Hope Bancorp Inc (HOPE) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2013 BBCN Bancorp earnings conference call.

My name is Regina and I'll be your conference Operator for today.

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

Later, we will be conducing a question-and-answer session.

(Operator Instructions)

As a reminder, today's event is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Angie Yang.

She is the Senior Vice President of Investor Relations.

Please go ahead, Angie.

Thank you, Regina.

Good morning, everyone, and thank you for joining us for the BBCN 2013 first-quarter investor conference call.

Before we begin, I would 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 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, are not guarantees of future performances, and involve certain risks, 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 quarterly report on Form 10-Q for the quarter ended March 31, 2013 could differ materially from the financial results being reported today.

Now, before we begin, I would like to inform you that we have a couple of mistakes in the release.

For the section in which we discuss non-interest income, we have switched the line item details for the 2012 fourth quarter and 2012 first quarter.

Also, in the financial statements where we provide the CRE loan balances by property type, in the 12/31/2012 column, it appears we have switched the balances for the mixed use facilities and warehouses.

We will be issuing a corrected press release after this call, but we wanted to bring this to your attention now.

Okay, we have allotted one hour for this call.

With us today from management are Kevin Kim, BBCN Bancorp's Chairman and CEO; Acting President and Chief Operating Officer, Boni Lee; and our Chief Financial Officer, Doug Goddard.

Our Chief Credit Officer, Mark Lee, and our Chief Lending Officer, Jason Kim, are also here with us, and will be available to respond to questions during the Q&A session.

With that, I would like to turn the call over to Kevin Kim.

Kevin?

Thank you, Angie.

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

This is my first earnings conference call since being named Chairman and CEO of the Holding Company.

I am pleased to have had the opportunity to meet with many of our participants in the investment community, and I look forward to meeting with a greater number of you in the near future, maintaining close relations.

With that, let's begin.

We continue to make progress, strengthening our leadership as the premier Korean American bank in the nation.

The Pacific International transaction was closed on February 15, and we completed the systems integration on March 18.

With this transaction, BBCN is now the leading Korean American bank serving the communities in the Pacific Northwest, in addition to our leadership in Southern and Northern California, and the New York metropolitan area.

From a financial results perspective, our net income for the quarter was impacted by the elevated provision expense related to one large loan, which Doug will discuss in more detail.

For the 2013 first quarter, our net income, which is now equivalent to net income available to common stockholders following the TARP redemption last year, came in at $17.5 million, or $0.22 per diluted common share.

This compares with net income available to common stockholders of $21.5 million, or $0.28 per diluted common share, for the preceding 2012 fourth quarter; and $22.1 million, or $0.28 per diluted common share, for the year-ago first quarter.

The earnings power of BBCN is demonstrated by our pretax, pre-provision earnings, which amounted to 2.54% of average assets on an annualized basis for the first quarter of 2013.

Our return on average assets was 1.22%, and our return on average equity was 10.42%.

The strength of BBCN, however, is highlighted by our loan production, which has been ahead of our peers, both in our niche market and in the mainstream.

So let me hand it over to Boni now to discuss our achievements on this front.

Boni?

Thank you, Kevin, and good morning, everyone.

We've had a solid quarter of loan production, particularly given that the first quarter is seasonally softer in terms of loan demand than we had experienced in [Q4] with the loans at the end of 2012.

In total for the first quarter of 2013, loan originations amounted to $220.7 million.

This represents an increase of 32% from $167.6 million of loan production in the first quarter a year ago.

CRE loans represented 76% of our first quarter loan production, CNI loans represented 22%, and consumer loans accounted for the rest.

Seven out of the 10 largest loans originated this quarter were refinancing of commercial real estate loans that came to us from a variety of mainstream and Korean American banks.

Within the CRE category, the loan production was broad-based, across both geography and property types, with a strong growth coming in the warehouse, retail, hospitality, and gas stations.

In particular, the hospitality sector is presenting a great deal of refinancing opportunities.

