Hope Bancorp Inc (HOPE) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2012 BBCN Bancorp Incorporated earnings conference call.

My name is Erin, and I'll be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will be facilitating a question-and-answer session toward the end of today's conference.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Ms. Angie Yang, Senior Vice President of Investor Relations.

Please proceed, ma'am.

Thank you, Erin.

Good morning, everyone, and thank you for joining us for the BBCN 2012 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 future events and the future financial performance of the Company.

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

Such words as expects, believes, estimates, anticipates, targets, goals, projects, intends, plans, seeks, and variations of such other words and similar expressions are intended to identify such forward-looking statements, which are not statements of historical fact.

We wish to caution you that such statements reflect our expectations based on information currently available and are not guarantees of future performance and involve certain risks and uncertainties and assumptions that are difficult to assess.

Actual results may differ materially as a result of risks and uncertainties that pertain to the Company's business.

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.

These documents contain important risk factors that could cause actual results to differ materially from the forward-looking statements.

BBCN 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, 2012 could differ materially from the financial results being reported today.

We have allotted one hour for this call.

With us today from management are Alvin Kang, BBCN's President and CEO; our Chief Operating Officer, Bonnie Lee; and our Chief Financial Officer, Phil Guldeman; our Chief Credit Officer, Mark Lee; and our deputy Chief Financial Officer, Doug Goddard, are also here with us and will also be available to respond to questions during the Q&A session.

With that, I'd like to turn the call over to Al Kang.

Al?

Thank you, Angie.

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

I just want to say a few words before handing the call over to Bonnie, who will walk you through our fourth-quarter results.

As we announced earlier this month, I will be leaving the Company on January 31.

Having completed the integration of Nara and Center, capturing the synergies that we projected for our merger, and raising the Company's performance to the level of the high performing bank we envisioned, it's time for me to step away and for our new leadership to take the reins as the Company moves on in its next phase of building the franchise.

I am extremely grateful for my time at Nara and now BBCN.

I had both the good fortune and bad timing to be named CEO of Nara during the worst financial crisis in decades.

We were able to navigate through that crisis and come out stronger on the other side due in no small part to the phenomenal efforts of the team we have built here.

As a CEO, you are only as good as the team that surrounds you, and I am truly grateful for the support and commitment that I received from the nearly 700 members of the BBCN family.

I want to thank all of our analysts and shareholders.

I have enjoyed getting to know many of you over the years, and I appreciate the support that you have given us.

When we needed to raise capital during the financial crisis and again prior to closing our merger, the investment community believed in our story and our vision and supplied the funding we needed to make it a reality.

I appreciate the confidence you showed in us, and I'm very happy that many of you have been well-rewarded for the investment you have made in our Company.

As I leave BBCN, I know that it's in good hands and the future is very bright.

The senior management team, which includes the people sitting around the table with me today, is as fine a group as I have ever worked with in my career.

I will miss seeing them every day and working together to build a Company that provides a satisfying, enjoyable work environment for the employees, while also delivering strong results for our shareholders.

It's been a fun and challenging ride as a CFO and then CEO of this organization, and I look forward to seeing it prosper and grow for many years to come in the future.

Now, I'll turn the call over to Bonnie.

Bonnie?

Thank you, Al, and good morning, everyone.

We finished 2012 with a very good momentum, highlighted by our highest level of a quarterly net income for the year and strong in-flows of both loans and deposits.

For the fourth quarter, we generated net income of $21.5 million, or $0.28 per share, an increase of 17% from our earnings per share last quarter.

We continue to have a high level of profitability with an ROE of 11.55% and ROA of 1.57%, and pretax, pre-provision income to average assets of 2.83%.

We had a very strong quarter of loan production with the loan originations totaling $371 million, up from $313 million last quarter.

This drove a 6% increase in both average loans and end-of-period loans.

90% of the loan production this quarter came in our commercial real estate portfolio, as we have seen a notable increase in demand for CRE loans in our markets.

The demand has been broad-based across both geographies and property types.

During the fourth quarter, our hotel/motel mixed-use facilities, multifamily and other property type categories each increased by at least 10% over the balances at September 30, 2012.

At least some of the CRE activity appears to have been driven by transactions that were accelerated ahead of year-end in anticipation of a potentially higher tax rate going into effect in the new year.

The new CRE production was split fairly evenly between refinancings and new investments.

