower other income resulting from a decline in income from the recovery of assets acquired from BankAsiana and Saehan Bank in addition to the reduction in loan servicing income on loans sold and serviced by the bank. During the first quarter, we recognized $1.3 million in gain on sales of SBA loans, $830,000 in gains on sales of residential mortgage loans, and $545,000 in gains from the sale of an impaired loan. We saw $14.9 million of SBA loans and the $54 million of residential mortgage loans in the first quarter, compared with $23.6 million and $44.8 million respectively last quarter. Our average gain on sale margin for SBA loans was 8.7% in the first quarter, compared with 8.3% in the prior quarter. The total amount of SBA and the residential mortgage loan sales in the quarter was impacted by timing issues that pushed some planned sales into second quarter. As a result, our loan held-for-sale increased to $90.4 million at March 31, 2016, up $25.2 million at the end of the prior quarter. The loans held-for-sale at March 31, consisted of $78 million of residential mortgage loans, $11.6 million of SBA loan and $787,000 in other impaired loans. During the first quarter of 2016, we had a planned to sell $51.7 million of group residential loans in work. But that transaction was pushed through April 2016. The larger amount of held-for-sale loan should drive an increase in our gain on loan sale income in the second quarter. However, for the next couple quarters given the production level we are seeing in SBA and residential mortgage businesses. Our gain on sale income may possibly be slightly greater than what we generated in first quarter of 2016. Our non-interest expense was $26.7 million for the first quarter of 2016 compared with $26.6 million for the fourth quarter of 2015, a decline in merger related expenses was partially offset by higher sales and the benefit expenses resulting from an increase in incentive compensation related to companies 2015 performance and commissions. We expect to see a decline in salary and benefits expenses in the second quarter. Moving to the balance sheet, our total loan receivable before a loss to loan losses were $3.79 billion at March 31, 2016, down slightly from $3.82 billion at the end of the prior quarter. Decreases in commercial real estate and the C&I portfolios were partially offset by growth in our construction portfolio. Our investment security portfolios declined by approximately $23 million from the end of the prior quarter. This was due to a $10 million security that was caused during the quarter. In addition to normal investment pay down. We did not make any new purchases of investment security in the first quarter. Our total deposits were $3.85 billion at March 31, 2016 up slightly from $3.84 billion at the end of the prior quarter. I will now turn the call over to Peter Koh, our Chief Credit Officer, for a discussion of our asset quality trend. Peter.

Thank you, Alex. From an overall perspective, credit metrics declined slightly in the first quarter a deterioration in a couple of larger credits drove an increase in some of our problematic categories. However, the overall health of the portfolio and our total loss experience continue to be quite positive resulting in just in modest reserve requirement for the quarter. At March 31, 2016, our non-performing loans totaled $25.2 million, up from $21.7 million at the end of the prior quarter. As a percentage of total gross loans, our non-performing loans were 65 basis points up from 56 basis points at the end of last quarter. Total inflow into nonperforming was $6.4 million during the first quarter, while we had total outflow of $2.9 million. Most of the inflow into non-performing loans was attributable to one $4.5 million in commercial real estate loan in which we have ample collateral coverage to protect this from any material loss. The outflow primarily consisted of $1.2 million in payments and amortizations and $1 million in transfers to OREO. Our classified loans totaled $85.2 million at March 31, 2016, up from $80.4 million at the end of the prior quarter. Total inflow into classified loans was $11.1 million, while total outflow was $6.2 million. The largest contributor the outflow was $2.3 million in pay offs. Our criticized loans totaled $161.1 million at March 31, 2016 up from $120 million at the end of the prior quarter. The primary contributor the increase was one commercial relationship totaling approximately $26 million. The borrower is a U.S. subsidiary of a large current Korean conglomerate and a subsidiary is experiencing a temporary deterioration in its financial performance. We believe the parent company will provide sufficient financial support to the subsidiary until the financial performance improves and we are not projecting any losses to be incurred on this credit. It’s worth noting that while our criticized loans has doubled than the past year, our classified loans have declined by 4% and our non-performing loans have declined by 17% over the same period. The criticized loan category represents loans, where closer monitoring is wanted and our loss mitigation efforts increased, such as determining whether we should allow these loans to be taken out by another bank. As we have improved our overall credit administration procedures over the past few years, we have become more proactive in moving credits into the criticized loan category, which has partially driven the higher dollar amounts we are currently seeing in this credit bucket. However, as the trends in classified loans, non-performing loan and net charge offs show, the increase in criticized loans has not resulted in higher levels of impairment or credit losses. Despite the increase in criticized loans, we remain comfortable with the overall health of the portfolio and believe our credit cost will continue to be at in moderate level. During the first quarter we had 598,000 in gross charge off and 361,000 in net recovery resulting in net charge off of 237,000 or less than one basis point of average loans. We recorded a provision of 300,000 for the quarter, which essentially covered our net charge offs and kept our allowance to total loans ratio relatively stable at 1.38%. Going forward we would expect to continue to record a modest amount of provision expense each quarter primarily to reflect the anticipated growth in the loan portfolio. Now, I will turn the call back to our Chief Executive Officer. Mr. Yoo.

