Hope Bancorp Inc (HOPE) 2014 Q2 法說會逐字稿

Good day and welcome to the BBCN Bancorp second-quarter 2014 conference call and webcast. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference call over to Ms. Angie Yang, Investor Relations for BBCN. Ms. Yang, the floor is yours, ma'am.

Thank you, Mike. Good morning, everyone, and thank you for joining us for the BBCN 2014 second-quarter investment 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 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 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 June 30, 2014, could differ materially from the financial results they have reported today.

As usual, we have been allotted one hour for this call. Presenting from the management side today will be 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; 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. Let me begin today with some brief comments on the quarter before asking Kyu and Doug to provide more details on the financial results. When they are finished, I will close with some final comments before we open up the call for questions.

Overall, we executed very well in the second quarter, delivering an all-around solid quarter and generating $22.3 million in net income or $0.28 per share. We were able to generate significant balance sheet growth which was all organic, resulting in a 10% increase in spread income over the prior year while improving credit quality.

We continued our strong business development momentum in the second quarter, originating $344 million in new loans. This represents a 15% increase from the first quarter of this year and a much more significant 65% increase over our loan production in the second quarter of a year ago.

While the competitive environment remains particularly intense, our business development teams continue to do an excellent job of retaining our most valued customer relationships while also developing referral sources that are leading to new customer wins and further penetration in our core markets. Our position as the preeminent bank in the Korean-American market with the greatest lending capacity, the most convenience, and the largest team of experienced bankers continues to be a substantial competitive advantage in developing new relationships and winning business.

As a result of our second-quarter loan production, our total loans increased to $5.35 billion as of June 30, 2014, which equates to organic growth of 12% on an annualized basis. Through the first half of 2014, our loan portfolio has increased more than 5%, which puts us ahead of the growth achieved last year and on track to at least repeat or exceed our 2013 organic growth rate of 9%.

Now let me turn the call over to Kyu to provide additional details on our business development efforts in the second quarter. Kyu?

Thank you, Kevin. As Kevin mentioned, we had $344 million in loan originations for the second quarter. Commercial real estate continues to be the area of lending with the highest demand, accounting for 88% of our total loan production in the quarter.

The CRE loan opportunities continue to be primarily driven by the financing. And the competition in this market remains fierce, coming from both the mainstream banks as well as other Korean-American peers. Within the commercial real estate portfolio we have seen growth across almost all property types, but we saw the strongest growth this quarter in the hotel/motel segment, which end-of-period balance increased 10% from March 31st.

We also continued to make progress in our C&I lending efforts, with loans to customers in the manufacturing industry being the strongest area of growth this quarter. We had $37 million in C&I loan originations during the second quarter.

In terms of total C&I loan commitments made during the quarter, we extended $57 million in commitments to commercial customers. Overall, we had $1.1 billion in total credit commitments outstanding to commercial customers, with a utilization rate of 56% on lines of credit at June 30, 2014.

Our SBA loan business was a strong contributor to total loan originations this quarter. Of the $344 million in loan production for the second quarter, $85 million were SBA loans. Of this amount, $62 million were saleable SBA 7(a) loans. From a geographic perspective, most of the loan production came from the Southern California and the New York/New Jersey market, as usual.

Northern California is continuing to have meaningful contributions, and we are now beginning to see higher lending volumes from our business development teams in the Pacific Northwest. Overall, the average rate on new loan originations was 4.52% in the second quarter, down just 1 basis point from the preceding quarter.

Fixed rate loans accounted for 61% of new loan originations, with the variable rate loans representing 39%. Aggregate payoffs and paydowns were $231 million during the second quarter, up from $198 million in the prior quarter and relatively in line with the $223 million a year ago in the second quarter.

We also had a very strong quarter of deposit growth, which was partially attributable to frequent deposit inflow that we see in the second quarter following the tax season, as well as a successful deposit campaign. Our total deposits increased by $135 million, which represents 10% growth on an annualized basis.

We had solid improvement in our deposit mix, as 92% of the total deposit growth was in our core deposits. Non-interest-bearing deposits increased 5% in the quarter, while money market accounts increased 4%. At the end of the second quarter, these two deposit categories accounted for 54.2% of our total deposits.

With that, let me turn the call over to Doug to go over our financial results in more detail. Doug?

Thank you, Kyu. We provided quite a bit of detail in our press release, and 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 increased by 4% from the preceding first quarter. This is attributable to a 5% increase in our average earning assets plus one additional day in the quarter versus the first. These factors more than offset the compression in our net interest margin, resulting in the increase in net interest income.

