Hope Bancorp Inc (HOPE) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2013 BBCN Bancorp Inc.

earnings conference call.

My name is Chantalay, and I will be your facilitator for today's call.

(Operator Instructions)

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

I would now like to turn the call over to your host for today, Ms. Angie Yang, Senior Vice President of Investor Relations of BBCN.

Please proceed ma'am.

Thank you, Chantalay.

Good morning, everyone, and thank you for joining us for the BBCN 2013 third 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 words and similar expressions, are intended to identify such forward-looking statements, and 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 performance, and involve certain risks and uncertainties, and assumptions that are difficult to assess.

Actual results may differ materially as the 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.

BBCN assumes no obligation to revise any forward-looking projections that may be made on today's call.

The Company cautions that complete financial results to be included in the quarterly report on form 10-Q for the quarter ended September 30, 2013 could differ materially from the financial results being reported today.

As usual, we have allotted one hour for this call.

With us today from Management are Kevin Kim, BBCN Bancorp's Chairman and CEO; Kyu Kim, our Chief Operating Officer; and Doug Goddard, our Chief Financial Officer.

Chief Credit Officer, Mark Lee, and Chief Lending Officer, Jason Kim are 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.

I'm going to start the call by making a few brief comments before asking our COO and CFO to provide more details on the results for the quarter.

When they have finished, I will offer a few more thoughts on our growth strategies and outlook.

We're very pleased for the results for the third quarter, which reflect consistency in our execution, and the high level of profitability in our business model.

We generated net income of $23.6 million, or $0.30 per diluted share in the third quarter.

This represents an increase of 28% in net income, and 25% in diluted earnings per share over the third quarter of 2012.

Again, comparing with the same period of the prior year, our return on average assets improved to 1.53% from 1.2%, and our return on average equity increased to 12.7% from 10.1% last year.

The strong increase in earnings and our level of profitability reflects the solid organic growth we have generated over the past year, as well as the improvement in asset quality.

At this point, let me turn the call over to Kyu to provide some comments on our business development efforts in the third quarter.

Kyu?

Thank you, Kevin.

As we expected, entering the seasonally strong third quarter, we saw a significant increase in loan production.

We had $389 million in loan originations during the third quarter, up significantly from the $280 million in the second quarter.

Within our customer base, demand for commercial real estate loans is far outstripping demand for commercial loans right now.

In particular, we continue to see very strong demand for CRE loans on retail, gas station, mixed-use, and multi-family properties.

We are remain disciplined in our underwriting criteria, with the loans we are booking having LTDs averaging 65% and having underlying businesses that are generating strong cash flows, and debt service coverage ratios of 1.2 and above.

Loan pricing, however, continues to be very competitive and there were a few large high-quality loan opportunities in the third quarter that we chose to be aggressive on, in order to capture that business.

The lower rates from these larger loans pushed our average rate on new loan originations down to 4.44% for the third quarter, from 4.71% in the preceding quarter.

Once again, loan pay-offs were on the high side, at $178 million in the third quarter, and together with the natural level of pay downs restrained somewhat our overall growth in the loan portfolio on an organic basis.

The elevated level of loan payouts is being driven by the available properties and refinancing opportunities, and there is a lot of competition for this business.

In select cases, however, we are electing not to maintain some of the low-quality loans.

During the third quarter, we had approximately $38 million of criticized and classified loans that were paid off entirely after the borrowers were refinanced by one of the banks, and this contributed to the improvement in our asset quality on our core basis, which does Doug will discuss later in the presentation.

Our SBA loan business was also very strong in the third quarter.

Of the $389 million in loan production in the third quarter, $72.7 million were SBA loans.

Of this amount, $40.2 million were [sell-over] SBA 7(a) loans.

Our loan pipeline has remained relatively strong, so we are expecting another good quarter of loan production in the fourth quarter, although not quite at the same level as we did in the third quarter.

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

Thank you, Kyu.

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.

We closed the acquisition of Foster Bankshares just about halfway through the third quarter, and it had a relatively minimal impact on our income statement for the period.