Thank you Peter. Before we conclude, I would like to provide a brief update on the progress of our merger being closed with the BBCN Bancorp. We continue to work towards getting the required regulatory and the shareholder approvals and the process is proceeding as anticipated. One important step was a recent adoption of community goals and the commitments to be implemented by [indiscernible] bank following the completion of the transaction. These are important goals that demonstrate our commitment to supporting the community in which we live and work. We continue to believe that the creation of the first super regional bank in the Korean market, we provide strong benefit to the community and the customers that we serve. Thank you all for being with us this morning.

Thank you Mr. Yoo. That concludes our formal presentation. At this time, we would like to open the call for questions.

[Operator Instructions] Our first question comes from Aaron Deer with Sandler O’Neill.

Hi. Good morning, everyone.

Good morning Aron.

Good morning.

Good morning

Alex, I was hoping if give a little bit more color behind the sharp drop in the loan yield during the quarter?

Loan yield overall, the decrease and I think the main reason for the decrease is actually the newly loans originated for the quarter, it’s actually lower than what we have in our portfolio. And I can give you more colors on the rates, on the production for Q1 of this year and the Q4 of last year, which is already lower and actual raise excluding the mortgage loan. I think we will need to exclude the mortgage loans in our analysis, because the mortgage loan actually we have a lower yields in our CRE and others. So we produce the more mortgage loans, the average rate on our new loans origination is actually did decrease. So excluding the mortgage loan for the Q1, the average loan yield was about 4.3% and Q4 was 3.99%. So that did have most impact on the reduction of loan yield and also we have about four basis points impact in loan yield resulting from a transfer of some accrual to non-accrual loans that did have around ($400) [ph] thousand dollars negative impact, which actually caused us to reduce our loan yield.

Okay, I’m sorry. Can you repeat what the average rate was in new originations in the first quarter? I’m not sure that I heard that correctly.

Sure. Average rate excluding the mortgage loan is a 4.28% and it’s more breakdown we have a fix rate of 4.2% and variable is 4.4%. So the quarter combine was 4.3% and our fixed and variable. Sorry. Go ahead.

I was just going to say that you said that the fourth quarter number was 399. So the new originations are actually rate was higher than the fourth quarter, is that correct, ex-mortgage?

Yes. That is correct. If you compare it did actually improve, but if you compare that with existing loan portfolio rate both 2015 Q4 and 2016 Q1 is lower than the existing portfolio. But two of quarter comparison actually average rate increased about 29 basis points.

Okay. And then, I’m sorry, I have missed this in your introduction remarks. What was the exact volume of the SBA and residential mortgages that we’re sold during the quarter?

Sure. Mortgage loans we sold $54 million at a premium around like 1.5% or we had a gain of $830,000 and SBA, we sold total $15 million at a premium of 8.7%, which resulted in $1.3 million gain on sales and also we have one impaired loan as we sold and recognized gain of $554,000.

Okay. So that was an impaired loan that was sold. And what was the volume - I’m sorry, what was the size of that loan it was sold?

I’m sorry?

The loan that was sold.

It was actually held at a zero balance, so the entire amount was a gain.

Okay. Very good. Thank you. I will step back.

Sure.

Our next question comes from Juliana Balicka with KBW.

Good morning.

Good morning, Juliana.

Good morning.

Good morning, Juliana.

I wanted to ask a couple of bigger picture questions. Peter you talked about specific trends in [indiscernible] in terms of non-accrual migrations, but could you expand a little bit on trends you are seeing in the CRE market in general in Korea Town and then also in Southern California. And in light of your occurring position as CCO of the combined post-merger company, could you talk about your view on managing CRE concentrations and what you are seeing in the marketplace and how you think the subsidiary business develop going forward?