Most of these borrowers are franchisees of a national chain.

After having seen their businesses recover from the economic downturn, they are now good candidates for refinancing.

We know this industry and these markets very well, and our responsiveness has helped us to win a lot of this business.

The one CNI loan within our 10 largest originations in the quarter was a $10 million line of credit for US subsidiary of a Korean company.

We won this customer from a Korean national bank, and I am pleased to report that this company also represents a sizable deposit relationship.

We are pleased that we have been able to keep pricing on new originations relatively stable over the past few quarters.

The average rate on new loan originations was 4.52% in the first quarter, down just 2 basis points from the preceding quarter.

We also showed nice growth in our SBA loan originations over the prior year.

We posted nearly $50 million in SBA loan originations in the first quarter of 2013, an increase of 43% over the first quarter last year.

Heading into the second quarter, we are optimistic that our loan production will follow its typical pattern of accelerating into the second half of the year.

As Kevin mentioned, we completed our acquisition of Pacific International Bancorp during the first quarter.

The integration has gone smoothly, and former Pacific International branches are now operating under the BBCN Bank brand.

Pacific International had not been a very active in lending over the past couple of years, as it primarily focused on managing its asset quality.

So it will take us a couple of quarters to ramp up the business development activities in this market, but over the longer term, we expect the Pacific Northwest to be a meaningful contributor to growth for BBCN.

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

Thank you, Boni.

We have provided quite a bit of detail in our press release, so I will just discuss a few items where I think some additional color is warranted.

Taking a look at our income statement, there was very little change from quarter to quarter in any of our revenue components.

Compared with the fourth quarter of 2012, our core net interest margin declined by 9 basis points.

In addition, the effect of purchase accounting adjustments was 3 basis points this quarter.

The primary driver of the pressure on NIM was the lower average yield in loan portfolio, as loans at higher rates roll off the books, and new loans and refinancings are being booked at the lower rates in the current environment.

One offset to the lower loan yields was the shift of cash balances into higher yielding assets.

As you may recall, we had built up some additional liquidity in anticipation of potential volatility and deposits around the end of 2012.

We have not seen any meaningful deposit outflows, so we have begun redeploying that excess liquidity.

At March 31, our cash balance declined by approximately $33 million from the end of the prior quarter, and we believe we have some additional room to bring this down even further.

Within non-interest expense, our salaries and benefits expense increased by a little more than $2 million from the prior quarter.

This is primarily attributable to payments related to the transition in senior management, as well as the addition of Pacific International during the quarter.

Moving to the balance sheet, we added approximately $130 million of loans from Pacific International net of the credit mark, which was approximately 10%.

We also added $143 million in deposits, of which approximately 15% were non-interest-bearing deposits.

Turning to asset quality, the loans added from Pacific International contributed $6.9 million to the increase in nonperforming loans by way of the delinquent loans 90 days or more on accrual status line item.

It also added $9.4 million towards delinquencies 30 to 89 days, and $25 million toward total criticized loan balance.

As with all acquired loans, these loans have been marked to market, and we believe the loss exposure is minimal.

In addition, the transaction added $4.7 million to our OREO.

During the first quarter, we recorded a provision for loan losses of $7.5 million.

Approximately $5.1 million of the provision was related to a new specific reserve set up for a $10.3 million commercial real estate loan that was restructured and placed on nonaccrual status during the quarter.

This loan was for a single-tenant industrial warehouse in Michigan that lost its sole tenant.

The owner is currently in discussions with new potential tenants, but we believe it is unlikely the property will generate the same level of cash flow as it did under the previous tenant, due to the current market rates.

CRE loans [located] outside of our core markets of California, New York, New Jersey, Washington and Illinois, comprise approximately 75% of our CRE portfolio.

The next largest single-tenant rental property outside of our core markets is less than $2 million.

Aside from this one loan, we had a handful of other CRE and CNI relationships that contributed to the increase we saw in the total criticized loans this quarter.

The circumstances of each loan are unique.

