Hope Bancorp, Inc. (HOPE) Q4 2016 Earnings Report, Transcript and Summary

Good day, and welcome to the Hope Bancorp Fourth Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [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, Ellison. Good morning everyone, and thank you for joining us for the Hope Bancorp 2016 fourth quarter investor conference call. Before we begin, I'd like to make a brief statement regarding forward-looking remarks. The call today may contain forward-looking projections regarding the future financial performance of the Company and future events. In additional, such statements regarding the proposed transaction between Hope Bancorp and U&I Financial Corp including the expected timeline for completing the transaction, future financial in operating results, benefits and synergies of the proposed transaction and other statements about the future expectations, beliefs, goals, plans and prospects of the management are statements that may be deemed to be forward-looking statements. These statements are based on current expectations, estimates, forecast and projections, management assumptions about the future performance of each of the Company and the combined companies as well as the businesses and markets in which they do and are expected to operate. These statements constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. We wish to caution you that such forward-looking statements reflect our expectations based on current expectations as soon as forecast and projections and management assumptions about the future performance of Hope Bancorp. These statements are not guarantees of future performance. Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The closing of the proposed transaction is subject to regulatory approvals, the approvals of the shareholders of U&I Financial and other customary closing conditions. There is no assurance that such conditions will be met and the proposed transactions will be consummated within the expected timeframe or at all. If the transaction is consummated factors may cause actual outcomes to differ materially from what is expressed in integrating the two organizations and in achieving anticipated synergies, cost savings and other benefits from the transaction. We refer you to the documents the Company files periodically with the SEC as well as the Safe Harbor statements in the press release issued yesterday. Hope Bancorp assumes no obligation to revise any forward-looking projections that may be made on today's call. The Company cautions that the complete financial results to be included in the annual report on Form 10-K for the year ended December 31, 2016 could differ materially from the financial results being reported today. As usual, we have allotted one hour for this call. Presenting from the management side today will be Kevin Kim, Hope Bancorp's President and CEO; and Doug Goddard, our Chief Financial Officer. Chief Credit Officer, Peter Koh is also here with us today and will participate in the Q&A session. With that, let me turn the call over to Kevin Kim. Kevin?