Compared with the first quarter of 2014, our net interest margin decreased by 9 basis points to 4.2%. On a core basis, excluding the effects of purchase accounting adjustments, our net interest margin decreased by 10 basis points to 3.72%. The decrease in our net interest margin, both as reported and on a core basis, was primarily attributable to a less favorable mix of earning assets, as we had a higher balance of cash and cash equivalents on our balance sheet in the second quarter.

We recognized $6.7 million in accretable discount on both performing and credit-impaired acquired loans in the second quarter compared with $5.8 million in the preceding quarter. At June 30 we had $33 million in accretable discount remaining on all of the acquired portfolios. While there are fluctuations quarter to quarter, we would expect the trend in the discount recognized each quarter will trend lower, although not necessarily on a linear basis.

Moving on to noninterest income, we were relatively consistent with the prior quarter in most categories, with the exception of the net gain on sales of OREO in the preceding first quarter for which there were no equivalents in the current quarter. Our net gain on sales of SBA loans was $2.8 million, up about $100,000 from last quarter.

During the second quarter we sold $31.3 million in SBA loans versus $30.3 million in the prior quarter. The premium in the wholesale market has held up and averaged approximately 10% for our sales in the second quarter.

Turning to noninterest expense, the most notable differences from the prior quarter included the following: our salaries and employee benefits were down about $800,000, primarily due to the separation payments related to the retirement of the Bank's prior CEO that increased our first-quarter expenses; our advertising and marketing expense -- this was up about $400,000, which is just a function of timing in when the spending occurred and not indicative of a higher run rate; and credit-related expenses, which were previously included in other expenses, were up $1.6 million. This was primarily due to approximately $1.5 million of past-due property taxes on loans acquired in the Foster Bank transaction. While there will always be some property tax payments each quarter, we would not expect this level to reoccur in the foreseeable future.

Turning to asset quality, we saw general improvement in the portfolio during the second quarter. Our total nonperforming loans, which is comprised primarily of nonaccrual loans and accruing restructured loans, increased slightly in absolute dollar terms but declined as a percentage of total loans. At June 30, nonperforming loans were $86.6 million or 1.62% of total loans compared with $84.8 million or 1.63% of total loans at the end of the prior quarter.

Nonaccrual loans at June 30, 2014, declined to $42.7 million or 0.8% of loans receivable from $47.3 million or 0.91% of loans receivable at March 31, 2014. As stated in our earnings news release, a restructured nonaccrual loan with an outstanding balance of $5 million moved to accrual status during the quarter as an accruing restructured loan. While this contributed to a reduction in our nonaccrual loan balances at the end of 2014 second quarter, conversely it resulted in an increase in accruing restructured loans at June 30, 2014.

For the second consecutive quarter we saw a decline in our total classified assets. At June 30, classified loans were $242 million, down approximately $11 million from the end of the prior quarter. We had $27 million flow out of the classified loan category in the second quarter and just $16 million of inflow. The outflow was primarily related to upgrades based on improvements in cash flows that we saw from updated financials received during the current quarter.

Our net loan charge-offs were $1.8 million or 14 basis points of average loans on an annualized basis, down from 36 basis points in the prior quarter. For the first half of the year, our net charge-offs were running at 24 basis points of average loans on an annualized basis.

With the low level of charge-offs and general stability of the portfolio, our provision requirement for the quarter was $3 million. This level of provision provided for the strong growth in the portfolio we had this quarter as well as covering our charge-offs. This put our allowance to total loans at 1.25% and our coverage of nonperforming loans at 77.3% at June 30, 2014.

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

Thanks, Doug. Overall, we are very pleased with our performance in the second quarter, and I believe the consistency of our financial performance underscores a couple of points. The first is strong execution by a best-in-class executive management team. I have spent considerable amount of energy over the last year to build a team that will lead BBCN to become a $10 billion-plus regional bank.

The second is the strength of our business development teams. As has been reported, we experienced some turbulence last summer with the departure of some senior officers. Notwithstanding this event, our teams stayed focused on their responsibilities, and we have not missed a step in terms of new business development and financial performance.

As part of our strategic vision for BBCN, we are highly focused on expanding our product and service offerings in order to become a more diversified financial services company able to provide our customers with a boulder array of services more in line with larger mainstream banks. The second quarter was our first full quarter of offering commercial equipment leasing to our customer base. The deals we have seen to date have been for smaller-ticket items ranging in the $50,000 to $100,000 range, which reflects the typical commercial equipment needs of the majority of our customers.

Given the size of these deals, we would not expect the commercial equipment leasing business to move the needle on a more than $5 billion loan portfolio. But we have received a very positive response from our customers, who are pleased to know that we now have this capability.