In particular, we are seeing quite a bit of refinancing opportunities in the hospitality sector.

This sector was somewhat late in tapping into the refinancing boom, but it is catching up now.

Their many properties have showed improved occupancy rates, revenue and cash flow trends over the past year.

We continued to experience the benefit of being a larger bank with a higher lending limit.

We are consistently having success attracting new, larger customers, as well as winning back business from former customers that had left us in the past for mainstream banks that could accommodate their larger borrowing needs.

We also had a very strong quarter in terms of SBA loan production, with total loan origination of $84.3 million, the highest level that we have seen in one quarter to date.

This represents a 32% increase from $63.7 million produced in the preceding third quarter.

For the full 2012 calendar year, we originated $250 million in SBA loans.

One of the (Inaudible) synergies we highlighted prior to the merger was the opportunity to leverage [synergy] strong SBA lending platform across a larger customer base, and we believe we are seeing this synergy materialize.

In fact, among the 100 most active SBA 7(a) lenders in the country, BBCN ranked ninth by lending volume for the SBA fiscal-year 2012 ended September 30, 2012.

On the deposit side, we mentioned in our last call that we initiated a deposit campaign in the fourth quarter to help bring down our loan-to-deposit ratio.

The campaign was centered around the one-year anniversary of the BBCN and was very successful, contributing to an 8% increase in our total deposits.

We were particularly pleased that we were able to meet our deposit generating goals without negatively impacting our deposit costs.

We increased our net interest-bearing deposit balances by $79 million, or 7% in the quarter.

This helped to offset the higher rate promotional CDs offered as a part of this campaign.

And our total cost of deposits remained the same as the last quarter at 52 basis points.

Of course, some of this growth is being driven by our loan originations, even with our CRE loans, we are typically able to capture some [DDA] deposits with each lending relationship.

With that, let me turn the call over to Phil.

Phil?

Thank you, Bonnie.

We're going to take a slightly different approach to our conference call this quarter.

We put a lot of information in our press release that details the specifics of each line item.

So rather than reviewing each line item on our call, I'm just going to discuss the items where I think some additional color is warranted.

Of course, in the Q&A session, we would be happy to address any questions you may have on the items that I do not discuss.

I'm going to start with our income statement.

Our net interest income was up 2% from last quarter.

This was primarily attributable to the loan growth we saw in the quarter.

It was partially offset by an 18-basis-point decline in our net interest margin.

Our reported net interest margin in Q4 was 4.61%, while our core NIM, net interest margin, which excludes the effects of acquisition accounting, was 4.06%.

The acquisition accounting adjustments had a positive impact of 55 basis points on our net interest margin this quarter.

Excluding this effect, our core net interest income declined by only 8 basis points from the prior quarter.

When looking at this core net interest margin, before any purchase accounting adjustments, the decline was primarily attributable to a 15-point -- basis point decline in our average loan yields, partially offset by a 4-basis-point reduction in our cost of deposits, and a 47-basis-point decrease in the cost of our FHLB advances.

Again, this is all excluding the effects of acquisition accounting adjustments.

Within our non-interest income, the most significant change from the prior quarter was the $2.8 million in gains we recorded on the sale of SBA loans.

Last quarter, we did not sell any of our SBA loans.

With our loan deposit ratio at an elevated level and premiums at historically high level, it's likely that we will continue to sell at least some, if not all, of our SBA loan production as part of our net balance sheet management strategy.

We sold $30.8 million of SBA loans during the fourth quarter, which represents slightly more than the amount of 7(a) loans we produced during the fourth quarter.

Moving to non-interest expense, let me just speak to a few items.

Our professional fees were up almost $0.5 million from the prior quarter, which is attributable to increased recruiting costs, IT consulting expenses and legal fees.

We had $505,000 in merger and integration expense, which related to our pending acquisition of Pacific International.

And our other expense was up by almost $1 million, which is attributable to adjustments to our FDIC receivable.

Moving to the balance sheet, our cash balances were up by a little more than $80 million from the end of the prior quarter.

We built up some excess cash balances in anticipation of potential in-flow -- out-flows following the expiration of the TAG program on December 31, 2012.

However, to date, we have not seen any out-flows of non-interest bearing deposits related to that expiration.

Our total loans held for investment were up 6% during the quarter, with most of the growth coming in the CRE portfolio.

And our total deposits were up 8%, due in part to the deposit campaign that Bonnie mentioned.