Thank you, Angie. Good morning, everyone, and thank you for joining us today. In the first full quarter of operations following the merger of the former BBCN Bancorp and Wilshire Bancorp, we delivered a solid performance, generating $40.6 million in net income or $0.30 per diluted share. This includes $3 million of merger related expenses, largely related to the implementation of phase one of our branch consolidation plan and a completion of our systems conversion. Excluding the merger-related expense, our net income would have approximately $42.4 million or $0.31 per diluted share. With the systems integration completed mid November and the first phase of the branch consolidations completed at the end of December, we've phased in approximately 50% of the projected cost savings for the merger. The second phase of the branch consolidations plan will be completed during the first half of 2017, and we believe we're well on track to fully realize all of the cost savings during the second half of the year. Most of our major line items fell within our expectations for the fourth quarter, with the exception of loan growth, which came lower than expected. We had $465 million in loan originations in the fourth quarter, which resulted in our total loans outstanding remaining essentially unchanged from the end of the prior quarter. Our loan production was impact by a number of factors. First, we generally saw a reduction in loan demand in our core markets which was particularly acute in the commercial real estate market following the election. Given the jump in interest rate particularly in the yield on to ten year, we saw a number of customers taking a more cautious wait and see approach to making near-term investments in commercial real estate until there is more certainty on the type of the economic and interest rate environment, we will have going forward. The number of transactions in our markets appear to pause somewhat in the last two months of the quarter, and many deals there were in the process were not completed during the quarter, as either the buyer or the seller hesitated or decided to back out. Second, of the deal flow that we did see, much of it was in segments of our portfolio, where we're closely monitoring and managing the growth rate. So, there were a numbers of deals that we were particularly selective and withheld from completing as we took a more cautious approach for our portfolio management strategy. And third, we held firm in our pricing on new deals particularly fixed rate loans given the rising interest rate environment. This obviously had an adverse impact on overall loan production. The average yield on new loan originations was 4.15% in the fourth quarter, up from 4.03% in the third quarter. And fix rate loans accounted for just 42% of new loans originations relatively in line with the preceding three quarters, but down from 53% in the year ago fourth quarter. On the commercial loan side, demand was solid and we did a good job of developing new relationships. Last quarter, our commercial loan originations included $100 million warehouse line up credit commitment, which was fully utilized as of September 30, 2016. Excluding this one credit, our new commercial loan originations increased by nearly 85% to $138 million from $75 million last quarter. Overall, we now have $2.4 billion in total credit commitments outstanding to commercial customers and the utilization rate on our lines of credit was 52% at the end of the quarter. In terms of SBA lending, we found that the same dynamics that impacted our commercial real estate lending also impacted our SBA loan production in the quarter, which came in at $63 million with $42 million being sellable 7(a) loans. We saw a general trend of lower deal flow postelection, less attractive deals that we elected not to complete and deals falling out of the loan pipeline due to a transaction being delayed or cancelled following the presidential election. Our residential real estate lending group produced $74 million of direct mortgage originations and another $16 million of new warehouse line outstanding. The fourth quarter is typically a seasonally slower quarter for residential mortgage production, and the increase in mortgage rates also had an impact. The former BBCN residential mortgage business was predominantly a refinanced business as a new platform. While the former brochure is longer established business was a more balanced mix of purchase and refinanced loans. With mortgage rates increasing during the quarter, demand for refinance transactions dropped significantly following the election. Given the less favorable environment for refinancing, we are expecting the growth in production of direct residential mortgage loans may sell somewhat from current levels until there is a more clarity on our new president's policies and agenda. All in all, of the $465 million in new loan originations, commercial real estate loans accounted for 58%, C&I loans accounted for 31% and consumer loans accounted for 11%. We saw an elevated level of long payoffs this quarter, which reflects in part a full quarters operation as a combined company and this offset growth in our loans receivable. We had $313 million of loans payoffs in the fourth quarter, which was almost the $100 million higher than last quarter. Loan pay down amounted to $104 million in the fourth quarter versus $142 million in the preceding quarters. Now, I would like to make a general comment on our overall progress with intimating our business units. We are in the final stage of a transitional period of combined two strong lending forces and formulating a strong credit culture that will cherry the bank through the years ahead. I am very pleased to say that our frontline leadership remains fully intact and our credit admin policies are now set. Now that our focus has moved beyond the integration and with clear overall business development guidance from corporate headquarters, we believe our frontline is now on track to begin delivering the synergies from the combined entity. Looking forward into 2017, we expect loan origination volumes will fully return to anticipated levels as a combined company by the second quarter and contribute to annualize loan growth of high single digits an organic basis. With that, let me turn the call over to Doug to provide additional details on our financial performance in the fourth quarter. Doug?

Thank you, Kevin. As this was our first full quarter of combined operations following the merger compare to just two months of combined operations of the third quarter, much of the quarter to quarter variance in particular line items can be attributed to the extra months of combined operations. So, as I review our results, I'll focus my discussions on those items where there were other factors driving the variant. Excluding the impact of purchase accounting adjustments, our net interest margin was 3.45%, down just three basis points from the prior quarter. The decrease was primarily driven by a 4 basis points increase in our core deposit costs. Moving to non-interest income the major variants was driven by the resumption of our usual practice of selling most of our 7 -- our SBA 7(a) loan production during the quarter, which contributed $3.7 million in net gain on sale. The average premium on premium on SBA loan sales in the fourth quarter was 8.6% and within the normalized range that we typically see. The other major variants from the prior quarter was approximately $950,000 left and net gain on securities sales, following the repositioning we did in the investing portfolio post-merger following the third quarter. Turning to non-interest expense, our merger-related expense was the largest difference from the prior quarter, coming in at $3 million, down from $11.2 million last quarter. The accrual for our FDIC assessment was unusually low this quarter at $468,000. We received a favorable rate adjustment during the fourth quarter. Going forward, we expect our quarterly FDIC assessment to be approximately $900,000. The major variance was in our OREO related line items, which swung from income of $423,000 of the third quarter to $1.4 million of expense in the fourth quarter. We typically see a higher level of volatility in these line items. Turning to the balance sheet, both total loans and total deposits were essentially flat in the quarter. With respect to deposits, our money market accounts were up by little more than $88 million which was offset by declines in time deposits. Moving on to asset quality, we saw generally good trends across the portfolio with declines in criticized loans and non-performing assets and a lower level of net charge-offs. The decline in non-performing assets was primarily driven by $5.5 million decrease in OREO, reflecting an effort of the fourth quarter to clean up our special assets portfolio post merger. We had a $9 million increase in delinquent loans, but this was mainly due to administrative delays for loans into renewal process. We continue to closely monitor any potential impact on our customers, as a result of the bankruptcy filing of Hanjin Shipping. Today, it appears that there has been minimal impact. We have one large multi-relationship customer who is related to Hanjin, whose status is being impacted by the bankruptcy proceedings. At this time, it appears though the outcome will be favorable. However, we have moved this credit from special mentioned to substandard until the outcome is finalized, and this one credit relationship accounting for the majority of the change in those credit classifications this quarter. Reflecting the favorable credit cash trends, low level of charge-offs and the current loan balance are provision for credit losses, was just $800,000 in the fourth quarter. With that, let me turn the call back to Kevin.

