Hope Bancorp Inc (HOPE) 2015 Q2 法說會逐字稿

Good afternoon, and welcome to the BBCN Bancorp second quarter 2015 conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Angie Yang, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Allison. Good morning, everyone, and thank you for joining us for the BBCN 2015 second 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 certain risks, uncertainties and assumptions that are difficult to assess. Actual results may differ materially as a result of risks and uncertainties that pertain to the Company's business.

We refer you to the documents the Company files periodically with the SEC, as well as the Safe Harbor Statements in the press release issued yesterday. 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, 2015 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 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.

As usual, I'll begin with some brief comments on the quarter, before asking Kyu and Doug to provide more detailed information on the financial results. When they have finished, I will wrap it up with some closing comments before we open up the call for questions. Let's begin.

We delivered a solid quarter, generating $22.9 million in net income or $0.29 per share. This performance was driven by positive trends in revenue generation, expense management and credit quality. Compared with the first quarter of 2015, we increased revenue by approximately 3%, while maintaining stable expense levels, which resulted in nice improvements in our operating efficiency ratio.

We had a strong quarter in business development, with $360 million in new loan originations. Which represents higher than the preceding quarter, and 5% higher than the same quarter last year.

This resulted in total loan growth of 2% in the quarter, and 9% over the past year. On a year-to-date basis, our total loans have increased 5%, which puts us well on track to reach our targeted level of loan growth for the year.

While we are executing well in our traditional lines of businesses, we also continued to make progress on the development of new businesses and product areas that can help diversify and strengthen our business model. As we indicated on our last call, we began to rollout our new residential mortgage products to southern California branches during the second quarter. During the rollout, we recognized that the processing time and customer experience levels were not up to our standards.

Changes in the leadership of the residential mortgage program have been made. And we are revamping our systems and processes to insure that we have a competitive offering in terms of responsiveness and processing time. This change, however, will shift our timeline for rolling out this product on a full scale nationwide to later this year.

Even with this delay, we remain excited about the opportunity to introduce this product to our customers. And build it into a meaningful contributor to our business in the years ahead.

On the other hand, we have had a very encouraging launch for our new credit card product, with the response from both consumers and business customers exceeding our initial expectations. Although it's a still bit too early to provide more detailed metrics related to this product line, we have been pleasantly surprised by the number of customers signing up. Particularly given that the credit card launch was a soft one without any major advertising campaign.

As of the end of June of 2015, we have approximately 1,000 new credit card holders, thanks to the effective cross-selling efforts of our front line. In fact, I'm pleased to report that our branches have been quite active in marketing our new credit card product to their existing customers, as well as providing referrals to our wealth management team.

And this underscores the fact that with a more comprehensive offering of products and services geared for both commercial and consumer customers, our retail branches will become more effective contributors to our overall business development efforts. Ultimately leading to greater efficiencies for the Company.

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 mentioned earlier, we had $360 million in new loan originations for the second quarter of 2015. Commercial real estate loans accounted for 78% of the originations, with balanced growth in all of our major property categories with the exception of retail.

Commercial loans accounted for 20% of new originations in the second quarter. We extended approximately $127 million in commitments to commercial customers, and funded $72 million by the end of the quarter. Overall, we now have $1.15 billion in total credit commitments outstanding to commercial customers, with a utilization rate of 52% online for the credit at June 30, 2015.

The C&I loans booked this quarter were broad based, with no particular concentration within any one industry. As part of our efforts to grow our C&I loan portfolio, we continue to focus on developing new business relationships with the US subsidiaries of Korean national companies. The largest in new C&I relationship developed this quarter was with such a subsidiary, and we believe we will be able to achieve even greater success in the years ahead as we progress with building our brand presence in Korea.

After having had a considerably higher mix of variable rate loans in the first quarter, due to a couple of large C&I loans we saw a more normalized mix this quarter, with originations coming in at 51% variable rate and 49% fixed rate. With this more normalized level of new loan originations, we also saw an increase in the average rate on new loan originations to 4.29%, up from 4.07% last quarter.

Our SBA business continues to be a strong contributor to our business development efforts. Of the $360 million in loan production for the second quarter, $70.3 million were SBA loans. Of our SBA originations in the second quarter, $58.3 million were 7(a) loans.

The SCB's rankings for the first nine months of FY15 were just published last week. And I'm pleased to report that BBCN continues its leadership in this area, topping all other Korean-American banks. Overall BBCN is currently ranked 12th in the nation as of June 30, 2015.