We posted a 4% increase in our net interest income compared with last quarter.

This was primarily due to a 5% increase in our average loans outstanding, coming from growth in our strong loan production as well as the partial quarter contribution from Foster.

Compared with the second quarter of 2013, our core net interest margin, which excludes the effects of purchase accounting adjustments, was unchanged.

On a core basis, our average loan yields declined by 6 basis points, but this was offset by higher yields in the securities portfolio, and a slightly more favorable mix of earning assets.

Our cost of funds stayed relatively consistent from quarter to quarter.

Within non interest income, our net gain on sales of SBA loans was 14% lower than last quarter.

We sold $36.8 million in SBA loans during the period, compared with $33.8 million in the prior quarter.

However, the premium on SBA loan sales has declined in the third quarter, as we previously guided on our last earnings call.

For the 2013 third quarter, the average premium was 9%, compared with 12.3% in the preceding quarter.

After having experienced approximately three quarters at normally high premiums while Treasury rates were at their lows, we now expect premiums to remain in a more normalized range of 9% to 10%.

Within non interest expense, our occupancy costs were down 10% from the prior quarter.

Last quarter, our occupancy costs included approximately $900,000 in one-time costs related to lease terminations and branch consolidations that were implemented late in September.

Going forward, it will be higher than we experienced in the third quarter, as we will recognize a full quarter's impact of the branches we added in the Foster acquisition.

Moving to the balance sheet, we added approximately $252 million of loans from Foster, net of the credit mark, which was approximately 15%.

We also added $321 million in deposits from Foster, of which approximately 30% was non interest-bearing deposits.

From an organic standpoint, we saw a drop in our non interest-bearing deposits during the third quarter.

This primarily reflect outflows of approximately $50 million during the quarter from one large deposit relationship, that was originally established to fund a sizable construction project in Los Angeles.

Aside from the balances from this one customer, our non interest-bearing deposits would have shown an increase for the quarter, even excluding the impact of Foster.

Turning to asset quality, we continue to see general improvement in our credit trends, excluding recent acquisitions, with notable declines during the quarter in nonaccrual loans, classified loans and special mention loans.

As Kyu mentioned earlier, some of the decline in these categories was due to loans that were refinanced by other banks and completely paid off.

The loans added from Foster contributed $42.3 million to the overall increase we had in classified loans, and $12.6 million to the overall increase we had in special mention loans.

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

Our net charge-offs totaled $6.7 million in the third quarter, or 56 basis points of average loans on an annualized basis.

$5 million of this total was related to one CRE-related charge-off, which we fully reserved during the first quarter of 2013.

In addition, a $500,000 charge-off was recorded during the period, related to one pool of acquired credit-impaired loans.

The loss on this pool of loans has been fully reserved since early 2012.

Altogether, we recorded a provision for loan losses of $744,000 in the third quarter.

The provision was almost entirely related to the growth in the loan portfolio, as well as our improvement in asset quality.

At September 30, our allowance represented 1.34% of total loans, and 182% of nonaccrual loans.

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

Kevin?

Thanks, Doug.

I'm very pleased with what we have accomplished so far this year.

We are delivering record earnings, while also positioning the Company for expansion in some of our smaller markets, through the acquisitions of Pacific International and Foster Bankshares.

Today, we are the dominant Korean American bank in all five of our core geographic markets, including southern California, northern California, Seattle, Chicago, and the New York Metropolitan area.

Since separating the CEO responsibilities at the holding company and the bank, we have been able to dedicate a greater amount of resources on strategic planning, with a focus on developing new initiatives that will enable us to better capitalize on the foundation we have built as the largest and strongest Korean American bank in the United States.

From a near-term perspective, we are focused on developing new products and service offerings that will provide additional cross-selling opportunities, and allow us to increase the profitability of each customer relationship.

We plan to add new offerings like equipment leasing, foreign currency services, credit cards, and residential mortgage products.

These are all services that are requested by our existing base of customers.

Through the development of these new offerings, we see significant opportunities to deepen our customer relationships, create new revenue streams, and diversify our portfolio in the process.

