Hope Bancorp Inc (HOPE) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the BBCN Bancorp first-quarter conference call. (Operator Instructions). This conference is being recorded today, April 22, 2014. I would now like to turn the conference over to Angie Yang, Senior Vice President, Investor Relations. Please go ahead, ma'am.

Thank you, Danielle. Good morning, everyone and thank you for joining us for the BBCN 2014 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 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 certain risks, uncertainties and assumptions that are difficult to assess. Actual results may differ materially as a result of risk 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 statement 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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 could differ materially from the financial results being reported today.

As usual, we have allotted one hour for this call. Presenting from the management side today will be Kevin Kim, BBCN's Chairman and CEO; Kyu Kim, Our Chief Operating Officer; and Doug Goddard, our Chief Financial Officer. Chief Credit Officer, Mark Lee; Chief Lending Officer, Jason Kim; and Chief Retail Banking Officer, Cha Park, 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 will start the call today with some brief comments before asking Kyu and Doug to provide more details in the results for the quarter. When they have finished, I will close with some final comments before we open up the call for questions.

We had a strong start to 2014 in terms of new business development, which was certainly one of the highlights for the quarter. We originated $298 million in new loans, just $25 million shy of the seasonally stronger fourth quarter. On a year-over-year basis, this represents a 35% increase. We attribute the robust levels of originations to the dedicated efforts of our skilled relationship managers on our lending teams. Notwithstanding what continues to be an extremely competitive market both from the larger mainstream banks and our niche peers, our business development teams have continued to deliver strong production levels quarter after quarter.

As a result of our first-quarter loan production, our total loans increased to $5.19 billion as of March 31 of 2014, which equates to organic growth of a little more than 9% on an annualized basis. With the higher loan balances and the benefits from the two acquisitions completed last year, we are seeing positive trends in revenue generation as our reported revenue increased 9% on a year-over-year basis to approximately $76 million.

Together with disciplined expense management and lower credit costs for the quarter, we continue to post a high level of profitability. For the first quarter, we generated net income of $22.2 million or $0.28 per diluted common share. On a pre-tax, pre-provision basis, this represents an annualized return of 2.44% of average assets, which is notably well ahead of industry averages and is a testament to the earnings power of BBCN.

With that, let me turn the call over to Kyu to provide some more details on our business development efforts and the first quarter. Kyu?

Thank you, Kevin. As Kevin mentioned, we had $298 million in loan originations for the first quarter. As with the recent quarters, the overwhelming demand in the market has been in commercial real estate. For the first quarter of 2014, approximately 83% of new loan originations were in commercial real estate and 16% in commercial loans. Within the commercial real estate portfolio, we have seen growth across all property types. During the first quarter, we saw the strongest growth in the warehouse, multifamily and mixed use segments of the CRE portfolio, which all increased between 6% and 8%.

Most of the loan production came from the Southern California and New York, New Jersey market. But we also had a meaningful contribution from our business development team in Northern California. Our SBA loan business was also strong (inaudible). Of the $298 million in loan production for the first quarter, $42.3 million were SBA loans. Of this amount, $38.1 million were [sellable] SBA 7(a) loans. The average rate of new loan originations was 4.53% in the first quarter, an increase of 3 basis points over the preceding quarter. Fixed rate loans accounted for 57% of new loan origination with variable rate loans at 43%.

Aggregate loan payups and paydowns were within the normalized range in the first quarter coming in at $198 million compared with the $210 million in the prior quarter. We also had a solid quarter of (inaudible). Our core deposits increased by $187 million, which equates to 4% growth from December 31, 2013 or 15% on an annualized basis. This growth was split almost evenly between retail deposits and core sale deposits.

With regard to the retail deposits, we experienced growth in each deposit category except for savings deposits. The largest increase came in jumbo time deposits, which increased at least throughout the quarter aggregating $50 million. Approximately $17 million of this is attributed to a CD campaign that we launched in the last week of March. With that, let me turn the floor over to Doug.

Thank you, Kyu. And just to wrap up the discussion on the deposit growth for the quarter, in terms of full sale deposits, we added a little more than $95 million in full sale deposits during the quarter to fund our strong loan growth. Now we provided quite a bit of detail in our press release that the quarter was relatively consistent with recent performance, so let me just discuss a few items where I think some additional color is warranted.