However, in each case, our review of updated financials showed some deterioration in the cash flows of the businesses.

The first relationship consists of two owner-occupied CRE loans aggregating $7.7 million.

This customer is an importer and distributor, and was downgraded to special mention due to their delay in replacing lost sales.

We are well secured, and we do not see any loss content at this time.

The second relationship consists of an owner-occupied CRE loan for $2.2 million and credit lines for $4.0 million to a steel fabricator.

These loans were downgraded to special mention, due to operating losses as the result of underbidding on jobs.

Based on the business outlook and the guarantor's strong financial profile, we do not expect losses of these credits.

The third relationship consists of a $12.8 million credit line to a customer in the retail industry.

This loan is currently performing as agreed and, again, we do not expect losses.

Overall, we do not see any trends that would indicate systematic deterioration in our asset quality.

It is always difficult to predict one-off credit issues, such as what we experienced this quarter.

Absent these one-off occurrences, the rest of the relatively stable trends we are seeing in the loan portfolio lead to us believe that our loan loss provision over the remainder of 2013 should be lower than what we experienced in the first quarter.

With that, I will turn the call back to Kevin.

Thanks, Doug.

As announced last week, BBCN signed a definitive agreement to acquire Foster Bankshares headquartered in Chicago.

Just to recap the key terms of the transaction, Foster's shareholders will have a choice between electing to receive the cash value per share, or for those shareholders who qualify as credited investors, 2.62771 shares of BBCN stock.

Shareholders may also elect a combination of cash and stock, and there is no limitation on the consideration mix.

Based on the closing price of BBCN stock on April 12, this represents an implied price of $34.67 for each share of Foster stock.

Since its founding in 1989, Foster Bank has been an integral participant and supporter of the niche community in Chicago.

This transaction complements BBCN's position as the premier bank serving Korean American communities across the United States, and extends our leadership in one of our core geographic markets.

Upon completion of the transaction, we will have a total of 10 branches in Chicago, and be the only Korean American bank with operations in this market, whether as full service branches or loan production offices.

We believe this will serve as a competitive barrier for our niche peers to entering this market, so the opportunities for long-term growth are considerable.

In addition, the transaction will provide BBCN with its first full-service branch operations in the DC metropolitan area.

This tri-state market, including Northern Virginia, Washington, DC, and suburban Maryland, represents one of the largest and fastest-growing populations of Korean Americans in the nation.

However, it is underserved by the Korean American banks to date, so we see considerable growth opportunities there.

The Foster acquisition will require the approval of our regulators, as well as other customary closing conditions, but we have already obtained commitments to approve the transaction from the majority of Foster shareholders.

We will not be required to file a registration statement for this transaction.

Conservatively, we have guided that the transaction will be completed sometime in the second half of 2013, but we anticipate it will likely be toward the end of the third quarter.

We are confident that this transaction will benefit all of our key stakeholders, including our customers, our employees, and our shareholders.

Moreover, we believe this transaction ex exemplifies BBCN's profile as a partner of choice for our smaller niche peers.

The operational challenges for smaller community banks under the current regulatory and compliance environment are tremendous, and there are substantial benefits to being part of a larger bank like BBCN, with a stronger capital base, a greater ability to absorb the higher costs associated with regulatory compliance, and significantly deeper resources in investing in technology.

Now, before we open up the call for questions, I would like to just make one final comment regarding the appointment of a Chief Executive Officer at the bank level.

As you know, there has never been a Korean American bank of our stature in the community, and the healthy growth of our Company is of utmost importance.

While this decision has taken a little longer than I had hoped for, we are in the final stage of this process and expect to make an announcement very soon.

I just wanted to take this opportunity to say, on behalf of the Board, that we very much appreciate your patience.

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

Regina, please open up the call.

(Operator Instructions)

Aaron Deer, Sandler O'Neill and Partners.

Good morning, everyone.

Good morning.

Congratulations on the announced deal to acquire Foster.

