Hope Bancorp Inc (HOPE) 2013 Q4 法說會逐字稿

Very good day, ladies and gentlemen.

Thank you all for joining and welcome to the fourth-quarter 2013 BBCN Bancorp, Inc.

earnings conference call.

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

Today's conference is being recorded.

(Operator Instructions)

I'd now like to turn the conference over to Ms. Angie Yang, Senior Vice President of Investor Relations for opening remarks.

Please proceed, ma'am, thank you.

Thank you, Lisa.

Good morning, everyone, and thank you for joining us for the BBCN 2013 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, and are not statements of historical fact.

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

Actual results may differ materially as a result of these 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 the complete financial results to be included in the annual report on Form 10-K for the year ended December 31, 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.

Let me start the call today with just a few brief comments before asking Kyu and Doug 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 for 2014.

We had a solid fourth quarter with positive trends in loan production, revenue generation, deposit gathering, and core expense management; however, we had one problem credit this quarter that drove a higher level of credit costs, which Doug will elaborate on later in the presentation.

While the elevated provision adversely impacted our profitability metrics for the quarter, our overall performance trends remain consistently strong.

New loan originations for the quarter amounted to $323 million, totaling $1.14 billion for the full year.

This is up 4% over $1.09 billion in new loan originations in 2012.

Loans receivable increased during the quarter to $5.07 billion, reflecting organic growth of 4% over the third quarter, or 14% on an annualized basis.

Total deposits increased to $5.15 billion, reflecting organic growth of 3% during the quarter, or 10% on an annualized basis, and total assets increased to $6.47 billion as of year-end, reflecting organic growth of 2% during the quarter, or 8% on an annualized basis.

For the 2013 fourth quarter, we generated net income of $19.8 million, or $0.25 per diluted share.

On a pre-tax, pre-provision basis, we generated $40.3 million, which represents an annualized return of 2.52% on our average assets.

This is right in line with the strong level of pre-tax, pre-provision returns we generated throughout 2013 and representative of the consistent earnings power of the Company.

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

Kyu?

Thank you, Kevin.

We finished the 2013 with a strong quarter of business development.

We had $323 million in loan origination, with approximately 85% of the origination being commercial real estate and 14% being commercial loans.

Within the commercial real estate portfolio, we have seen very balanced growth across virtually all property types.

During the fourth quarter, the retail, hospitality, warehouse, mixed-use, and multi-family segments of the CRE portfolio all increased between 5% and 8%.

During the fourth quarter, most of the loan production came from the Southern California and New York/New Jersey market.

With a persistent international acquisition fully integrated and a refocusing of our business-development team now in full gear, we are starting to see more deal discussions taking place in the Pacific Northwest, and we look forward to this market making a larger contribution to our overall loan production in 2014.

Currently our team in the Midwest and Virginia is primarily focused on ensuring a smooth transition for the customers across the bank and refinancing maturing loans.

The systems integration was successfully completed during the fourth quarter, and as we shift more towards a business-development focus and build on the pipeline of lending opportunities, we expect to see a more meaningful contribution from these markets in the second half of the year.

I can tell you that we have already seen growth in the pipeline for these markets.

So overall, we are very pleased with the level of business development efforts across all of our geographic markets, notwithstanding what continues to be an extremely competitive market for good loans, particularly commercial real estate.

The average rate on new loan originations was 4.5% in the fourth quarter, an increase of six basis points over the preceding quarter.

This reflects a heightened emphasis on pricing discipline in our loan originations.

As well, the average rate on new loans benefited from the contribution of new originations in gas stations, which average rate tend to be higher than the overall rate.

Loan pay ups and pay downs were lighter in the fourth quarter, coming in at $139 million and $70 million respectively, compared with $178 million and $88 million in the prior quarter.

With our strong loan originations and lower level of pay ups and pay downs, our total loan portfolio grew at an annualized rate of 9% during the fourth quarter of 2013.

Our SBA loan business was also strong in the fourth quarter.

Of the $323 million in loan production, $67 million were SBA loans.

Of this amount, $35.5 million were sellable SBA 7(a) loans.

We are quite pleased with our strong performance in SBA loan originations to date.