Our net interest income declined by 3% from the preceding fourth quarter. While we had a 4% increase in average loans receivable, the average yield on interest earning assets declined by 22 basis points. In addition, the first quarter has two fewer days than the fourth, which accounts for approximately $1.1 million in interest income. Compared with the fourth quarter of 2013, our net interest margin decreased by 16 basis points to 4.29%. The primary driver of the decline was a lower level of discount accretion on acquired loans as the accretable discount that remains for the Nara/Center merger continues to tail off.

We recognized $5.8 million in accretable discount on both performing and credit-impaired acquired loans in the first quarter, down from $7.4 million in the prior quarter. At March 31, we had $37.5 million in accretable discount remaining on all of the acquired portfolios and we would expect the trend and the discount recognized each quarter will continue to be lower, although not necessarily on a linear basis.

On a core basis, excluding the effects of purchase accounting adjustments, our net interest margin decreased by only 5 basis points to 3.82%. The decrease in our core net interest margin was primarily attributable to the declining yields on loans as loans are still being booked at rates below the average rate of the maturing loans. Our cost of deposits increased 2 basis points to 52 basis points during the first quarter. This was attributable to two factors. First, we added time deposits as part of a deposit campaign in the fourth quarter of 2013. Most of which came in during the month of December. The impact of this is now reflected in our cost of interest-bearing deposits, which is up 3 basis points from the fourth quarter of 2013.

And second, during the first quarter, our balances of non-interest-bearing deposits dipped temporarily at the beginning of the quarter, which is somewhat typical. As a result, our average balance of non-interest-bearing deposits was approximately $89 million lower than our end-of-period balances and about $26 million lower than our average balance in the fourth quarter. This had a negative impact on our total cost of deposits, but we should see that trend reverse in the second quarter given the deposit inflows we saw late in the first quarter.

Moving on to non-interest income, they are flat or slightly down in most categories compared to last quarter, but within the usual range we would expect to see. As well, the first quarter non-interest income relative to the preceding fourth quarter was adversely impacted by the two fewer days in the quarter. Our net gain on sales of SBA loans was $2.7 million, essentially flat with last quarter. During the first quarter, we sold $30.3 million versus $32 million in the prior quarter. The premium in the wholesale market has held up and averaged approximately 10.5% for our sales in the first quarter.

Turning to non-interest expense, when merger and integration-related expenses are excluded, we were essentially flat with the prior quarter. I should note, however, that our salaries and benefits expense in the first quarter included separation payments related to the retirement of the bank's previous CEO. So it is a little higher than what we would expect the run rate to be going forward.

Turning to asset quality, our non-performing loans increased to $84.8 million or 1.63% of total loans at March 31 from $73.1 million or 1.44% at the end of the prior quarter. The increase was attributable to a handful of loans that were downgraded during the quarter with no particular similarities of note and no meaningful increase in our loss expectations for these credits. Over the past several quarters, our non-performing loans have varied between 140 and 170 basis points of total loans, which we would consider a normalized range given the current economic environment.

At March 31, approximately 79% of our non-performing loans were paying as agreed. Our total classified loans declined by approximately $13 million during the first quarter to $253.3 million. We had $26 million flow out of the classified loan category in the first quarter and just $13 million of inflow, which is down from $38 million of inflow last quarter.

Our net loan charge-offs were $4.6 million or 36 basis points of average loans on an annualized basis, down from 75 basis points in the prior quarter. Approximately $3 million of our charge-offs this quarter relate to the C&I credit relationship that we recorded an additional reserve on in the fourth quarter subsequent to the release of our fourth-quarter 2013 results. With the low level of charge-offs and relative stability in the portfolio, our provision requirement for the quarter was $3 million. This put our allowance to total loans at 1.27% and our coverage of non-performing loans at 77.4% at March 31, 2014. With that, I will turn the call back to Kevin.

Thanks, Doug. As Doug mentioned early on in his comments, the 2014 first quarter reflected a relatively regular quarter of financial performance. I view this as a very positive statement. With the consistency of our financial performance and strong profitability, we continue to generate a significant amount of excess capital that we can reinvest in the Company to further the growth of our franchise.