Looking ahead as we have stated from time to time, the second half of the year has typically been a seasonally stronger period of a loan production for the bank. Entering the third quarter, our loan pipeline was at a high point for the year. Which leads us to believe that the trend of stronger loan production in the second half of the year should continue in 2015 as well.

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

Thank you, Kyu. As usual, we've provided quite a bit of detail in our press release, so I'm going to limit my discussion to just some of the more significant items in the quarter.

We had one large non-core item that positively impacted our results this quarter, which was the receipt of a one-time special dividend from the FHLB totaling $923,000. This special dividend had the effect of increasing our investment securities income and yield in the quarter, and had a positive impact of approximately 5 basis points on our net interest margin.

Our net interest income increased by $2.3 million from the preceding first quarter. Aside from the impact of the special dividend, the increase reflects a $124 million increase in our average loan balances. As well as a $595,000 increase in purchase accounting benefits versus the first quarter.

At June 30, we had approximately $18 million in accretable discount remaining on all of the acquired portfolios. While there will be fluctuations quarter-to-quarter as we have stated on each conference call over the last three and a half years, the discount recognized each quarter should continue to trend lower. Although not necessarily on a linear basis, as we can see in the first and second quarters of this year.

Excluding the impact of purchase accounting, our core net interest margin increased by 2 basis points from the preceding quarter. The improvement in our net interest margin was attributable to the special dividend from the FHLB as well as a favorable shift in our mix of earning assets, which offset a decline of 5 basis points in average loan yields.

As we mentioned over the past couple of calls, we had some large short-term deposits on the balance sheet that we kept in highly liquid assets. We utilized our cash balances and FHLB advances to manage those deposit outflows during the second quarter.

We also continued our strategy to bring our securities portfolio back to a more normalized percentage of total earning assets, after it had decreased to the low end of the range we target. The reduction in cash balances, the increase in the securities portfolio, and the growth in total average loans resulted in a positive shift mix in our mix of earning assets.

Moving on to non-interest income, most items were consistent with last quarter, with the exception of net gains on sales of securities as we did not recognize any gains this quarter.

Our SBA loan sale activity was relatively similar to last quarter, as we sold approximately $35.2 million in SBA loans versus $33 million. The premium in the secondary market has held steady at approximately 10%. As a reminder, the gain on sale from SBA loans that we post is net of broker fees and other payments.

Given that the 7(a) production of $58.3 million this quarter was considerably higher than the approximately $43 million in Q1. All things remaining the same, we would expect our SBA gain on sale next quarter to trend higher than the current $3.1 million.

Turning to non-interest expense. There were minor differences between the quarters, but most items were in the normal range of variance and amounted to a 1% decline from the first quarter. Overall, it was a good quarter of expense management, and we realized some improvement in our operating efficiencies as a result.

Moving to the balance sheet. Kevin and Kyu already discussed the loan portfolios, so I'll start with the securities portfolio.

The portfolio increased by approximately $63 million, or 8% from the end of the prior quarter. The securities we purchased were primarily mortgage backed securities and municipal bonds, and had an average yield in the range of 2.4%. The new securities were consistent with the duration profile that we target, and the overall portfolio continues to have a duration of around four years.

Turning to deposits. Our deposit growth was impacted by the out flow of the large short-term balances that I mentioned earlier. Outside of the impact of these larger temporary balances, the trends in deposit flows remain consistent with recent quarters, with growth overall in our core deposits.

Given our success in adding more commercial banking relationships, the strongest area of growth continues to be non-interest bearing deposits, which were up 4% from the end of the prior quarter. Since the end of 2014, non-interest bearing deposits have increased 9% and increased to 29.3% of total deposits from 27.1% at the end of the year.

Turning to asset quality. In general, we saw positive trends throughout the portfolio. At June 30, our non-accrual loans were $39.7 million compared with $38.8 million at the end of the prior quarter. But as a percentage of total loans, our non-accruals remained unchanged at 68 basis points.

Our total classified loans declined to $195 million at June 30, from $210 million at the end of the prior quarter. This continues a longer trend we've seen in classified loans, which have decreased by 19% over the past four quarters. In general, the decline has been driven by payoffs as well as loan upgrades.