For the fiscal year ended September 30, 2013, BBCN Bank was ranked eighth in the nation in terms of new loan originations by dollar volume, improved from a ranking of ninth in the nation for the 2012 fiscal year.

We also had a solid quarter of deposit gathering, in celebration of the Foster Bank transaction and BBCN's second anniversary, we initiated a deposit campaign across all geographic markets beginning mid-quarter.

This campaign was particularly well received in the Midwest.

In total, we brought on approximately $120 million in new deposits, 61% of which was in money-market accounts and 39% in CDs.

As a result, we were able to grow total deposits by approximately 2.5% during the fourth quarter, with most of the net growth coming in money-market accounts.

The growth in CDs from the campaign was largely offset by a net decrease of $65 million in wholesale time deposits during the quarter.

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

Doug?

Thank you, Kyu.

We 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.

The fourth quarter was our first full quarter following the closing of the Foster Bankshares acquisition, and you can see the positive impact throughout our income statement.

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 both our strong loan production, as well as the full quarter impact of Foster.

Compared with the third quarter of 2013, our net interest margin increased by 3 basis points to 4.45%.

On a core basis, excluding the effects of purchase accounting adjustments, net interest margin increased by 1 basis point to 3.87%.

The impact of the increase in average loans outstanding, along with a more favorable mix of earning assets, more than offset a 4 basis point decline in average loan yields, or 6 basis points on a core basis, enabling us to generate the slight improvement in our margin, both on a core and as-reported basis.

Going forward, we would expect the negative impact of maturing loans will be a declining factor to the overall pressure on our net interest margin.

In 2013, loans with interest rates in the high-5% to mid-6% range were maturing and repricing at rates in the low- to mid-4% range.

We were losing anywhere between 125 to 250 basis points of yield on these repricings.

In 2014, the loans scheduled to mature have rates in the low- to mid-5% range, and we expect the repricings to be in the mid-4% to low-5% range.

In general, we expect to lose less than 100 basis points of yield on the repricings in 2014.

In summary, while we expect the headwinds to our net interest margin will abate relative to last year, the pressure on net interest margin will continue to exist for the near term, albeit at lower levels, until we see a meaningful rise in the interest rate environment.

Moving on to non-interest income, we reported a 12% increase in service fees on deposit accounts over the proceeding third quarter.

This largely reflects a full quarter's contribution from the Foster deal, and we with expect is roughly representative of our run rate going forward.

Our net gain on sales of SBA loans was $2.7 million, 5% lower than last quarter.

The decline reflects a lower amount of loans sold in the quarter, $32 million versus $36.8 million in the prior quarter.

The lower volume of sales was partially offset by an increase in the premium, which rebounded to 10.1% in the fourth quarter from 9% last quarter.

All in all, total non-interest income rose 4% over the third quarter of 2013.

Within non-interest expense, we saw increases across most line items due to the full quarter's contribution of Foster.

The increase in our salaries and benefits line for the quarter also includes acquisition-related severance payments related to Foster, as well as holiday bonus payments.

During the quarter, we recorded $2.2 million in other merger and integration expenses.

Going forward, we would expect these expenses to be minimal, at least until another transaction unfolds.

Turning to asset quality, let me first begin with a brief discussion regarding a change that affected our non-performing loan totals, which remained stable at $73.1 million during the quarter.

This total excludes acquired credit impaired loans that were mark-to-marketed acquisition and are accruing interest.

This balance had previously been included in our definition of delinquent loans 90 days or more on accrual status.

We have changed the presentation from prior quarters to conform to the more common industry practice; however, for your benefit and for transparency's sake, we have included a note to our financials clearly stating the amount of acquired credit impaired loans for each period.

Now moving on to the provision, we recorded a provision for loan losses of $8.5 million in the fourth quarter compared with $744,000 in the third quarter.

The fourth-quarter provision was largely driven by a partial charge off of $7.2 million related to one line of credit in our trade finance business.

As discussed in the press release, the borrower informed the Company during the fourth quarter that a major disruption to its cash flows had occurred.

As a result, the borrower will be unable to meet its contractual loan obligations.