One major area of reinvestment will be in the development of new products and services. During the first quarter, we launched our new equipment lease financing business. The reception by our existing customer base has been quite positive and we actually approved a number of deals before the quarter-end. As we are targeting our existing customer base, we are already familiar with their business operations and financial spending, which significantly minimizes the associated risk. This product offering will help deepen the relationship with our customers making it more difficult for our competitors to poach the business.

In addition to other new business lines that will better enable us to capitalize on the foundation we have built as the largest Korean-American bank in the nation, we are also reinvesting in our structure and talent. Currently, we are in the process of refocusing our business lines into commercial and retail banking. Korean-American banks have grown to date predominantly from commercial real estate lending. For the most part, we have done it well, but much of the business was developed by a few top players.

By adding a dedicated focus on the retail branch sales efforts, we believe we can benefit in a number of ways. Our sales teams will benefit from more relevant and specialized training with their specific areas of focus ensuring that our customers receive differentiated, but high quality services. We will be better equipped to promote cross sales, which we believe will ultimately lead to higher performance throughout the organization. And we believe this will create a more scalable business model as we continue to make progress with our strategic goals and prepare to transition to a regional bank based upon a relationship banking model.

As I stated last quarter, at the end of the day, it takes people to deliver. When we're talking about our front-line managers or our executive management team, I think our results firmly support my belief that BBCN has the strongest team of bankers in our niche market. With one solid quarter behind us and looking forward into 2014, I believe BBCN is well-positioned to achieve our strategic goals and strengthen our leadership stance as the premier Korean-American bank in the United States. With that, let me open up the call to answer any questions you may have. Operator, please open up the call.

(Operator Instructions). Scott Valentin, FBR Capital Markets.

Hey, guys. This is Josh in for Scott. Thanks for taking our question. We were wondering what was the growth -- the year-over-year organic growth rate in loans.

On an annualized basis, approximately 9%.

Okay. And where do you see core NIM possibly bottoming? And when if you have thought about it at all?

Well, that is very hard to pinpoint the day. I would point to the fact that -- I think Kyu mentioned it in her comments that our average originations were at 4.53% for the quarter, whereas our loan portfolio on average earns 3.8%. And until those two numbers are the same, we are going to experience a continued very slow decline in the core margin.

Okay. And do you see yields -- do you see increased pressure on yields or is it just the dynamic that the yields are lower coming onto a higher yielding book? Or is it both?

Well, it is mostly the latter. I mean the production people under it will tell me there is always competition for the yields out there. It is a very competitive market, but the fact of the matter is we still have loans, we have loans paying off that originated when the average rates were 5.5%, 5.75% still. And that's just a different rate environment than we are in right now.

Okay. Thanks for the color. That is it for us.

Aaron Deer, Sandler O'Neill & Partners.

Hi, good morning, everyone. Kevin, I applaud your efforts to add some of these new strategic business lines. I think it is an important step in transforming the business. But I'm curious if you can give some expectations in terms of when we can expect that to materialize in the loan originations and what maybe your goal is to bring up the percentage of the C&I book as a percentage of overall loans or to bring down your commercial real estate book as a percentage of overall loans or capital?

Well, it is hard to pinpoint the exact timing for those new business lines materializing to our profit bottom line. We expect meaningful contribution from our new business lines from 2015. We will introduce the mortgage lending, residential mortgage lending, the second half of this year and obviously it will take some time for us to have meaningful contribution from our new business lines and products. But overall we will see a lot of synergies from the cross-sellings of various products and services to our existing customer base. And in the long run and over the next two to three-year period, you will see the significant difference from the investment that we are making at this time.

Do you have any goals longer term in terms of how you want the portfolio mix to shape up?

Ideally you want the interest income source to be as diversified as possible and also supplemented by non-interest income. At this time, the bank is going to be focusing on the production line as we rationalize our delivery channel. We do expect to generate more commercial businesses, but that also takes a lot of human resource investment. So it will take time.

Okay. And then obviously you have got terrific profitability and very strong capital levels. I'm just curious what kind of discussions the Board is having with respect to raising the dividend or starting up with the buyback plan?