We had $1.5 million in gross charge-offs during the second quarter, and $975,000 in recoveries resulting in net charge-offs of $476,000 for the quarter, or just 3 basis points of average loans on an annualized basis. Thanks in part to the success we've had with recoveries, we recorded a provision for credit losses of $1 million, which more than covered our net charge-offs, and provided for the growth we saw in the quarter. This resulted in an allowance to total loans of 1.21%, and a coverage ratio of non-performing loans of 72% at June 30, which were essentially unchanged from the end of the prior quarter.

With that, let me turn the call back to Kevin.

Thank you, Doug.

Financial results for the three months ended June 30, 2015, reflect solid execution across all areas of our business operations. We are particularly pleased with the consistency of our financial performance, as we continued to transform BBCN into a more diversified financial institution.

Aside from the new product offerings that are currently underway, we are also expanding our CMS offerings with two new cash management solutions in business payroll and merchant processing. In addition, we are also making progress enhancing our branch network.

Later this year, we expect to add to our presence in the Washington DC metropolitan area with the opening of our second full service branch in Centreville, Virginia. As you may recall, we acquired our current branch in Annandale, Virginia as part of the Foster Bank acquisition, and we are now looking forward to more active business development efforts in this geographic market.

As I stated on our last conference call, the Board and Management of BBCN remained highly focused on operating the Company with a long term perspective. Ultimately, it is our goal to deliver greater value to our customers, employees and shareholders as the premier Korean-American bank in the nation.

Underscoring our Board's confidence in the long-term prospect of BBCN and commitment to enhancing shareholder returns, we announced our third consecutive annual increase in our cash dividend. For shareholders of record as of the close of business on July 31, a cash dividend of $0.11 per share will be paid on or about August 14, 2015, representing a 10% increase.

We are in the midst of exciting times at BBCN, with growth happening all around us. And we look forward to keeping everyone apprized of our ongoing progress.

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

(Operator Instructions)

Our first question comes from Matthew Clark of Piper Jaffray.

Hey, good morning, everyone. Maybe first on expenses, you guys have done a great job of pulling the line there the last few quarters. Just wanted to get a sense for how we should think of that $39 million run-rate going forward with the new initiatives in place? And any additional hiring you might need to do?

Yes, this is Doug. While we've still as we've talked the last several quarters consider ourselves in net-investment mode, and there are a number of new ventures that Kevin alluded to you. That net investment in terms of G&A is really fairly minor as a percentage of our G&A for the next few quarters, so I'm not expecting a big ramp up in G&A.

The cost control that you have seen is not any one large item. It's very, very careful attention to a lot of little items where we've been able to get little phase to try to offset some of the investment we're making in new adventures with some improvements in efficiencies and other areas.

Any seasonality that we should think about going forward, or are you going to hold the line on $39 million?

There's no particular seasonality. The longer-term trend in terms of the absolute dollar amount probably still is upward, as I say, just because we are adding growth to some new-business units. But we expect to maintain a very good and tight efficiency ratio through that growth.

Great, good. And then on your reserves and the coverage ratios, it looks like reserves alone is down a couple of basis points at 1.21%. Can you just help us understand where we might see that ratio bottom? And maybe your overall, provisioning outlook for the year, for this year?

That actual coverage ratio I think is bouncing around in a fairly narrow range right now, and I don't see the re-coverage ratio moving very quickly in either direction. As far as provisioning, as the finance guy, I look at each quarter and try to figure out what's recurring and what's maybe a little bit special. As I looked at the provisioning in the current quarter, the only thing that was a little bit special I would say was our recoveries were a little higher than normal.

I might expect and I'm looking across the table at Mark here maybe $500,000 to $600,000 recovery, and we got closer to $1 million. So if we had lower recoveries and our provision had been 1.4% or 1.5% this quarter, I'd say that's a very completely, normal provision for us in this part of the cycle.

Got it. Thank you.

Our next question comes from Aaron Deer from Sandler O'Neill.

Good morning, everybody. This is Alex Moore stepping in for Aaron.

Just had a quick question regarding pay downs. Saw those ticked up a little bit in the second quarter. Is there anything you can attribute that to or provide any color on that? And do you have any expectations of where that should run in the coming quarters?

I'll let Kyu jump in if you know something I don't. But I look at that number and it bounces around in a range. And I don't think, the current quarter was higher than the average, but I don't think it was wildly abnormal. Do you have anything?

I think he's asking for pay-downs, right? Not pay offs.