Given this new information, we revised our impairment analysis and recognized the additional impairment through the provision for loan losses during the fourth quarter, partially charging out the loan.

Based on our examination of the circumstances affecting this credit, we believe this is very much a Company-specific issue and not indicative of any broader systemic weakness within our trade finance portfolio.

Aside from the impact of this one loan, all of our other credit metrics were relatively stable, with only modest increases or decreases within particular credit categories.

Barring any large one-off credit issues, we would anticipate that our provision expense will return to a lower level on a quarterly basis in 2014.

At year-end, our capital ratios remained strong, with total risk-based capital at 14.78%, our leverage ratio at 11.89%, and our tangible common equity at 10.98% of tangible assets.

As reported this morning, our Board of Directors declared a quarterly cash dividend of $0.075 cents payable on February 21, 2014 to shareholders of record as of February 7.

And finally, before I turn the call back to Kevin, let me remind you that we will be redeeming on or about March 17, 2014, $15 million in trust preferred securities issued by Foster.

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

Kevin?

Thanks, Doug.

I just want to wrap up with a few remarks about our strategies and outlook for 2014.

Throughout the year, we continued making progress as the largest and premier Korean-American bank in the country.

We completed two acquisitions, fortifying our national footprint.

BBCN Bank is the dominant Korean-American bank in all five of our core geographic markets, including Southern California, New York/New Jersey metropolitan area, Chicago, Northern California, and Seattle.

Complementing this strategic expansion was solid organic growth of approximately 8% during 2013.

While the banking industry remains challenged in a low-interest rate and heightened regulatory environment, we believe BBCN is well positioned to continue our journey to become a more diversified financial services company.

Since taking the leadership role as the holding Company, we have made significant investments with respect to strategic planning.

Assisting me in this effort is a newly established strategic planning team now led by Chief Planning Officer, Daniel Kim.

While Daniel just joined us this past December, the planning team has been busy developing new initiatives that will enable us to better capitalize on the foundation we have built as the largest Korean-American Bank in the United States.

During the first half of the year, we expect to launch a new commercial equipment leasing business.

This is a service that our existing customer base has regularly requested in the past.

Now, we are in the process of gearing up to launch this new offering, initially targeting our current commercial customer base.

We are also actively developing a residential mortgage strategy, which we expect will be launched in phases throughout our various geographic markets.

And we are currently projecting the launch of this business line sometime in the second half of the year.

We have a number of other business lines that we are in the process of developing, but I will refrain from elaborating further at this point for competitive reasons.

All in all, we believe these new offerings will one, help diversify the composition of our portfolio; two, help build deeper and stronger relationships with our customers; and three, further differentiate BBCN as the premier Korean-American Bank in the nation.

While we expect to launch several business lines during the year, it will be 2015 before we see meaningful contributions to our revenue stream.

We are also optimistic about the opportunities to expand our retail banking business.

As we previously announced, Cha Park recently joined BBCN as our Chief Retail Banking Officer.

We believe Cha represents the most highly accomplished Korean-American banking professional from the mainstream market, and we are fortunate to have attracted an experienced banker of her caliber to our organization.

At the end of the day, it takes people to deliver on sound strategies.

And at BBCN, we are confident not only do we have the strongest executive management team in our niche market, but we have the best mix of skills and expertise to lead BBCN forward in a safe and sound manner.

We began the year with renewed energy and momentum, and we expect 2014 to be another solid year of profitability.

We look forward to keeping you apprized of our progress.

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

Operator, please open up the call.

Certainly, thank you.

(Operator Instructions)

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

Hello, good morning, everyone.

Good morning.

Doug, can you give some thoughts on expectations for the provision over the coming year?

It sounds like you expect it to trend lower.

On a related point, I was looking at the charge-offs that BBCN has had over the past several years since 2007, and it looks like there's over $200 million over that time frame, and I guess that actually excludes center.

So I've got to think that there's probably going to be some recoveries coming in that book, given the improving economic outlook.

Is that built into your provision expectations, or would those just be considered icing on the cake, so to speak?

This is Mark.

With regards to the expectation for recovery, we are running somewhere between $0.5 million to $1 million on a quarter.