Moreover, we believe the addition of these types of financial services will enhance our ability to expand BBCN's market share on a national scale.

In addition to being the largest Korean American bank in the country, providing the best in service, convenience, and access to our customers, our goal is to provide the most comprehensive offering of financial services for our customer base.

Ultimately, we believe size, a national platform, and a comprehensive financial services offering will be essential to our longer-term plan to establish a meaningful presence for BBCN in Korea.

We have already had some success providing financial services to the US operations of small and medium-sized South Korean businesses.

And we believe targeting relationships in the country, even before the corporation enters the United States, will better enable us to penetrate this market.

We are very excited about the plans that we have been developing.

We believe they will be instrumental in taking our Company to a new level, and significantly enhance the overall value of our franchise.

We look forward to providing you with updates on our new initiatives as things develop.

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

Operator, please open up the call.

(Operator Instructions)

Lana Chan, BMO Capital Markets.

A couple of questions.

Could you give us an idea, in terms of the large loans that you mentioned earlier on, how big were those credits?

And just going forward, what the loan pricing were on those, and going forward, what your appetite is to continue to compete for those larger credits?

I would give you three largest new credits we had in the third quarter.

$30 million loan for a medical facility and we had a $28 million for a multi-tenant retail property, and also $12.6 million loan for multi-tenant retail property.

The interest rate for the loans -- I can provide that off-line.

Okay.

And the question you had, yes, we do have the increase in larger loans.

We have steady increase we see after we become BBCN.

Okay.

And could you provide any outlook on the margin going into the fourth quarter and early 2014, if you continue to compete on the loan pricing?

Are there expectations that the margins will continue to come down a bit?

Yes.

This is Doug.

We saw a very almost flat core margin this quarter.

I think we're still slowly declining on the loan yield.

So I would expect maybe, if I took a midpoint of the range, 3 or 4 basis points decline in loan yield next quarter.

Just because the loans -- whether we're competing or not, the market rate for new loans is still a little bit lower than what was rolling off every quarter.

But that decline is definitely slowed in the last few quarters.

So I'd expect it to be a fairly moderate pace in the fourth quarter.

And just one more question if I could, Kevin, you talked about expanding into some new products.

Is that through acquisitions?

Team hires?

How do you think you're going to get into those new areas?

Well, it could be either.

We may build infrastructure from the ground, or we could acquire an existing entity.

But that varies from the service or product item.

And that's the guidance that I can give at this point.

Okay.

Thank you.

Gary Tenner, D.A. Davidson.

I have two questions.

First on the core margin staying flat at 3.86%, Doug, was there any benefit from interest recoveries this quarter on interest that had previously been charged off, that was maybe larger than the second quarter?

I'm sorry.

I'm not sure I caught all of that, but basically no, there was nothing very unusual in the quarter at all.

It was fairly normal activity.

Okay.

And then just secondly in terms of the SBA loan sales with the premiums a bit lower, you obviously still sold a fair amount here in the third quarter, but if the premiums are in that 9% to 10% range, does that change your thought process on selling those into the secondary market?

How do you look at that?

Yes, Gary, this is Jason.

In the last call, we guided there was a correctional stage in the SBA premium market.

And on average, there has been about 20% correction.

This is the norm, given our 20 years plus of operations in the SBA lending.

This is a normal market.

So due to the steepening curve that has occurred in May through June, we saw a correctional stage of the premium market, so we expect to see 9% to 10% range on the SBA gain on sale.

To the extent your question is whether it changes our view on whether we're going to sell, I would say at this point, no.

I always caution that we reevaluate that every quarter based on every factor, and returns, markets, our liquidity, our capital position.

But at this point, it has not changed our position on whether we would sell.

Okay.

And is the liquidity in loan-deposit ratio the number one trigger for whether or not you sell anything in the given quarter right now, or is it anything else?

From our current position it's probably higher than capital, because we have such strong capital position.

But we have to look at every factor every quarter.

But it's still a fairly healthy return, it's a very nice ROE when we sell.

As Jason says, we think it's a normal market.

I think as Kyu's numbers indicated, we are still doing well in terms of generating assets for our balance sheet.