I was wondering if you could please provide any sort of metrics that you have in terms of anticipated loan marks on that book, and what kind of tangibles might be created by the deal?

Sure.

This is Doug.

When we look at a deal, because we're trying to project a loan market, a date in the future -- on our portfolio in the future, we do sensitivity analysis.

We do our analysis on what we think the market will be today, and we do high and low and up and around.

Given the fact that this bank has a high level of nonperforming assets, as a percentage of loans in double digits, we would expect the loan mark to be in the low to mid-double digits as a percentage of the portfolio.

Okay.

And then on the credit numbers in the quarter, I was just wondering if -- you kind of highlighted some of what's going on there, and sounds like it's just mostly one-off.

But I'm just curious if there was any change in the credit monitoring and analysis methodology during the quarter that identified these particular credits?

Yes, this is Mark.

We haven't had any specific changes to how we monitor credits.

In regards to the $10.3 million commercial real estate loan, as we discussed with the borrowers, we were notified of the absence of the tenant, and therefore we worked with the borrower to modify the credit.

Okay, and did I hear you correctly, that property is located in Michigan?

Yes.

Okay.

Was that something that was originally -- originated by its center or Nara?

It was a part of the acquired portfolio center.

Okay.

All right.

Thanks for taking my questions.

Scott Valentin, FBR Capital Markets.

Good morning.

Just two quick questions.

One, I think Doug, you mentioned the SG&A contains some what I think are one-time items.

Just wondering what would be kind of a decent run rate to use going forward?

Maybe you could identify what those one-time items were?

Well, the one-time items we mentioned are the management's changed, we did put an 8-K out on that.

So it's probably about $800,000 related to that in the quarter.

The other thing which, if you're trying to model this, makes it a little challenging.

We have half a quarter of Pacific International's G&A in there, so that's probably $450,000 of salary expense in this quarter, which is a normal run rate of $800,000 or $900,000.

If you just take -- if you just want to take the current quarter and normalize it, it's probably $1 million higher than you would expect.

Okay, great.

That's very helpful.

And then on the core margin, I know the [core yield] is obviously hard to project given it's affected by prepayments, but just on the core margin, you mentioned loan yields seem to be stabilizing.

Just wondering where you see the -- you see the margin stabilize as well or are there additional liability benefits there -- that are out there?

Well, just to clarify, I'm not sure we're saying the margin itself has stabilized yet, just the run rate of new originations has stabilized.

Still, as we're originating loans at a -- closer to 4.5%, the loans that are paying out are in the low 5%s.

So we are still seeing some pressure on loan yields for the next few quarters.

Okay, and any liability offset or --?

Very little.

Very little, okay.

And then just one final question on the M&A front.

You guys have been active.

Obviously, you closed Pacific International this quarter, you announced Foster Bankshares.

I mean, are you guys kind of tied up now near-term, and there's nothing else you can do, or you'll kind of keep your eye open and if another opportunity comes up, you guys would look to act on it?

Well -- hi, this is Kevin, and we are very open-minded to potential transactions with any meaningful targets.

So as long as any such deal would make any operational and financial sense to BBCN, we will be very open-minded to those deals.

Okay.

Thank you very much.

Gary Tenner, D.A. Davidson.

Thanks.

I just had a question on balance sheet management on the securities portfolio.

It looks like from the table in your press release, the weighted average duration of the securities portfolio went from 3.25 years to almost 4 years.

I don't know if that was something that was perhaps in error as well, given the other items?

But any thought on how you're going to manage the portfolio, given your comment on putting some of the excess cash to work?

No.

We kept our purchases in the investment portfolio between four and five years.

The length in the duration has more to do with the existing portfolio having prepayment slowdown.

It doesn't have to do with anything in -- changing our acquisition profile.

Okay.

Thank you.

Julianna Balicka, KBW.

Hi.

On the -- continuing on the securities questions, in terms of the existing portfolios having a prepay slowdown, we've seen from a number of banks a little bit more proactive securities gains this quarter.