Another contributing factor to the growth is an institutional money desk that we have opened to bring in out-of-market CDs, which serve as a relatively less expensive additional source of funds to support our loan growth.

Moving to asset quality, we continue to experience a stabilization in the portfolio, highlighted by a decline in the our non-performing assets of almost $2 million during the quarter and the lowest level of net charge-offs we have seen prior to the financial crisis.

I'll quickly go over some of the significant changes in our various credit categories from the prior quarter.

Our total delinquencies increased by approximately $13 million, and our substandard loans increased by approximately $10 million.

$8.4 million of the increase in both categories is related to two loans.

We have purchase and sale agreements on both of those loans, and we expect these sales to be completed this quarter.

Since these credits had previously been marked to market, we have no loss exposure.

Our performing TDRs increased by almost $8 million.

This was primarily driven by a reclassification of a loan that was reported as non-accrual last quarter.

The borrower has shown improvement, and the loan was upgraded to accrual status.

But since there were changes in the contractual terms as part of our work-out process, it is now reported as a performing TDR.

We recorded a provision for loan losses of $2.4 million during the fourth quarter, which is down from $6.9 million last quarter.

The lower provision reflects the improving historic loss rate, as well as the low levels of charge-offs we had this quarter.

Our allowance for loan losses was 1.5 [per six] of total loans at the end of the year, with a 252% coverage of our non-accrual loans.

During the quarter, we made a modification to our loan loss methodology.

We increased the look-back period for our loss exposure to 16 quarters from 12 quarters.

We did this so that we could capture the full duration of this credit cycle in our formula.

At the same time, the qualitative factors portion of our allowance has moderated to reflect improving environmental factors, most notably, some of the positive trends and appraisal values over the past year and many of our property types in our CER portfolio.

Given the positive trends we are seeing in the portfolio, we expect our credit costs to continue to be manageable.

We would expect that our provision for loan losses should be in the range of $10 million to $15 million for 2013.

With that, I'll turn the call back to Bonnie.

Bonnie?

Thanks, Bill.

I just want to wrap up with a few remarks about our outlook for 2013.

We entered the year with a lot of momentum, and we expect 2013 to be another solid year of profitability.

We typically see some seasonal drop off in loan production during the first quarter, and we expect to see a greater impact this year due to the loans that were pulled forward as a result of our concerns about the fiscal cliff.

After this seasonal issue in the first quarter, our loan production should pick up over the remainder of the year.

We remain on track to close the Pacific International acquisition this quarter.

We are excited to begin integrating our operations, building out our presence in Pacific Northwest.

We believe this region of the country strengthens our dominance along the West Coast, and longer term, will serve as an important area of growth for the bank.

With that, we would now be happy to take any questions you might have.

Operator, please open up the call.

(Operator Instructions)

Your first question comes from the line of Aaron Deer with Sandler O'Neill & Partners.

Please proceed.

Let me begin by, Al, wishing you congratulations on really having done a marvelous job over these past few years.

It's been great working with you as well, and I certainly wish you all the best in your next endeavor.

Thank you, Aaron.

And then if I may, a question for I guess Phil.

With so much of the growth coming this quarter in commercial real estate, I'm curious where your current -- where that stands now as a percentage of total risk-based capital.

And how would you characterize your excess capital today as being above the 300% regulatory threshold?

And what does that give you in terms of ability to continue growing the balance sheet and do acquisitions?

The specific number I'll have to get back to you, but in terms of excess capital on an overall basis, we do a pretty comprehensive internal analysis that quantifies five different elements of risk.

And it shows that we have a substantial amount of capital over and above that which our internal calculations suggest we need, which of course, is higher than that required by the regulators to be well-capitalized.

Aaron, in regards to the CRE concentration, we are well within the -- well below the 300% threshold.

I understand that.

I'm just trying to gauge -- but that's partly due to the fact that you have a lot of excess capital right now.

I'm just curious how you would think about the volume of excess capital that you have and what that would afford you to do in terms of additional balance sheet growth or acquisitions.

Well, as we've always said, Aaron, the first use of our capital is to support growth, both internally and acquisitively.

And we think that this is a good environment to make that happen.

So that's really where our primary focus has been on, in terms of deploying capital.

And then in terms of the new growth that you had put on in the quarter, what was the average size of the loans added?

And how big were, say, the top two or three credits?

For the CRE, average loan size is about $2.4 million, and what was the second question?

