HOPE
#Thank you, Nicole.
Good morning, everyone, and thank you for joining us for the Hope Bancorp 2017 Second Quarter Investor Conference Call.
Before we begin, I'd like to make a brief statement regarding forward-looking remarks.
The call today may contain forward-looking projections regarding the future financial performance of the company and future events.
In addition, certain statements regarding the proposed transaction between Hope Bancorp and U & I Financial Corp.
, including the expected time line for completing the transaction, future financial and operating results, benefits and synergies of the proposed transaction; and other statements about 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, forecasts and projections; management assumptions about the future performance of the company; as well as the business and markets and ---+ the company does and is expected to operate.
The statements constitute forward-looking statements within the meaning of the U.<UNK> Private Securities Litigation Reform Act of 1995.
We wish to caution you that such forward-looking statements reflect our expectations based on current expectations, estimates, forecasts or projections; and management's 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 transaction will be consummated within the expected time frame or at all.
If the transaction is consummated, factors may cause actual outcomes to differ materially from what is expressed in integrating the 2 organizations; and in achieving anticipated synergies, cost savings and other benefits from the transaction.
We refer you to the documents the company 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 quarterly report on Form 10-Q for the quarter ended June 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 <UNK> <UNK>, Hope Bancorp's President and CEO; and Doug <UNK>, our Chief Financial Officer.
Chief Credit Officer <UNK> <UNK> is also here with us today and will participate in the Q&A session.
With that, let me turn the call over to <UNK> <UNK>.
<UNK>.
Thank you, <UNK>.
Good morning, everyone, and thank you for joining us today.
In the second quarter, we had our strongest quarter of business development since the completion of our merger of equals last year, reflecting the progress we are making in integrating the 2 companies and improving our execution at all levels of the organization.
We generated $40.7 million in net income during the second quarter or $0.30 per diluted share compared with $36.2 million or $0.27 per diluted share in the preceding first quarter.
Excluding merger-related expenses, the increase in earnings per share was $0.02.
During the second quarter, we originated $725 million in new loans, an increase of 23% from $587 million in the prior quarter.
This drove a 2.5% linked-quarter increase in our end-of-period loan balance and brought us back to the high single-digit annualized loan growth that we are targeting.
Much of the loan production came in later in the quarter, and our average loan balances were up just 1.5% from the prior quarter, so we should see a stronger pickup in the net interest income heading into the third quarter.
Importantly, we were able to generate the higher level of loan production without compromising on our pricing or credit quality.
During the second quarter, the average rate on our new loan originations was 4.56%, an increase of 31 basis points from the preceding quarter.
Our current focus in business development is producing the more balanced loan mix that we are targeting.
Commercial real estate loans comprised 63% of total production.
Commercial loans accounted for 27%, and residential mortgage loans 10%.
We had 2% growth in our commercial real estate portfolio on a linked-quarter basis.
We saw very balanced growth across this portfolio with every major property type up between 2% to 4%, with the exception of multifamily which was down 2% in the quarter.
We are very pleased that we continued to see higher levels of commercial loan production.
We had $178 million in new C&I originations by our commercial lending teams in the second quarter, up from $152 million in the prior year quarter.
This resulted in a 5% increase in the commercial loan portfolio on a linked-quarter basis.
We saw good balance within our commercial lending groups, including our West Coast, East Coast and corporate banking group, all making significant contributions to the total production.
Overall, we now have $2.39 billion in total credit commitments outstanding to commercial customers, and the utilization rate on our lines of credit was 50% at the end of the quarter.
We had a strong pickup in SBA originations in the quarter as well, although the production of 504 loans as a percentage of total SBA originations was higher than usual.
Since it is the 7(a) originations that comprise the sellable portion of SBA loans and the majority of the originations in a given quarter are sold in the next quarter, the strong SBA production had more of a positive impact to our portfolio growth this quarter than it did to our gain on sale for the quarter.
We funded $109 million in SBA loans during the second quarter, with nearly $66 million being sellable 7(a) loans.
This compares with $80 million in originations in the preceding first quarter, with $52 million being sellable 7(a) loans.
Our residential mortgage group also saw a higher level of production consistent with the seasonally stronger second quarter.
We had $71 million of direct mortgage originations, up from $58 million last quarter.
At this point in the interest rate cycle, most of our production continues to come from the purchase market rather than refinancing.
As a result, we expect our consumer residential mortgage originations may be at lower levels than our historical performance due to the current market trends.
Given the preferences of the customer base that we serve in the purchase market, our current production is heavily weighted toward the 5/1 and 7/1 adjustable-rate mortgages that we retain on our balance sheet.
So as with our SBA production, our residential mortgage production this quarter had more of an impact on our portfolio growth than our gain on sale.
Our overall consumer portfolio which includes our residential mortgage loans increased 10% on a linked-quarter basis.