So it still net makes sense to sell, I think.

Okay.

Thank you.

Julianna Balicka, KBW.

I was hoping if you could break down for us the accretion income on loans this quarter, between the Center, the Foster and the Pacific acquisitions?

And then also maybe, how should we be thinking about run rate of accretion given the two-year acquisitions you've layered on?

I'm going to hold off on the break-out between those two loans for our 10-Q, because that's -- when we have an acquisition in the middle of the quarter, those are numbers we're really rushing at.

But I guess I could give you a really rough ballpark, but the Foster deal is probably less than $0.5 million out of that, in total.

Once again, I don't think in aggregate the current quarter accretion number is unusual.

It's not wildly affected by unusual prepayments.

I would say it's a kind of normal number, still any long-term decline just because that's the nature of the level yield method, which we accrete over.

And because Central was a healthy bank acquisition we shouldn't see as much volatility in the numbers as we are seeing at some banks, that are coming to the end of their FDIC loss sharing?

I'm sorry.

I didn't hear all of that.

Since Central is a healthy bank acquisition, the volatility in accretion that we're seeing from some FDIC acquisitions, we shouldn't be expecting that in your numbers?

I'm not seeing anything that should cause wild variation other than to say the long-term trend is down, just because the portfolio's declined.

Okay.

Very good, and if I may, could you discuss the loan growth that's been coming in from New York, and then how has Pacific's contribution in Seattle going, and stuff like that?

The loan demand pretty much proportional to our footprint.

The strongest loan demand is in Southern California, then New York-New Jersey region.

For PI, our priority were system consolidation and branch consolidations and we were successful completing all of that.

And we do believe that it would take a couple more quarters for any meaningful growth that we can expect from that market.

Very good.

Thank you very much.

(Operator Instructions)

Steven Marascia, Capital Securities Management.

Question for you.

Actually two, one is a follow-up to the margins you talked about.

Saying that you thought that you might see a 3 or 4basis point decrease during the fourth quarter.

What do you see happening to that in 2014?

And also, looking at the weighted average of your loans, I'm sorry, weighted average yield on the loan portfolio, you looking out at about 4.43.

Same question there, what do you see happening to the yields there, going into 2014?

Well, the longer you go in the future the harder it is for us to forecast.

We don't give concrete guidance.

As I say, the margin net decline has been slowing.

If you can tell me exactly what the Fed's going to do over the next year, as rates rise, particularly the five-year Treasury rates, you'll see our margins stabilize.

I expect that to happen sometime during the year, but it's really too early for us to pinpoint when it happens.

Did you see, has there been any blip in rates, or what we can expect for fourth quarter based upon the run-up in rates -- mini run-up in rates last month?

In the bond market?

Well, I get it anecdotally secondhand, but yes.

But I think the first impact is that I think we saw a slowdown of the plunging rates from the previous quarter.

There was a really, really hot competitive market for fixed rates at the end of the second quarter, which flopped a little bit into the first part of the third quarter, just because of the lag time between an application and an approval and funding.

And the backup of particularly the 5- and 7-year treasury did slow that.

And perhaps turned it around.

And I think we will start to feel the effect of that over the next two, three quarters.

Thank you very much.

Aaron Deer, Sandler O'Neill & Partners.

Kevin, it's encouraging to hear you talk about some of the strategic plans that would help to diversify your loan book.

I'm curious, over what period of time do you expect to see this benefit?

And do you have a goal to which you'd like to see the commercial real estate concentration brought down to?

We expect that the home mortgage products and equipment leasing would most likely be launched in the first quarter of next year.

And the other service offerings will follow those two items.

Okay.

And now, with the Foster deal closed, and integration seems to be well underway.

Have you turned your attention to additional deals, and has there been much discussion in the marketplace?

Well, we have our eyes open for the possible opportunities out in the market.

And as I mentioned, we are the dominant Korean American bank in all five of our geographic markets, but there are other markets, which have large concentrations of our core customer base.

So we still have our eyes open.

Our minds mind open for the possible transactions.

Okay.