C&I was $600,000.

C&I was about $700,000, and you asked for the largest?

Largest two credits.

One was actually a church loan that we did.

It's actually a customer that we used to have.

They left us for more of the mainstream bank, and they came back to us.

Another loan is a hospitality loan that we financed the purchase, and also the customer is -- existing -- a past loan customer, existing deposit customer.

How big were those credits?

$20 -- the church property was $28 million, and the hospitality was $24 million.

Okay.

And then just one more, if I may, and then I'll step back.

The average yield on the new production this quarter relative to loans that paid down during the quarter?

Average that we booked is at 4.54%, and I'll have to get back to you.

Do you have --

I don't have the average yield that was paid off.

We'll have to get back to you on that, Aaron, but obviously it was significantly higher than the stuff that's coming on the books at this time.

And your next question comes from the line of Lana Chen from BMO Capital Markets.

Please proceed.

Also I would like to add my well wishes for Al in his future endeavors.

Question around the margin, if you could talk about what your expectations are for the decline in purchase account accretion for 2013?

Yes, as you know, that number has a tendency to bounce around.

It's not a linear number, and it's hard to predict it because it is driven so much by prepayments on loans and refinancing.

But if you look at the last four quarters, you'll see that the benefits were $12.1 million, $9.4 million, $7 million, and $6.3 million.

So that's a declining trend that's likely to continue with some ups and downs as we go forward.

Could you remind us how much is left over the next couple years?

Doug?

It's just over $50 million.

Okay.

Thank you.

And then in terms of the market share gains, taking back some of the commercial real estate customers from the bigger banks, is it -- are you getting the relationships really through more competitive pricing, or is it better service?

What do you think is driving that market share gain back?

We are known in the community to deliver our loans on time.

So I would go with more of a service than pricing.

As you can see on the new loans, the rates that we booked, the loan yields were actually 1 basis point higher than the third quarter.

Okay.

That's interesting.

Thank you very much.

And your next question comes from the line of Julianna Balicka from KBW.

Please proceed.

Likewise, I'll add my good-bye to Al and best of luck to Bonnie and the rest of the team.

We'll miss you, Al.

I would like to ask if you can just -- exactly the point you were just touching upon, to elaborate, you mentioned the stabilization of competitive pricing in the marketplace during the fourth quarter.

Is that specific to commercial real estate?

Is that more general loans?

Is it more from the national banks, or is it from your peer Korean American banks?

Also, can you discuss the pricing environment in terms of deposits as well?

Let me touch base with -- on the loans first.

Loan pricing within the Korean American banking space has gotten really competitive, and we are seeing on the commercial real estate that are below 4%, especially owner/occupied properties, rates coming in as low as 3.45% on the five-year fixed-rate loans.

On the deposit side, again, it's very, very competitive.

We had our deposit campaign in the fourth quarter, and we had a deposit campaign within the DDAs as well as demand deposits as well as CDs.

So we were able to maintain the margin.

But it seems to be both loan and deposits, pricing is getting to be very competitive.

So the stabilization that you reference, is that in terms of the stabilization in terms of for yourself specifically in what the loans you're able to put on?

Or is it more of just more generally for your peers as well?

It sounds like it's just stabilization in terms of your own loan yields.

Well, in terms of pricing, which can't go too low, so we are putting some discipline in our pricing structure.

Okay.

Very good.

And then I have a housekeeping question before I step back.

In terms of your tax rate, it went up to 41% this quarter.

Thinking about 2013, are there any tax strategies you have in place to lower your tax rate?

Well, we're constantly looking at that.

As you can appreciate, the tax credits that we get for some of our investments diminish as the rest of the P&L statement gets larger.

So we're always looking for opportunities to decrease that.

But of course, we understand that a low tax rate does not necessarily mean a low after-tax net income.

So we're always looking at the balance.

And your next question comes from the line of Brett Rabatin from Sterne Agee.

Please proceed.

I'll add my farewells to Al, as well.

Just wanted to ask on the hotel portfolio growth in the quarter, maybe if you could provide a little more color around how structures are holding up and those loan originations.

And then just generally, if that was where the brunt of the quote, year-end activity related to tax stuff was located.

In terms of the activities related to the fiscal cliff, we did have the hospitality loans, as well as the multi-tenant commercial real estates where the sellers in anticipation of a tax-rate change, they wanted to close the deal before the year end.