Ultimately, we believe that this product offering will help deepen the relationship with our customers, help us capture a greater share of their total banking business, and further differentiate BBCN from our smaller Korean-American competitors. We also recently began offering interest rate swaps to our commercial real estate customers, and we booked our first swap income related to this product line in the second quarter. In addition to further positioning BBCN as a bank capable of providing services, providing customers with more sophisticated products than they can typically find in the Korean-American market, we believe that interest rate swaps can eventually develop into a meaningful source of fee income for the Bank.

We have had a strong first half thus far, and with the progress we are making with our strategic initiatives, we look forward to keeping you apprised of our steady progress, strengthening our leadership position as the preeminent Korean-American Bank in the United States.

With that, let's open up the call to answer any questions you may have. Operator, please open up the call.

(Operator Instructions) Aaron Deer, Sandler O'Neill & Partners.

Pardon me if this was discussed earlier on the call; I jumped on late. But Doug, I was wondering if you could give us a sense of what the impact was of the excess liquidity on the margin this quarter, and if you anticipate kind of redeployment of that, getting back that basis point impact in the third quarter?

Sure. This is Doug. Yes, I would expect to go to a more normal mix of loans to other earning assets in the second half of the year. April is our most volatile deposit month; we tend to carry more cash in the second quarter. So I don't have the exact calculation, because it's dependent on an exact cash number, but it's 6 or 7 basis points with the decline in the op-related (technical difficulty).

Okay. That's great. And then just kind of looking at the shift that you've had in the loan production over the past year, can you talk about the fixed rate production? I'm curious to know, of the fixed rate loans that were originated this past quarter, what percentage of those had terms exceeding five years?

And then, how you think about the risk price? Does the 56 basis point variance between your fixed rate production and your variable rate production -- does that compensate any for the interest rate risk that you are taking with the fixed rate loans?

Well, we price all our new production to be indifferent to the interest rate risk. So we're looking for the same ROE, regardless of whether we are doing a prime loan or a five-year fixed.

Anything over five years would be an exception, and it is not a significant part of our portfolio at all. So really, of the fixed portion that's on our balance sheet, the actual duration is probably 3 to 3 1/2 years of what's remaining. But yes, I mean, does it complicate it? We run a balanced book as far as the interest rate risk.

Okay. Great. I will step back. Thanks for taking my questions.

Julianna Balicka, KBW.

I wanted to ask some follow-up questions. One, you mentioned that the strongest growth in CRE came from hotel/motel segment. Could you elaborate on that as far as property types, geography, the underwriting characteristics? A little bit more color, since that portfolio has not -- it has not always been in your footprint, etc.

This is Mark. Good morning. The hospitality -- yes, we saw a large increase. Most of these were underwritten per standard underwriting criteria; most of these are within our traditional territory. In terms of loan to value, I would say to less than 70%, with this year more than 1.3 or higher.

And what drove the greater growth? Is it the more demand from hotel/motels? I mean, why this quarter versus before?

This is one area that has had traditionally higher loss content for banks in general. So I was just trying to figure out if incrementally the fundamentals are changing for that segment, or if it just happened to be this quarter.

Surprisingly, the hospitality among all our CRE portfolio is the one that's performing the best right now. I'm looking at the hospitality segment in terms of performance, and let me just give you one number.

Among all our nonperforming hospitality, it's only 0.79% of our total nonperforming. Net over the hospitality portfolio, only 0.79% is nonperforming. So compared to other segments, it is actually performing much stronger.

Very good. And then one more follow-up, and I'll step back. On the strong deposit growth that you had this quarter, can you elaborate on some of the qualitative factors driving that? Any particularly large relationships, or any additional color that you can provide?

Basically, we don't see anything unusual in that activity; we certainly have some big relationships, and there's some ebb and flow in those balances, but we consider this a continuation of normal activity.

Excellent. Good to see. Thank you.

Tim Coffey, FIG Partners.

I was wondering if I could get a little color on what you think your outlook for the net interest margin is on a core basis? It looked like new production was coming on right around where it was last quarter, albeit a little bit lower than core loan yields.

Well, you answered your own question, I think. (laughter)

Okay. So marginally lower, then?

Yes. I mean, our originations -- you know, 4.52% or in that range the last couple of quarters, just 20, 25 basis points below what our portfolio is. The core is still showing very slow compression -- much slower than it was two quarters ago, but it's still down probably a few basis points a quarter for the next couple of quarters.

Okay. And then, Doug, following up on your comments about the noninterest expenses, it seemed like you were kind of -- the impression I was given is that it could be a little bit lower from here, but bumpy quarter to quarter. Is that about right?