Lastly, Doug, I might have missed this earlier, but can you give us a sense of what the expense run rate is going to be with the full load of Foster here in the fourth quarter?

And what extent there might be cost saves heading into the new year?

I'll give you a couple pieces of data because I know you like to model these things yourself, but the run rate for G&A for Foster on a standalone basis is probably about $18 million a year.

So like, it's $1.5 million a month or $4 million-plus a quarter.

So in the current quarter, we have half of a normal quarter of expense plus the merger-related expenses we've identified.

In the fourth quarter, we will have our systems conversions.

So between contract terminations and systems work and contractors and everything else, we could have in the neighborhood of $2.5 million of merger-related expenses.

Going forward, as an out-of-market merger, but with the size it is, we would expect to get 25% savings off the run rate.

That's all very helpful.

Thank you, everyone.

Tim Coffey, FIG Partners.

I just wanted some clarification for myself on the new product offerings.

Is it your intention to portfolio those, at least in the home mortgage, or would it be selling them into the secondary market?

Well, our main focus is to supplement our services and products to our existing customers.

So although the sales in the secondary market would be obviously part of the mortgage business, our main focus, at least at the beginning stage, would be to service our existing customer base.

Right.

I was assuming you would retain servicing rights on them.

Okay.

Okay.

Their portfolios.

And then was there any disruption to the SBA program or the SBA funding channel from the government shutdown?

Well, despite the temporary government shutdown, we are accepting the application on a business as usual, and we had a strong third-quarter SBA origination.

And we expect a strong fourth quarter SBA origination.

Okay.

Great.

Well all my other questions have been answered.

Thank you very much.

Scott Valentin, FBR Capital Markets.

With regard to the five core markets you're in, I know you mentioned M&A as looking at other markets, but as far as de novo branching, do you see any opportunities?

I know the Washington, DC market's a new market for you with one branch, or do you see opportunities to open additional branches?

Well, that is part of our strategic considerations.

And if we believe that the Washington, DC market is [within] more presence for BBCN branches and obviously we do, but the question is the timing.

We will either open up more branches, or we will -- we may purchase a few branches from other institutions, and we have all the possibilities open.

Okay.

And additional follow-up on the new initiatives, I think you mentioned the four.

What could be the impact on the expense line?

Do you see these things having meaningful impact on initially increasing expenses, with revenues to follow?

The level of investment required to start a new line of business is dependent -- depends upon so many variables.

And like Lana questioned, whether we invest in people and systems to build infrastructure from the ground or whether we acquire existing business entities, there is so many variables.

And I think it is really difficult at this time to provide any meaningful guidance at this point.

Okay.

And my last question, with regard to loan officers, I'm wondering if you're finding opportunities out there to hire additional loan officers, and maybe is it more on the C&I side or the commercial real estate side?

Yes.

We are constantly looking to hire more people.

And also train inside.

And we are looking for more opportunities in the C&I market also.

[And in Massamy City].

But nothing outside of normal -- you are just consistent addition of loan officers, nothing big planned?

Nothing specialty planned, no.

All right.

Thank you very much.

Don Worthington, Raymond James.

Just wanted to follow-up a little bit on, I think was Tim's question on the SBA, with the shutdown.

Is there any lag in the gain on sale that you might realize?

Basically push from one quarter to another because of any processing delays?

No.

The processing delay was specifically on the closing side of the SBA originations.

So we do normal wholesale during the quarter, but it will not impact any delay or recognition of the premium going forward.

Okay.

And then on the acquired nonperformers from Foster, any color on expected time to dispose of those?

That's a good question.

I think it's going to keep in mind, Illinois is a judicial state.

So anytime we do a foreclosure, as such, it's going to take a while, one to two years.

Thought is that we would like to work with the customer to the extent we can.

Working with the customer is always preferable than to go to the foreclosure process.

Okay.

Thank you.

At this time, there are no additional questions in the queue.

And I would like to turn the call over back over to management for closing remarks.

Please proceed.

Once again, thank you all for joining us today.

We look forward to speaking with you next quarter.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a wonderful day.