So we had that phenomenon.

Okay.

And then are the structures holding up in the hotel book in terms of new originations?

Where do those look like versus maybe what they did a year ago in terms of how you're making those loans?

Well, in terms of our credit structure is pretty standard, five to seven years, 65% loan to value on average basis, DCR above our minimum standard, 1.25.

Okay.

And then secondly, was just curious about SBA volumes in the fourth quarter versus the third.

I don't know if that was a seasonal thing.

And then just what the outlook looks for that for 2013?

Well, there was -- as Bonnie said, there were a lot of people that were trying to accelerate some things, and we had a lot of 504 loans that came on in the fourth quarter.

A larger percentage of the total population of new SBAs were the 504s as opposed to the 7(a)s.

A couple transactions on the 504s we were informed by the borrower that if they don't close by December 31, the deal is off.

So it was very clear that it was driven by the seller's motivation to close the transaction before the tax-rate change -- capital gain tax-rate changes.

As Bonnie said, the first quarter is typically our slowest quarter in loan production, and I think that would probably likely to hold true for SBA production as well.

Okay.

Great.

Thanks for all the color.

And your next question comes from the line of Gary Tenner.

Please proceed.

Thanks.

I wonder if you could quantify how much of the fourth-quarter loan growth you think was accelerated, pulled forward from the first quarter?

Give color, top-10 new loans, which contribute about 37% of the loan origination, I would identify from the top-10 relationships, three properties were related to the acceleration.

And you had mentioned that you thought that perhaps first-quarter growth then would be not as strong and then catch up later in the year.

Is that what you had said earlier?

Yes, historically our first-quarter loan origination is the slowest among four quarters.

This year is probably just going to be a little more extreme in terms of the seasonality?

No, in terms of the -- looking at what is in the pipeline, it's similar to the -- what we saw in the 2011 and 2012.

Okay.

Thanks very much.

Al, best of luck.

(Operator Instructions)

Your next question comes from the line of Joe Stieven from Stieven Capital.

Please proceed.

First of all great quarter and year to the whole team.

Most of my questions have been asked, but I'll ask this one.

Your capital, obviously, at year end is fabulously strong, and you guys did announce your first dividend.

Or you did announce dividends, $0.05 a share.

Can you explain your rationale on how you came up with the first dividend you started at, that's number one?

And then number two, with your credit quality, where do you think or where would you like to see your tangible common equity at as a ratio?

Thanks.

In terms of reinstating the dividend, what we looked at was some of our peer banks in terms of payout ratios and dividend yields.

And we targeted where they were at this point in time, and we will constantly revisit that as time goes forward.

In terms of the target for the tangible capital equity, again, we show that we have perhaps $2 million of excess capital, and we're focusing that again to try and support our acquisitive and balance sheet growth.

I'm not sure I'd want to put a specific number in terms of the target, because what will happen will depend upon circumstances that we don't necessarily have full control over, particularly in the acquisition front.

Okay.

Thank you.

Congrats again.

Al, congrats to you.

Thank you.

Your next question comes from the line of Don Worthington from Raymond James.

Please proceed.

As with everyone else, I'll pass on my best wishes to Al, as well.

Just had a couple of questions on the deposit campaign.

You may have said this before, but what kind of a premium rate did you offer in order to attract the deposits?

On a one-year CD we offered 1%.

Okay.

And then would you expect those deposits to -- or any of them to flow back out at some point?

Well, hopefully not for a year.

(laughter)

Yes, yes.

That was a deposit campaign, but as you know, we have operations now around the country.

So we would expect that this will not be the last of our deposit campaigns, and we'll use our regional pricing capabilities to rotate campaigns throughout the various markets throughout the country.

Okay.

And then in terms of the wholesale jumbo CDs, average rate and term on those?

Well, the money desk deposits, the institutional deposits that we're bringing in, they're coming in for one-year money around 50 basis points.

The one thing I didn't mention about the CD campaign is that we did tie that CD promotional campaign to bringing in some additional DDA accounts.

And we brought in about $0.40 in new DDA accounts for every $1 worth of CDs that -- new CD money that we brought in.

Okay.

Thank you, and then last question.

What is the magnitude of the merger costs you would expect for first quarter?

I think what we saw this quarter is probably representative.

And I would now like to turn the call over to Management for closing remarks.

Once again, thank you all for joining us today.

We look forward to speaking with you next quarter.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.