It jumps all over the place.

Now when we look at the provision, that's not something we anticipate happening on a consistent basis, so that's not something we bake into our expectation.

Okay, and then the -- looking at capital, with not a lot of big deals necessarily to be had, at least directly within your niche at this point, and with your TCE ratio pushing back above 11%, Kevin, are share repurchases something that you and the Board are looking at as a way to manage capital levels at this point?

Well share repurchase has been the subject matter that the Board has been reviewing on a regular basis, and as a possibility, but at this particular time, we do not have any specific plan to introduce a share repurchase plan.

But that's a consideration that would be possible in the future.

How would you rank that in terms of your priorities for trying to keep your capital levels from?

Well, we believe that the best use of our capital would be to fund our organic and strategic growth.

So although some repurchase is always a possibility, I don't think it is the very top priority for us.

Okay, great.

Thank you for taking my questions.

Thank you for your question.

Our next question is from the line of Scott Valentine of FBR Capital Markets.

Please go ahead, thank you.

Hi good afternoon guys.

This is Josh in for Scott.

So looking at margin, what's the opportunity for repricing of time deposits and for better deposit mix?

Well you can see, this is Doug, our cost of deposits actually ticked up 1 basis point this quarter.

We've been bumping along at a pretty flat rate for several quarters.

I don't see it repricing down from here.

Okay, and what will be the benefit of the redemption of the trust preferred shares on your margin?

Fairly small.

The coupon rate on those trust preferred shares is only about 2% right now.

The reason we're redeeming it is if we were not redeeming it short-term as a result of the mark-to-market adjustment acquiring it, we would have had to book a much higher yield.

But given that it was a very short-term maturity and we were only booking 2% on it right now.

Okay, and then moving to expenses, how should we think about additional cuts through 2014, if at all?

I'm sorry, think about additional cost?

Yes, like cost cuts from the merger.

Cost cuts, well in terms of our run rate in the fourth quarter on just the compensation line, we're probably $600,000 to $800,000 higher than what I would call a run rate.

Offsetting that, we do certainly hope to be investing in new production and new products during the year, so there will be some upward adjustment for that.

But just in terms of the core run rate in the fourth quarter, we're probably $600,000 to $800,000 high.

That's helpful.

Thank you for answering my questions.

Thank you for your question.

Our next question in the line is from Julianna Balicka of KBW.

Please go ahead.

Good morning.

This is actually David Gong for Julianna.

Hi David.

Just had a question, you talk about most of the loan production in the quarter came from California and New York and New Jersey markets, so could you talk a little bit about loan growth expectations from Chicago and Seattle in 2014?

Yes, for Seattle we are actually seeing some loan development from Seattle and we are getting many discussions for the loan deals.

So we do expect meaningful contribution from that region in 2014.

For Chicago region, our teams are still focusing on the smooth transition of our -- as to our system conversion, so it's going to take some time, but we do see some development in small commercial loans and also [CIV] loans in the markets.

But probably not until the second half of the 2014, we're not going to see meaningful contribution from that area.

But we do -- we are hopeful that we will have some contribution by second half of the year.

Okay.

So in terms of originations, can you give us the dollar amount for some of the larger originations in the quarter and the rates you're getting on those?

Yes.

This is Mark.

The three largest new credits, they are all CRE, starting from the top -- $15.9 million, multi-tenant retail; $13 million, industrial warehouse CRE; and we also had $11.5 million, which actually represents four gas station loans to one borrower.

In terms of the rate that we did, I think we --

On the rates, we don't like to comment on individual deals for competitive reasons, but our average rate on the new deals was 4.5%.

Okay, and just a follow-up question on expenses.

So what was the contribution in terms of Foster acquisition, are we seeing all of the cost saves in the fourth-quarter numbers, or are there more cost savings to come in 2014?

Well, there will be some.

As I say, I think our run rate of expenses is about $600,000 to $800,000 high on the comps line.

And obviously, the line merger-related expense contains a lot of our conversion expenses that occurred in the quarter, which will go away nearly entirely next quarter.

So those will be the most measurable impacts of further cost cuts in the next year.

Thank you very much.

Thank you for your question.