With that as an overview of our business development efforts, let me turn the call over to Doug to provide additional details on our financial performance in the second quarter.
Doug.
Thank you, <UNK>.
As I begin the review of our second quarter results, I will limit my discussion to just some of the more significant items in the quarter since we provided quite a bit of detail in our press release.
I'll start with the net interest margin.
On a reported basis, it declined by 2 basis points to 3.75%.
With the recent increases in the prime rate as a result of 2 Fed rate increases since December, we had a 9 basis point increase in our loan yields when compared to the preceding quarter.
However, this was not sufficient to offset the impact of the higher funding costs, a large part of which was attributable to the runoff of the beneficial impact of purchase accounting adjustments on our liabilities.
This accounted for approximately 9 basis points of the increase in our funding costs relative to the preceding first quarter or roughly 2/3 of the increase.
In the next few quarters, we do expect some continued pressure on our net interest margin from declining purchase accounting, but we believe we will be able to offset deposit pricing pressure with improving loan yields.
Moving to noninterest income.
Most of the major items were relatively consistent with the prior quarter, with the most significant variances coming within the other income line item.
Last quarter, our noninterest other income included higher-than-usual swap income of $963,000 versus $481,000 in the current second quarter.
In addition, we recognized as other income recoveries from premerger, fully charged-off acquired loans of $1.1 million in the preceding first quarter versus only $210,000 in the current quarter.
As <UNK> mentioned, we had stronger production of both SBA loans and residential mortgage loans, but due to the mix of production, our net gain on sale income was fairly similar to last quarter.
We sold $46 million of SBA loans in the quarter with an average premium of 9.2% before broker commissions.
This compares with $45 million of SBA loan sales in the preceding quarter with an average premium of 8.85%.
Turning to noninterest expense.
We had a few notable variances from the prior quarter.
Our advertising and marketing expense declined by 30% primarily due to the impact of our new LPGA title sponsorship that was fully recognized in the first quarter this year.
Going forward, these expenses are being accrued throughout the year, so we would not expect a significant swing as we saw in the preceding quarter.
Our data processing and communication expense declined 26% from the preceding first quarter.
This was attributed to a number of factors, including we recognized a credit in the current quarter of approximately $380,000, which is a onetime event following the renegotiation of a contract with a former Wilshire vendor.
And two, we had decreases in item processing and ATM debit card processing expenses largely related to our branch consolidations in 2017.
Excluding the impacts of the onetime credit, we believe our current data processing and communications expense represents a fair quarterly run rate for the foreseeable future.
Our professional fees declined by 21% from the first quarter.
As you may have noticed from our Form 10-Q for the first quarter, which was filed with the SEC on July 20, 2017, the amount of professional fees for the first quarter was higher by approximately $1.3 million compared with what we reported previously in our earnings release and conference call.
This was due to the recognition of audit fees that were finalized and received late in the second quarter but for services in earlier periods.
And lastly, our credit-related expense swung to the recognition of $88,000 of income this quarter.
This is always a volatile line item, with this quarter being positively impacted by the timing of OREO-related expenses and valuations.
Now that we are substantially through all of the MOE integration, we believe we have achieved the cost saves that we projected for the combination of the 2 companies.
However, we continue to invest a portion of these cost savings to strengthen our infrastructure as well as support our new business development initiatives.
We have a number of projects in the second half of 2017, much of which is related to the meeting of the higher regulatory requirements.
And we would also expect an uptick in merger-related expenses for the upcoming U & I Financial transaction.
Despite the recent branch consolidations, our FTE count increased to 1-3-7-8, 1,378, as of June 30, 2017, from 1,352 as of March 31.
This is just one example of the investments we continue to make in our workforce.
As a result, we expect our noninterest expenses will run higher in the second half of this year before moderating back down to levels that will help us meet our targeted efficiency ratio goal of mid 40s in 2018.
Moving on to asset quality.
We saw some increase in our problem loan categories but a low level of credit losses in the quarter.
Our nonperforming assets increased by approximately $19 million in the quarter.
However, earlier this month, we received the full payoff of a little more than $5 million on a nonperforming loan, so we've already seen an improvement of NPAs during the third quarter.
Out of the new nonperforming assets, roughly half of this new inflow is coming from 2 larger credits.
One is a hotel commercial real estate property that is on nonaccrual, and one is a C&I loan that is a TDR.
We believe we are properly reserved for both of these loans.
Aside from these 2 larger credits, the remaining inflow of NPAs are much smaller credits.
Our total criticized and classified assets increased by approximately $30 million, but the increase was predominantly in the special mention category.
We don't see anything systemic in the loans that were downgraded to indicate any broader issues within the portfolio, and we believe that the longer-term trend will continue to be towards a lower level of problem assets.
We had just $1.3 million in net charge-offs in the quarter.