Is that something that you're thinking about for the rest of the year, as part of duration management?

I'm sorry.

You'll have to go over that again for me.

So we've seen a lot more securities gains this quarter from some banks, in part because of the lengthening duration of their existing portfolios or kind of monetizing gains.

Are you planning on increasing your securities gains, or what are your thoughts about some more active selling in the portfolio?

No, we're -- we manage our liquidity ratios.

And there's -- you know, ongoing concern from the regulatory -- of keeping a certain amount of on-balance sheet liquidity.

What we have right now in our investment portfolio is about what we would expect to have, in terms of managing our liquidity position.

Given our loan demand, we're not looking to originate securities for profit.

We're looking to originate loans for profit.

So what's there is really a liquidity play, attempting to be kept at a moderate level of profitability.

Okay.

And then in terms of your loan growth this quarter, the originations were at a nice level, although seasonally down a little bit, but the pay-downs had slowed relative to what you normally originate.

So could you discuss something about the trend there?

Is that something to kind of think about going forward or --?

I'm sorry, the what slowed down?

Pay-downs.

Pay-downs, oh.

Well, I -- looking to the other side of the table, I don't know we have a real clear view of that.

We're not seeing it move very wildly from month to month.

Julianna, just looking at the last couple of quarters, in terms of aggregate pay-ups and pay-downs, and some of the adjustments, in any given quarter the range is anywhere from a little over $100 million to $170 million.

So it fluctuates, and there are some quarters that we may have a large pay-down or pay-off, and that will skew the numbers, so just giving you the range.

Okay.

Very good.

Thank you very much.

I'll step back.

(Operator Instructions)

Jordan Hymowitz, Philadelphia Financial.

Hi, guys.

Thanks for taking my question.

Two things.

One, can you talk about the SBA gain on sale margins and trends?

They have continued to be very strong.

Yes, the secondary market for SBA premiums continues to be very strong, and we -- first quarter of the SBA loan gain was a 12.5% premium gain.

And I mean, that's continuing -- it's been very strong for a long period, but are you continuing to see that level, or has there been any weakness or strengthening?

Given the lack of investment opportunity in the secondary market, there's a greater appetite from the investor to purchase more on the government SBA loan products, so we expect that to continue in the foreseeable future.

Also, given the low interest rate environment.

So we do expect this strong premium in the foreseeable future.

Got it.

And next question is, when you look at the analyst estimates, you know, they are $0.28, $0.29 the next couple of quarters.

You talked about margins flat to slightly down.

Are you expecting anything else to be a big gainer or offset that, to enable you to hit those numbers in the next couple of quarters?

Well, I mean, the trend we've been dealing with for the last couple quarters is losing a little bit on net interest margin and making it up somewhat on volume.

The leverage we have short-term are really balance sheet growth, getting maybe some cost saves out of the acquisition, which will start to phase in more in the second half of the third quarter.

But not -- there's no hidden, big windfall out there.

So a big stair-step up at least in the next one to two quarters is unlikely?

Yes, the big variable there is the loan loss provision; and it's not linear, as we proved this quarter, unfortunately.

As I say, we expect the loss provision that we have in this quarter to be unusually high, and we've tried to look around for other one-time loans that could cause this kind of variation.

We do not see that right now, so we do expect benefit from a declining provision.

Got it.

Thank you.

Thank you.

Scott Valentin, FBR Capital Markets.

Thank you for taking my follow-up question.

Just with regard to the loan originations, you mentioned that loan yields were flat, and just trying to get a sense of maybe the competitive nature you're seeing out there.

Are people loosening on terms to keep yield, or maybe what you're seeing, maybe different asset classes, both CNI and CRE?

In terms of CRE, it's overall pricing in the market, whether it's our Korean American banking space, even mainstream.

It's very competitive, especially in an owner-occupied property, that we even see the rates that are below 4%, that are five to seven-year fixed range.

Traditionally, we have never been a pricing leader, so we like to originate loans with very disciplined pricing.