(Operator Instructions)

Moving on, our next in line is the line of Lana Chan, BMO Capital Markets.

Please go ahead.

Hello, good morning.

Good morning.

A couple of questions, one, Doug, I was wondering if you could give us some guidance on expectations for the purchase accounting accretion this year, how much we should be building in?

Oh, that's always fun to try to answer.

If you look at the current quarter, I would expect it to decline probably 20% during the year, the coming year, because that's just the run rate at which it's declining, as the portfolios pay down.

Okay, and I think last year, you guys had targeted mid to high single-digit organic loan growth and did a little bit better than that.

Given the new initiatives and the new markets, would you expect to be able to do better than that this year?

We are budgeting for high single-digit organic loan growth for this year.

That's comparable to the 8% organic loan growth that we delivered in 2013.

Okay.

I would just add, if you take our 2013 numbers and back out the acquisitions, our organic growth was about 8%.

If we do that again, in next year, that will be growing off those acquired portfolios also, so that would represent more dollars of growth because of the bigger base we've built with those acquisitions.

Okay, great.

My last question was I was wondering if you could discuss the recent retirement of Mr. Min and what the expectations are in terms of replacing that position.

We would like to have the entering period to be as brief as possible, but at the same time, we have to be prudent in our due diligence efforts.

And the Board has decided to retain an outside search firm to identify and elect our next CEO.

I think that's the information that I can share with you.

Okay, thank you.

Thank you for your question.

Our next question is from the line of Gary Tenner of DA Davidson.

Please go ahead, thank you.

Good morning.

I had a question on that trade advance loan that was impaired.

What was the total size of that loan, gross of the impairment?

This is Mark again.

This is actively ongoing work-out case.

It's something that we don't want to discuss openly on a open forum, in terms of total credit limit.

I can answer that offline, if you'd like.

Okay, fair enough.

And then secondarily, in terms of the new initiatives on the leasing business and on the residential mortgage business, could you give us a sense of who is going to be leading that?

Are you bringing somebody in from the outside to lead the leasing business?

What kind of expense build-out would you expect heading into 2015, which is when you expect there to be more of a revenue benefit?

Yes, this is Jason Kim.

In terms of new initiative on commercial equipment leasing, we have spent a lot of time and effort in developing this cutoff, as requested by our existing customer base.

And we have done a lot of strategic initiative to really better manage in terms of risks and expenses.

And I think we will have more clarity as we go maybe a few more quarters down the line in the second half of the year, 2014, in terms of production and expenses and the income that will be driven on this product.

And I will have this product in the developing, and we will launch toward the end of first Q 2014, most likely in March.

If I could just add, Jason, there's a lot of details to come, but it is not something -- the way we've structured it where there's a big up-front expense.

You'll see that it will be fairly modest impact in the start up, because we've structured it that way intentionally.

Okay, thank you very much.

Thank you for your question.

(Operator Instructions)

We have another question from the line of Don Worthington of Raymond James.

Please go ahead.

Hello, good morning, everyone.

Good morning.

Just noticed in looking at the balance sheet that the goodwill number came down about $12 million I guess [link] quarter.

Anymore color on that?

Sure, this is Doug.

Yes, when we released the third quarter, we did highlight the fact that the purchase accounting on Foster was preliminary.

And the final analysis of both the loan mark and the deferred tax asset ended up with a more favorable result than we put in our preliminary numbers, so that entire decline was related to Foster.

Okay, great.

And then any guidance on the tax rate for 2014, what you expect that to be?

Well I would round it to 40% if you're doing a model.

I think we tend to bounce around 39.5%.

The mix of what states we do business in is actually one of the biggest variables; we've got some higher tax jurisdictions, but 40% is not a bad guess.

Okay, great, thank you, Doug.

Thank you for your questions.

Okay as we have no further questions in the queue, I'd like to hand back to management for closing remarks.

Thank you.

Okay, once again, thank you all for joining us today, and we look forward to speaking with you again next quarter.

Thank you.

Thank you to all the speakers.

Thank you, ladies and gentlemen, for participating.

That concludes today's conference call.

You may now disconnect your lines.

Have a good day, thank you.