Generally speaking, I think we have a pretty good management of our CRE concentration. We are very mindful of the pending merger coming up, I think both things are in a relatively higher CRE position, but I think we already had pretty active discussions and kind of thought process views in place to deal with that. I think in general, I think the CRE market is doing well in some ways but I think from a risk standpoint we are seeing some signs, some red flags and things that we are trying to navigate through. And I think a lot of that’s just caused by the higher valuations here, I think there are talks that some areas the CRE market seems to be a little bit profit. So I think we are all trying to balance and really trying to achieve quality growth here and I think our both banks are trying to do that independently as well as a combined unit and I think we will have hopefully much more success doing that. I think the Southern California or the primary areas we reserve, they are doing well. I think generally in most of the forecast for CRE domestically has been quite favorable. I think that’s what all the indicators are showing, but we are mindful of some of the other larger macroeconomic factors like oil and impact from China. So those are things that we are mindful of, but I think from the specific domestic market at least things are sort of looking to be improving. Did that answer Julian?

Yes that’s great and to follow-up on that do you think CRE growth of 8% to 10% is doable in this kind of environment or do you think CRE growth will generally slow down? And also you mentioned being cautious about certain areas where maybe you can add points what market are sort of maybe [indiscernible] cash flow what is specifically are kind of the areas of cautions?

Yes, I think we will have to see what growth rate that we are comfortable in, I don’t think we have any real guidance that we can give there. But I do think that we will try to balance that percentage of growth coming from the CRE portfolio. And I think the idea really is to just diversify away from CRE going into more non-CRE products. I think we are positioned well to do that with our residential platform, SBA platform. And I think we have been newer idea coming forth from the C&I side which I anticipate will become a larger portion of our balance sheet. So again, we are just cautiously trying to navigate through this part of the cycle with the CRE. I think we are doing a pretty good job balancing that growth. I think first quarter was a little seasonably slow, I think that we will be picking up from here going into these quarters where we actively generate success to our markets. That’s probably it.

Very good thank you very for that color. Thank you for that color. And then maybe, I can switch to different question gentlemen. Could you speak about pricing competition, how it's trending in your market, how it was in the first quarter? Can you talk a little bit about margin impact, Alex I’m not sure, but I mean maybe more what you are seeing [indiscernible] from your peers on loan pricing as well as because of pricing who is being aggressive kind of things. So what are you seeing?

I think over the loan pricing side, as you can kind of - CRE kind of mentioned right now before, the first quarter pricing actually came up a little bit from the fourth quarter. I think a lot of them are some margin or the yield pressure that we saw during the first quarter was really from the full quarter impact from the high originations we did in the fourth quarter. So I think with that funds going up in December I think there was a little bit of a tense for the market to bring the prices up from our competitors and just from the general market place. But unfortunately I think that not as much of a improvement as we had hoped for. So it continues to be very competitive, I think loan pricing depending on what financial institution, their strategies and their goals are. Some are being still very, very aggressive and so we are competing directly with that but we are trying to get the pricing up as much as possible.

And then to add on to the pricing on the deposit side, we actually recently saw net loans to deposit ratio actually increase up until third quarter of last year. We had a very low trending down almost below 90% at one point. However, due to strong loan demand we did actually have increase on net loan to deposit ratio like 98%, 99%. So going forward, we would like to control those net loan to deposit ratio move downward so that's why we are actually in process of developing a deposit campaign. Personally, the deposit cost didn’t increase or even though it is very competitive, but I think a we still have a room for us to improve the deposit without causing it increase in our deposit cost.

Okay, thank you very much for that color and a one more question and I'll step back. Maybe and I'm sorry if I missed this in your remarks but could you quantify that gain that you expect - the margin you are expecting on the residential mortgage loan sale that got pushed into April and also what are the trends you are seeing in SBA loan sale premiums and I'm sorry if you have discussed this in your remarks.