As proven by the last couple of quarters, in terms of new origination at the yield level, that only -- the yield only changed about 2 basis points through the last three quarters that we've been tracking.

Okay, and then just on -- in terms of underwriting, any changes to LTVs?

Are they moving up a little bit or anything else, maybe debt service ratios moving up on CNI?

No, we haven't changed anything on the underwriting requirement.

Okay.

Thank you very much.

Pat O'Brien, Fox Asset Management.

You mentioned that there were some special payments for the change in management.

Would you describe that in more detail?

How big was this?

I don't have the 8-K in front of me, but I think it was -- do you remember the numbers, Ken?

Pat, I'll -- this is Angie.

I'll connect back with you.

We filed an 8-K that has most of that detail in there.

Oh, okay.

I'll touch base with you after the call.

Okay.

What would the provision have been, except for the special items that you mentioned?

Well, the one loan drove $5.1 million of the provision, is that right?

Yes, so if you take that out, it looks much like recent quarters.

Oh, okay.

Good.

Thanks.

Don Worthington, Raymond James.

Good morning, everyone.

Good morning.

Doug, you mentioned the loans acquired in the Pacific International, but I missed that.

What was the net amount of loans acquired?

The net, as marked to market, was right around -- was approximately $130 million.

Okay, great.

And then in terms of the deposits acquired, would you expect any of that to run off, or would you plan to run any off in terms of maybe CDs, you know, that are above market?

Answering for myself, no.

I mean, there's always some attrition when you do a merger, but there's certainly nothing there we're intentionally running off, and to the extent we do lose some just because there is some turnover, we expect to offset that by bringing in [deposits].

Okay.

Thank you.

We have been tracking the deposit trends, [group] acquisition, and we -- actually the initial couple of weeks, we had gains from the deposits and we had fluctuations in the average balances, but we haven't had any greater outflow from the acquired deposits.

Okay, great.

Thank you, Boni.

Julianna Balicka, KBW.

Thank you for taking my follow-up.

On the two acquisitions, the Pacific International and the Foster Bank, you mentioned the credit marks, but could you talk about the interest rate marks or any other accretion-related expectations we should have in the near-term for both Pacific International and Foster, when that kicks in?

And also, what is the remaining accretion income we should be thinking about from the merger of equals?

I'll answer the one that's easy here, at the end.

The remaining on the merger of equals is about $48 million.

We haven't really done the loan mark to drive accretion on the Foster yet, because that's projecting, but the net effect, if you're trying to model, it's basically you can pretty much take whatever is on there as nonperforming assets and convert it to a performing asset.

So if you've got a -- if you look at Foster Bank, they've got something like $40 million-some, if you go in December of nonperforming assets, you can go convert those to 5%, 6% earning assets, and that's kind of what the net effect of all the pluses and minuses of the acquisition mark is.

On Pacific International, obviously in the current quarter, it was de minimus, the impact.

It was really only six weeks impact.

I mean, I think the total accretion was $100,000 or something like that.

And then in terms of the impact to your ongoing EPS from both acquisitions, what are your thoughts, once kind of the lending kind of ramps up?

You said a couple quarters out for Pacific International before you start seeing any dropdown to bottom line, I assume something similar for Foster, which is equally troubled?

But when you forecast out into 2014 or '15 even, what are your thoughts?

Well, I'll take the two deals.

On the Pacific International, once we kind of get to the cost -- stabilizing the costs, we expect that to be accretive in its first year, in the neighborhood of $0.04 a share, so that's $0.01 a quarter, and the Foster deal is roughly double that.

Okay.

Very good.

Thank you very much.

Ladies and gentlemen, this does conclude the question-and-answer portion of today's broadcast.

I would like to turn the call back over to management for any closing remarks they would like to make.

Once again, thank you for joining us today.

We look forward to speaking with you next quarter.

Thank you.

With that, ladies and gentlemen, we'll go ahead and conclude today.

Thank you so much for your participation.

You may now all disconnect.

Have a great day.