Thank you, Doug. As we announced, yesterday, we were very pleased to reach a definitive agreement to acquire U&I Financial Corp, the holding company of UniBank in Seattle, which was our only Korean-American competitor in the Pacific Northwest. While the size of this transaction is much smaller than our recent merger of equals, the combination with UniBank is a very important milestone. First, this merger makes Bank of Hope, the only Korean-American bank with operations into the Pacific Northwest, which has shown a steadily growing Asian-American community. In terms of Korean-Americans, we estimate that there are maybe close to 150,000 scattered through the greater Seattle area and over 500,000 Asian Americans. However, the vast majority of this population is using mainstream banks. This means, there are tremendous opportunities for us to gain deposit market share. Moreover, we believe we have established a formidable competitive barrier that will be a considerable challenge to overcome for any of our niche peers who may want to enter this market. Second, the Pacific Northwest has been a very ripe SBA lending market. As most of you should know Bank of Hope is one of the top SBA lenders in the nation, and this transaction further strengthens our competitive position in this region of the country. Third, Seattle serves as an important port in the transpacific trade link with our strong heritage in international trade finance, our goal is to better position the bank for the long-term to capitalize on what we believe will be increasing business opportunities for us in this part of the country in the years to come. And finally, this merger continues our momentum as the only superregional Korean-American bank and the only one with a true national footprint. Now, UniBank operates four branches in Seattle area, three of which are located near Bank of Hope branches. And as many of you may expect, we anticipate a relatively high level of cost savings in the range of approximately 60% for this transaction. The economics of the transaction are very attractive, and we expect the acquisition to be immediately accretive to tangible book value and earnings. On the basis that the transaction is completed by the only part of our 2017 third quarter, we would expect earnings contribution of approximately $0.01 in 2017 before transaction cost and $0.02 in 2018. Outside of the acquisition of U&I Financial, our focus in 2017 will be on fully realizing all of the synergies projected for our merger of equals. The integration has gone smoothly so far, and we look forward to demonstrating our full earnings capacity after all of our cost savings achieved. We will also continue to focus on diversifying both our loan portfolio and our overall business mix. We have a number of new business lines that continue to gain traction such as residential mortgage, credit cards, equipment leasing and wealth management. As we continue to gain more experience and generate more awareness for these offerings, we believe they will start making meaningful contributions to our financial results. Overall, 2016 was certainly a monumental year for our organization with the formation of the only superregional Korean-American bank in the United States, and one that cannot be replicated by our niche peers in terms of size or market dominance. We believe this organization is far better positioned than ever to deliver strong and sustainable financial performance and further enhance the value of our franchise for our customers, employees and shareholders. With that, let's open up the call to answer any questions you may have. Operator, please opens up the call.

We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Matthew Clark of Piper Jaffray. Please go ahead.

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

Approximately $900,000.

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

I don’t have the exact dollish-ish immediately in front of me, but there is really a very minimal impact on our margin. It's simply not a great big part of our portfolio. I can get back to you with the actually number at a later time, but it is not a major variance item for us.

Okay, that’s fine then. And then on the loan growth, I know you laid out a bunch of reasons as to why the balances were down this quarter. But just curious, if there might be a portion of your combined loan portfolio that where there might be some customer overlap or there might be some concentrations by industry or type that you might be targeting to run off overtime? Just trying to make a sense, if there is a portfolio that we should consider going forward that might mitigate some of the loan growth?

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

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

Yes.

Okay. And then just last one in terms of the cost saves on the latest acquisition. Did you say 60% just before?

60%, six zero.

Our next question will come from Chris McGratty of KBW. Please go ahead.

Maybe we start the question on the SBA business. I am interested Kevin in how you are thinking about the legacy business? And how it will react from a growth and again on sale perspective in a rising environment?