Due to the low level of credit losses, our quantitative reserve requirements dropped a bit in the quarter, which had a favorable impact on our level of provision expense.
We recorded a provision of $2.8 million in the quarter, which kept our allowance-to-total loans ratio essentially unchanged from the prior quarter.
With that, let me turn the call back to <UNK>.
Thank you, Doug.
Looking ahead to the remainder of 2017, we are optimistic that we can continue our momentum in business development.
Over the past few months, we've made some adjustments within the organizational structure to enhance our focus on generating new business.
And we anticipate seeing the impact of these changes not just in the coming quarters but for years to come, supporting our continued growth.
We are also actively adding new talent to the bank that can positively impact our growth and diversification.
The most significant recent step was the addition of Steven Canup to head our new Institutional Banking Group.
The ability to attract Steven to the bank and to form an institutional banking group was a direct benefit of the increased size and scale we have following the MOE.
We now have the capital base, lending capacity and treasury management capabilities to effectively service the larger commercial enterprises that comprise the target customer base of this group.
We anticipate that the formation of the Institutional Banking Group will provide a number of benefits for us.
It provides an incremental source of balance sheet growth.
It will be focused on supplementing our efforts to lend to larger commercial credits, which should improve our overall diversification and reduce our CRE concentration.
And it will generate lower-cost transactional deposits.
That should reduce our reliance on more costly CDs.
We anticipate the Institutional Banking Group will make a meaningful contribution to both deposits and loans over the second half of the year.
With this contribution and the healthy pipeline we have in our traditional lending areas, we believe we are well positioned to maintain high single-digit annualized growth rate in loans that we are targeting.
With regard to the previously announced acquisition of U & I Financial Corp.
, as a result of our delayed 10-K filing, we expect the completion of the transaction will also be delayed toward the end of the year or early 2018.
As most of you should have noticed, the company filed its Form 10-Q for the first quarter of 2017 on July 20.
As a result, we have received confirmation from NASDAQ that we are now back in compliance.
And as previously guided, we expect to be timely with our quarterly SEC filings going forward.
And finally, we announced last week an increase in our quarterly dividends from $0.12 to $0.13 per share.
This represents our fifth consecutive annual increase in our cash dividends and exemplifies our board's commitment to continuously enhance shareholder returns.
This dividend increase also underscores our board's confidence in the long-term growth prospects of the company as the only super regional Korean-American bank in the U.<UNK> As both organic and acquisitive growth strategies add quality assets to the bank, we anticipate a positive impact on our level of profitability going forward.
With that, let's open up the call to answer any questions you may have.
Operator, please open up the call.
Yes, that is true.
As you saw in the second quarter, it has grown nicely in the double-digit range.
And I think it should support the high single-digit annualized growth that we are targeting.
It's the other gain on sale, so roughly a little under 400.
It's a very small number.
That's all of it.
Yes, there's a lot of moving parts in there, obviously.
And we, as a result of all the moving parts, went through a sort of reforecasting internal process.
And I'll break it into 2 pieces: We do have the U & I merger coming up, and so merger-related expenses will probably cause a spike of maybe 2% of the efficiency ratio within the quarter that closes.
Barring that, the current run rate of expenses and efficiency ratio are actually pretty close, and that's where we are in the second quarter.
And the reason it's not getting down to what we have previously guided in terms of mid 40s as soon as we thought is a lot of onetime projects were identifying that they're going to hit the second half of the year.
And those relate to, not only some new business units that are starting up, which <UNK> referred to, but some more expenses related to things like enhanced stress testing related to DFAST and credit modeling and some of the infrastructure-d.
So an extra $4 million, $5 million of sort of project-related expenses that are going to hit the second half of the year, we believe, are going to hold that efficiency ratio up closer to the current level, excluding merger expenses, delaying when we get back to the mid 40s to the start of next year.
Yes, I'm going to answer those in reverse order.
On the asset side we are seeing some upward tick in loan yield as things reprice and as we have some inflow of loans that are higher than the coupon rate in the portfolio.
That spread is a little higher than that in the investment portfolio with ---+ and new purchases and repricing in the investment portfolio are noticeably higher than our current portfolio.
On the deposit side, the good news on the purchase accounting benefit we're losing, we have very little left to lose there.
We will lose about another 3 basis points in the third quarter for purchase accounting benefit, and then that's it on the Wilshire deal.
It's gone.
And that will be ---+ that will then be able to stabilize.
With the other costs of deposits where we're seeing the most movement is on retail CDs.
On that piece of it we're definitely seeing repricing.
So on the $600 million or so of retail CDs that'll reprice in the quarter, we'll see a definite uptick of anywhere from 15 to 25 basis points on some of those.
Overall, that drives an increase in overall cost of deposits in the neighborhood of 2%.
We think we can offset.