Well, with the transactions that were announced or completed last year, the number of our prime acquisition targets is down from a year ago. Accordingly, the priorities for an increase in the dividend or a stock buyback program are much higher today than they were a year ago and that is I think as much as they can tell you.

Okay. But that is on the Board's agenda at this point?

Yes, it is -- currently, it is seriously being considered, various scenarios, how to capitalize or how to utilize our excess capital.

Okay, that is great. Thanks for taking my questions.

Thank you.

Julianna Balicka, KBW.

Good morning. I have a couple questions. One, to follow up on the line of questioning Aaron just began in terms of the new business lines that you are developing. Although it is hard to tell when that will hit the revenue lines, is there a way we should think about that as an increase to expenses as you continue to invest in this human and infrastructure capital? Or how should we think about the near term? And also on the commercial leasing, you said you had approved a number of loans already. So if you can give us maybe size of the pipeline there.

Julianna, first of all, that was lot of questions, but we are having a hard time hearing you clearly. I apologize, but would you restate your questions?

Yes, okay, for the commercial leasing, can you quantify the pipeline that you mentioned you approved a number of loans?

Hi, Julianna, this is Jason. We launched a bankwide new product middle of last month. It is important to know that we have introduced this product to our customers and the responses from our customers have been very positive. So we just launched this like literally middle of last month. So I think the takeaway is the responses from our customers have been very positive.

Okay, very good. So that makes sense. So we will ask the question about the pipeline next quarter then. And the other question I was asking about is in terms of the new product development. Is there expenses that you are investing in right now? So is there a higher expense run rate that we should be thinking about as you develop your new product suites?

Well, clearly, we are investing money in people and products and in ideas. A fair amount of that is actually in the numbers you see and we currently don't have any major expense increase coming that we don't expect to allow us to stay within the same kind of efficiency ratios you are seeing, which is in the high 40%s.

Okay, that makes sense. And then I had another question and then I will step back. On the wholesale deposits that you added this quarter and the deposit campaign that you began at the end of the year, I see that you're running at a 100% loan to deposit ratio or maybe 99% to be precise. Can you talk about your loan to deposit ratio management? Is there a ratio that you are comfortable getting above or below you would prefer to operate at just as we think about potential future deposit campaigns and wholesales.

Well, we are sort of in a middle of a range. At the 98% to 100%, we are fairly comfortable with that because of our significant borrowing capacity. In terms of optimal liquidity, I would probably like it to be a little lower than that. In terms of our ability to go over it, we could go over it some in terms of a period of growth. So we're kind of in the middle of the rage. If I talked to you four or five years ago from now in the future, I would probably like it to be lower than 90%s. You may see it bounce up and around a couple basis points around 100% in the next few quarters.

Got it. Okay, thank you very, very much.

Don Worthington, Raymond James.

Good morning, everyone. In terms of -- I think you mentioned an increase in FTEs of about 25 since the end of the year. But what areas were those in? Was it mainly production or did you add compliance? Just a little color there.

I'll just give the color. It is a little bit of all of that. There are certainly some areas where we've added some production people and brought in some people for things like mortgage. We have also given our size and where we want to be. We've absolutely shored about some compliance areas with some people.

Okay, thank you. And then is the bank looking at any new LPOs or de novo branches?

For the loan production officers, we are looking to add more business development officers, but we don't immediately see a new opening for the foreseeable next couple quarters.

And for the new branch openings, we'd look into the possibility of enhancing our presence in both the existing and the new markets.

Okay, thank you. And then on the deposit campaign, or I guess there is two. I mean you had one in December and then one more recently. What do you typically offer in terms of say a premium relative to your normal rates?

Yes, basically the promotional rates tend to be right at 1% for a one-year CD, give or take. And that is less than a quarter over some of the rates we have to offer anyway.

Okay. All right, thank you.

Tim Coffey, FIG Partners.

Good morning, everybody. So I had a question about your markets and where you're -- is there a particular market that you're seeing the best loan growth or where the BBCN message is being best received?

Well, we see a significant loan growth in the Northern California market and also we expect to see meaningful growth from the (inaudible) area probably this quarter.

Which are additions to what have historically been our biggest markets, which, of course, is Southern California and New York, New Jersey.

Right, okay. And then looking at the dollar change in interest expense the last couple quarters, it has been around $350,000 a quarter, how much of that is tied to the promotional campaign and is that a good run rate going forward?