The noninterest expense? Yes. Particularly the credit-related expense was higher than normal for a couple of reasons. One is we only pay property taxes twice a year, but the other is there is definitely a cleanup effort there involved in the Foster portfolio that we acquired. It was more than a usual twice-a-year event. So that line can always have bumps in it, but we would expect this to be an unusually high quarter.

Okay. And then on the payoffs -- is there any seasonality that you find quarter to quarter in your loan payoffs?

We're all looking around the table at each other here. Not a clear seasonality. It tends to be more other factors -- you know, what's going on with interest rates; what's going on with competition; what's going on with the valuation of properties. I think we are in a range now that is not particularly unusual as far as the payoffs.

Okay. Great. Well, those are my questions. I appreciate it.

(Operator Instructions) Gary Tenner, D.A. Davidson.

Doug, I have a follow-up question on the margin and deposit question from earlier. You mentioned that you thought you'd recover some of the margin hit on the excess liquidity this quarter. How do you -- you guys have been a little more aggressive the last couple of quarters with deposit programs and things of that nature to help kind of lower the loan/deposit ratio. Should we not expect that to remain the case in the back half of the year?

Well, I think we are certainly off the bottom as far as cost of deposits. We are seeing, like, 1 basis point or 2 basis point increase in our average cost of deposits. That would not be a surprising trend for the next couple of quarters, which is to say it's essentially flat, but it is not falling. So what's really on the other side of the equation to loans is going to drive whatever movement in our net interest margin.

All right. But just in thinking about the impact of kind of the build of deposits and how that would impact the margin, it sounds like you are expecting excess liquidity to get used via loan growth over the next couple of quarters as opposed to continuing to build some liquidity through deposit programs. Is that accurate?

Well, I mean, we are trying to keep the growth of the deposits and loans growing at sort of equal rates on both sides of the balance sheet. There will be a little bit of adjustment in the next quarter, we think, because as they are lowering, earning cash will probably decline $50 million, $60 million.

But other than that, I think the end and the goal will be out -- outside of the balance sheet, we are trying to keep strong organic growth going, which will keep the average cost in funding fairly similar to what it is now.

Okay. Thank you.

Lana Chan, BMO Capital Markets.

I was wondering if you had any update on the residential mortgage platform you guys are developing? I think last we had talked, it was a second-half event. Is that still on track?

This is Cha. I can answer that.

Yes, we have been making solid progress developing our residential mortgage loan strategy. And we are going to be pilot launching, as we planned, in the second half of the year. And it will be done in various geographies. So it's set, and the formal Bank-wide launch will be in early 2015.

And as a follow, on an unrelated note, I think last quarter you guys said given your access to capital position, you were considering dividend increase and buybacks. I saw that -- the dividend increase. Are you still considering buybacks?

This is Kevin. In terms of capital deployment we have focused on three main areas, and the first one is our organic loan growth. We have been generating strong levels of loan originations, and our pipeline today is also growing.

And the second is strategic acquisitions. With the transactions completed since last year, the number of prime Korean-American acquisition targets is down from a year ago.

But as I have mentioned before, in addition to Korean-American targets, we are also interested in mainstream banks which are located in desired geographic markets, like Texas or Atlanta, for example. So we continue to actively monitor and analyze our opportunities.

And the third is the cash dividend. Given the consistency of our financial performance, our Board declared an increase in the quarterly dividend, as announced this morning. And while many factors will determine this, ideally the Board would like to be in a position to make incremental increases in cash dividend on a regular basis.

So overall, we believe the opportunities for BBCN are growing and strong. And we currently assess that the return for shareholders by way of these three methods is greater than that for a buyback program. So the buyback possibility is kind of remote at this time.

Okay. Thanks for taking my questions.

Don Worthington, Raymond James.

I'm just curious about SBA lending and kind of where you see production levels going versus this quarter, which was pretty strong.

Good morning, Don. This is Jason. Yes, we did have a very strong second quarter. And the SBA loan originations, from our experience, tends to be more higher in the second half compared to first half. So we expect the level of second-q origination to continue in the second half of the year.

Okay. And then it's a relatively small item, but service fees on deposits were down linked quarter, while the deposit growth was pretty strong. Any particular reason for that?

Basically, nothing -- no one item we can identify. That number does bounce around a little bit.

Okay. Okay, that's all I had. Thank you.

(Operator Instructions) It appears that we have no further questions at this time. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

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

And we thank you to the management team for your time today. This conference call has now concluded. We thank you all for attending today's presentation. At this time you make disconnect your lines. Thank you and have a great day, everyone.