Sure. We have as you will see loan held-for-sale balance increase substantially this quarter. So we have $90 million dollars of loan held-for-sale. Out of that $78 million consist of mortgage related and out of that $78 million $52 million is the one that pushed into April. We would expect, because due to the timing issues it didn’t completed the transactions or it could not be in Q1 event, but we expect to complete it this $52 million sale at a premium of 1.5% so we would expect to gain around like $800,000 level from this mortgage. And also SBA the loan held-for-sale in SBA loan is $11.5 million and we did have 8.7% of gain on sale and we would expect to kind of similar level say 8.5% on gain on sale. I think it will help to boost up our gain on sale from those two loans and also there is one kind of the impaired loan including that $90 million doesn’t have a balance of $797,000 of our book value. If we actually sell this one in the second quarter, we would expect to have more than $0.5 million or close to $1 million gain on sale from this particularly impaired loans.

Got it. Thank you very much.

Thank you.

[Operator Instructions] Our next question comes from John Moran with Macquarie Capital.

Hey good afternoon guys.

Hey John.

Hi John.

Hi.

I know it sounds like 1Q was kind of rough in terms of demand drivers and you sort of spelled that out, it sounds like 2Q off to a much better start. I was wondering if you could quantify I know 4Q was great production and it sounds like you are kind of drained to the pipeline, but where we stand pipeline wise kind of coming into 2Q versus where we were at the end of the year and maybe on a year-over-year basis?

Sure. I think for Q4 2015 I think maybe there was really a kind of a banner quarter for us in a lot of ways for the production side. Were still somewhat building the pipeline I think from that quarter. As you mentioned, I think we did start 2Q on a much stronger foot, but at the same time, I do think we are still kind of cautious and we’re balancing and really trying to achieve that quality growth that we've been talking about. So I do think we do expect to see improvement from first quarter, but probably not at the same levels as we saw in the fourth quarter.

Okay that's helpful. The other one that I had was just a probably for Alex on the operating expense run rate I think you said that salaries and employee benefits would be expected to tick down a bit in 2Q. Is everything else that we saw in there and really kind of getting at the other expense kind of at a good run rate?

Yes. As I mentioned earlier, the salary and benefit expenses actually kind of unusually higher and actually there is some seasonality factors, because the payroll taxes typically Q1 is higher than the other quarters. And also related to 2015 incentive bonus, we actually recognized additional incentive bonus kind of expenses around like $0.5 million, so that actually we would expect to bring down in the second quarter. And relate to other non-interest expense item does include a kind of a recoveries from the loans that we acquired from BankAsiana and some other legal claims. I don’t think this will continue, so there would be around like 275,000 reduction on the expenses and also we have a one kind of a bank stock that we owned not a significant amount, but due to the sales transaction of that particular bank we had our charge off of around $200,000. So I do believe those bonus and payroll and legal claims related BankAsiana and [indiscernible] stock those are about like $1 million or $1.2 million, we really expect to not recur in the second quarter. So with that our total non-interest expense might go down let’s say around like $1 million level.

Perfect. Thank you very much for the clarification.

Thank you.

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

Good morning. I had a question regarding the securities portfolio yield, it looks like it came down nearly 30 basis points versus the fourth quarter. I think you made a comment about not investing during the first quarter and want to get a sense of how you are going to manage that going forward will you run down a bit more going into we presume - closing of the BBCN deal?

Well, I think we’ll be maintaining the balances that we currently have. Yield wise as you know with the financial turmoil in the first quarter, treasuries went down to three-year low. So prepayments speed and productions picked up. So we recognize more amortization expense on our MBS and CMO portfolio that drove the yield mostly lower.

Okay. So if there is a more stable yield environment in the second quarter that should come up a little bit even to maintain the balances?

Yes.

Okay. Great. Thank you.

Our next question comes from Don Worthington with Raymond James.

Good morning, everyone.

Hi. Good morning.

Good morning.

Good morning Don.

You may have disclosed this, if you did I missed it, but what was the level of repayments pay offs in the quarter versus the fourth quarter?

Pay offs for the first quarter was about $104.8 million, pay downs was about $107.1 million. A little bit elevated on the pay off, Q4 pay offs was about $78.6 million, pay down was about $116 million.

Okay, great. Alex, I wanted to just clarify. Was the impact of the interest reversals the 400,000 or four basis points that you mentioned?

Yes. That’s correct.

Okay. All right, thank you.

Okay. And I’m not showing any further question at this time. I would like to turn the call back over to our host.

Okay. Thank you. That concludes our quarterly conference call. On behalf of our management and the Board of Directors, I would like to thank everyone again for your participation and continued interest and support of Wilshire Bancorp. If you have any further questions, please feel to contact us directly. Thank you.

Ladies and gentlemen that concludes today’s presentation. You may now disconnect. Have a wonderful day.