And if I were to factor in the rest of the liabilities side of the balance sheet, I'd say the cost of funding could go up 2 to 4 basis points in the next quarter.
And we expect to be able to offset a fair amount of that on the opposite side such that the core NIM excluding the purchase accounting is really fairly unmoved right now.
I hope that wasn't too long an answer.
It's about $800,000 we'll get.
And you'll see ---+ well, how much is left for the third quarter.
No, there's about $250,000 left for the third quarter.
Roughly we're up by about 2 basis points on a core basis.
We don't break it out in as much detail.
There are very touchy rules about non-GAAP disclosures about things like margin, but currently we're running at 3.75%, of which about 1/4 is purchase accounting.
I'm rounding a little bit.
That core is up from about 3.48% last quarter.
No, purchase accounting was comparatively flat between quarters.
The Wilshire deal is still new enough that, that number is not moving very fast.
It'll bounce around a little bit.
We will start to see that decline, particularly in 2018, but I think we're in good shape to have our growth offset that.
Well, I think the integration between BBCN and Wilshire during the past 12 months was a quite successful one.
And we'd pretty much achieved all the cost saves that we anticipated and represented to the investment group at the beginning of the deal, but we had a lot of projects going on, which resulted in higher-than-expected expense levels at least in the year of 2017.
So that is I see those more like an investment for the future of this organization.
And it will eventually benefit the Bank of Hope and its shareholders, and I feel very positive about that.
Once we complete those investment type of the expenditures, I think our efficiency will be achieved as originally expected.
And for the next 6 months, our revenue will continue to grow, but at the same time, our expenses will be there, but from 2018, I think we begin to see the real benefits of all the investments in the deal that we did during the past 12 months.
Well, no.
That's in the second six ---+ in the second half of the year.
A good part ---+ I ---+ a good part of that will drop out.
I mean the ---+ I don't want to say 100% because we do ---+ are making some net investments on infrastructure that result in some higher headcount, but it ---+ we're talking about some projects that really are kind of onetime help us finalize getting over that $10 billion hump and things like that, in a variety of projects that are ---+ that I do believe are onetime, that ---+ so that the ---+ it's not just the efficiency ratio.
The actual ---+ those actual expense levels should decline in the first part of next year.
Sure.
I think about half of the NPLs are coming from those 2 large credits.
They're actually both unrelated industries.
One is a hotel CRE.
And there was a TDR loan about $5 million that was in the C&I area.
So both, I think, have ample reserves.
The actual calculations are coming off of our impairment, and basically those 2 loans combined are about $9.2 million.
So pretty much half of it was based on those 2 unrelated customers.
And as we noted, in the third quarter, we already had some good recoveries or some collection activities on those nonaccrual loans, not the 2 I just mentioned but in the rest of the portfolio.
So about $5 million of it are already in the third quarter.
We were able to make some progress.
And just to touch upon, I know, on this special mention category: We also had a little bit of an uptick there as well.
And there were 2 large CRE loans that drove that increase.
About $18 million of that increase in the special mention category came from these 2 loans.
And both of these loans actually are well secured, and they're paying as agreed.
And I think it's a reflection of just our proactive management of our portfolio.
Not really.
I would add ---+ not even not really.
Not at all, I would say.
We've been in an environment where our customer base has been anticipating rate increases for the last 6 months, and it's been a very competitive promotion pricing-driven environment for the last 6 months.
And I haven't felt that change at all as a result of the branch closures, but it is in fact there still.
I had here another follow-up, I guess, on the expense and efficiency question.
My recollection from last quarter is that you all had talked about a low- to mid-40% efficiency ratio in the third quarter.
Now I get why it's getting pushed out to '18 given what you're talking about, some investments for the back half of this year, but in terms of not getting the efficiency ratio maybe down as low as you previously guided, is that an expense item.
Or is that a revenue item that's kind of keeping the number of little bit higher.
Well, a little bit is revenue because we did have lower growth in the first half of the year than we would have hoped for just in terms of earning assets and so forth, but we've been thinking in terms of mid 40s for a while now.
And it really is mostly what we're looking at and in our internal forecasting, the timing of some of these infrastructure expenses in the second half of the year.
Okay.
And <UNK>, I don't know if you'd be able to comment at all on Steven <UNK> stepping down as Chairman of the Board.
Any kind of changes.
What does that mean in any sense.
Well, I don't know what I can say about that.
It was Chairman <UNK>'s long, hard decision to voluntarily step down from the leadership, but he will remain as a member of the board.
And I think we will rely on his leadership in the future as the Honorary Chairman of the Board and also as a director of the board.
He ---+ his influence in the community is really big.
And I think he will continue to serve as a good ambassador of the bank in the community, and I hope that will continue for a long time to come.
Okay, thank you, everyone.
Thank you again for joining us today, and we look forward to speaking with you again in 3 months.
Thank you.