Well, we have not seen any substantial changes in the secondary market that would be a signal to a change in direction one way or another. And premium in the secondary market seems to be holding up pretty well. So, I don’t anticipate any substantial changes in that area. And SBA has been a very important business segment for Bank of Hope. Going back to BBCN and Wilshire, both legacy organizations had strong business in the SBA area. And with the acquisition of UniBank in the Pacific Northwest, I think our SBA will be a big factor for 2017. And actually if I look at the pipeline of our SBA loans for the first quarter of 2017, it looks much better than the one that we saw in the fourth quarter of 2016.

Maybe question, Doug, for you. Can remind us the where to be the balance of accretive yield ended, end of the year? And then the expectations for contribution in next couple of years?

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

And then maybe one more, now that you've gone through a full quarter of the integration. How should be thinking about the size of the investment portfolio either dollars of percentage from here, any fine-tuning that needs to be done or is it kind of 1.6 billion about was right forum?

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

And then maybe last, if I could. On the acquisition, I haven't been able to dig in too much into the financial of the Company you're acquiring. But in terms of season expenses before the cost savings, could you just help us with what the run rates have been and we can layer in the 60% off to that? Thanks.

I am sorry, you are asking for run rate of expenses?

The expenses at the Company you are purchasing, right. You get the 60% -- I am just trying to get a sense of what that level is?

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

Okay. And the fee income, Dough, component of I assume it wasn't much of that.

The fee income component -- the non-interest income component of the bank was very much driven by SBA gain. So, I would look at that in terms of our combined target, as the SBA gain as the fairly low percentage on the target bank.

[Operator Instructions] Our next question will come from Tim Coffey of FIG Partners. Please go ahead.

Doug, we just begin on kind of the details of transaction. Have you identified loan marks?

Well, I mean obviously, it's very preliminary, but they're not a trouble bank, they would well run bank, they have slightly elevated non-performers. So, a midpoint of their estimate probably about 5% to the loan marks.

Okay. And given the size of the cost saves, are you anticipating any fix asset write-downs?

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

Okay. And then, Kevin, you've mentioned in your prepared remarks, there were some portfolios that, I think Hope Bancorp might have held back the growth there. Could you put some color what those portfolios were?

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

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

I think it is little too early to project at this time, but the new trade policy I think would induce more investments from Korean national companies to the U.S., and if that happens I think I would positively impact our potential opportunities here in the U.S..

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

Just wanted to get some clarification on the timing of the fourth quarter branch consolidation and any benefit on the expense line in the fourth quarter, and then also beyond the onetime cost for the second phase of the price consolidation? Are there any other meaningful one-timers left in the MOE?

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

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

Yes.

And then in the fourth quarter, the timing of the branch consolidation and if the there were any benefits to operating expense in the fourth quarter from that?

Some but not large because of the timing, I mean we did have some staff reduction during the quarter, but most to that starts to hit the run rate in 2017. There is a lot of moving parts in the expense obviously were building expenses on the area risk management and in some of the initiatives and growth in other areas but we do feel like hitting the targets on the cost reductions. But because of all the moving parts I like to reduce that to the efficiency ratio, excluding merger related expenses. We are still aiming to be at a run rate of low to mid 40s on the efficiency ratio by the next year.

Middle of '17?

Yes, this year.

[Operator Instructions] Our next question is a follow-up from Chris McGratty of KBW. Please go ahead.

For 2017, Doug, can you help us with the tax rate, effective tax rate?

With or without of price change from the government, the fourth quarter tax reduction pretty normal, it's very, very close to 40% as a normal rate for us with the recurring it tax advantage as we have are also combined bank, it's very close to 40%.

And obviously it's still preliminary, but I'm interested in your thoughts on -- to the extent we do get corporate tax reform. Number one, have you thought about the actual impact? And then number two, we're hearing some banks talk about how much of that actually falls to the bottom line versus gets competed away? Any high level comments on either those factors? Thanks.

Very high level, I mean sure with the onetime, with a change in the corporate tax rate from federal tax rate there is two impacts. One there is onetime effect on your differed tax asset. So if we went to 25% tax for example I think we would lose about somewhat between $15 million $20 million on our tax asset, but we would add to our core recurring run rate we are doing that back in less than a year. The effect is slightly muted it's in our case just because we have a lot operations in California and the east in Ney York. So the state doesn’t affect change but so the first path as you get a onetime hit on your differed tax asset you get it back about nine months from the tax rate. As far as what happened to competition I am not sure my guess is a lot better than yours. Well, I do have a guess those there would be some pressure, but the industry would try to keep some of that.

[Operator Instructions] I'm showing no further questions. This will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

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

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