I missed the first part about the -- but there is a lot of bouncing around. Are you talking about the other category in G&A?

No, I'm talking about interest expense.

Oh, interest expense.

It is a dollar change.

Well, it is several things. As I mentioned in my comments, one is the number of days in the quarter affects it obviously. The deposit campaign did bump us up a couple of basis points, but also the variability in our DDA balances. Particularly in the first quarter of the year, we see some definite seasonality. We see quite a dip the end of January, the first part of February and then it came back fairly strong in March. And that all translates into what you're paying in interest-bearing deposits versus having free money.

Sure, okay, okay. That takes care of my questions. I appreciate it, thank you.

Gary Tenner, D.A. Davidson.

Thanks, good morning. I just had a question regarding the loan payoffs and paydowns. Your loan production increased nicely year over year, but the pace of paydowns remains pretty high gaining some of that origination volume. Can you talk about what you are seeing just competitively in terms of other banks, whether you have the ability to be a little more aggressive on pricing to maintain some of the business and any thoughts around that?

The paydown -- while paydown is up, obviously it's scheduled amortization, but the payoffs, these are the CREs that are being offered at very low interest rate where we choose not to compete on the pricing. So that's what happened in the quarter. The CRE refinance market is very, very competitive.

Okay. And then I guess the same question on your production side. I mean ex the SBAs, I was just looking at the non-SBA production, which I think would have been around $230 million, how much of that would you suggest is kind of true new business versus bringing customers over from other institutions?

Can you repeat that question please?

I am just wondering what your sense is of your loan originations in the quarter, excluding the SBA production. So I guess that would be around $230 million or so. How much of that production would represent true kind of economic growth new business as opposed to bringing over loans or customers from other institutions?

The majority of the CRE production this quarter was the refinance of loans at [other] institutions. We lose some, we gain some. And some of the CRE production was also the -- a small portion to the effect is to finance the purchase of properties.

Okay.

Hope that answers your question.

Yes, that is helpful. Thank you.

(Operator Instructions) Lana Chan, BMO Capital Markets.

Hi, this is actually [Albert Brossard] in for Lana. I am not sure if you can ballpark what the separation charge was in the personnel cost?

I think it was approximately $800,000.

Okay, thanks. And are there any more merger charges expected in the upcoming quarters?

Not really. That line may not go to absolute zero because there is some little tail costs related to insurance policies and so forth, which for comparability purposes we will leave it there. But in terms of material numbers, until the next deal, I don't see anything coming down the pipe.

All right, and one question, on some of the deals you have been doing in equipment finance, can you give any color on the type of yields that you are getting?

Yields are -- we look at the yields on a monthly basis, but it is north of 4%. High north, close to 5%.

Thanks, that is all my questions. Thanks.

Julianna Balicka, KBW.

Good morning, I have a quick follow-up. Could talk a little bit about -- in terms of the loan yields, they went up, they ticked up a little bit linked quarter. So could you talk about whether or not that is a function of the market pricing getting better or is it just simply the mix changed ever so slightly?

Well, I am going to answer that, unless the business people here want to contradict me. I see that number bouncing up and down within a fairly small range for the last -- I look at it monthly, not by the quarter. So I would hesitate to say that it is a change in pattern yet. It is pretty much staying in a range right now.

Okay, that makes sense. And then I have another follow-up. On the credit costs, they came back down to look like a more normalized level today. So could you talk a little bit about the credit restatement at the end of last quarter after you had released earnings, kind of why there was a couple of hiccups last quarter? How should we think about the potential for hiccups on any given bases going forward?

Well, that basic timing issue, which is we released earnings a few weeks before the 10-Q. If something happens to one of our borrowers in that interim time, well, there's always a possibility for a hiccup. But as we look at this quarter and the immediate time period in front of us, we feel like this is a fairly normal run rate we are experiencing right now. And there can always be surprises, but by definition we don't know about them yet.

Very good, thank you very much.

(Operator Instructions). There are no further questions at this time. I would like to turn it back over to management for any closing remarks.

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

Ladies and gentlemen, that does conclude the BBCN Bancorp first-quarter 2014 conference call. Thank you for your participation and you may now disconnect.