Oh, excuse me, yes, pay-downs, correct.

Yes, and it was a little bit higher. But one or two borrowers doing a large refinancing or selling their building is stuff that can cause that kind of movement quarter to quarter, and that's really all I attribute that variation to the current quarter to. I'd look more at a year average rather than at any one quarter if you're trying to project it.

Got it. Thank you very much for that. Then just on the SBA front, are you guys seeing any more competition in the marketplace? Any kind of competition, and are there any new markets that you guys are looking at for SBA?

This is Jason. SBA, given the profitability of the product, you have to be in a competitive for a number of years. It will always be a competitive. But we've been adding our business-development officers in the area that we know the market. So in terms of competition, it's very strong, but we're doing a lot of initiative to really increase our production.

That's great. Thank you for that. And then just finally if I could, saw a slight uptick in special mention and I guess overall criticized loans for the quarter. Anything that drove the rise in special mention?

Yes this is Mark. We did have a little uptick in the special mention. It's really due to the couple of relationship.

One, just CRE that had a buyer and fully covered by insurance until it's renovated. That's why it's a little bit up in the air, so we took it down to special mention.

And another one, about $10 million relationship. They are undergoing the ownership's change, so we took it down to special mention until we find out exactly how everything is going to stack up.

But other than that, it's just two relationships that drove these downgrades. But we're still making a pretty good progress on improving the overall, classified level.

That's great. And just moving forward, would you expect it to hang around in this range, maybe improve a little bit? Is there any forecast you can provide?

Well it's always hard to forecast what's going to be going forward. But the trend line is that we are continuously making progress on the classified over last four quarters, and special mentions tend to be a little bit more noisy depending when a borrower's [these] big events.

That's great. Thank you very much for the color.

Our next question comes from Gary Tenner from D.A. Davidson.

Good morning, everybody. I had a couple of questions.

Kyu, I think you had mentioned that the largest new credit commitment in the quarter was to a US sub of [a crane] company. I wonder if you could give us any idea of the magnitude of the credit commitment there? And maybe also talk about what you expect to occur there on the deposit side over time?

It was a manufacturing company, so (inaudible) from Korea. And the Korean one was $25 million, we funded about $10 million last quarter and we do expect that we'll continue the business from the subsidiaries. We do request deposits for all the commercial loans, and we do service both deposits out of the state with our CMS products and services.

If I could just add, the deposit amount typically runs low-seven figure.

Okay. Great, thanks for that. And then just curious about the service charge line. Year to date, it's about 10% lower than it was first half of 2014. Has anything changed there in the way that either the accounting is showing up on the fee line, or whether there's been any changes in your fee structure?

Are you talking about the service charge on deposits?

Yes.

Yes, we have a couple of headwinds in that line, and most of that is coming from NSF fees. The negative part, we have some growth in other categories.

And part of that is industry trend with NSF fees being down in general in the industry. And the other part is that the natural, client-selection process we go through and the clients we target are not necessarily clients that are going to generate a lot of NSF fees. And the combination of those things has caused a decline in that one line item within service charges over the last year.

Okay, great. And then just one final question on the Annandale Market where you're opening a second branch. Is the market leadership in Annandale, has that changed since you acquired the one branch there in the Fosters deal, or is that the existing leadership that came over?

We cannot say we changed the leadership. It's the same as before, but we would like to.

So you've added, you're adding a branch, but you're still looking for new market leadership in northern Virginia?

Are you talking about staffing?

Well I'm talking about like a market President or your head lender in that market. Because the branch was part of the acquisition, so I'm just curious if you had changed over the leadership in that market.

We believe that geographic market is currently underserved by the Korean-American Banks. And there are a few competitors in the area, but I don't think there is any one single dominating Korean-American bank servicing the area.

And we want to be the dominating player there. So we are adding one branch there, and hopefully, we will capture the underserved portion of the Korean-American population in the metropolitan, Washington DC area.

Right, okay. And maybe I didn't ask the question clearly enough. But I'm just -- when you acquired Fosters and you inherited this branch in northern Virginia, did you change the people running that franchise or is it the people that were there when you acquired it?

We kept the staff from the Foster Bank.

You did?

For the new branch.

For the new branch, we are currently in the selecting process to hire new people.

Okay. All right, that's great. Thank you.

(Operator Instructions)

Our next question comes from Julianna [Kabritska] from KBW.

Good morning. I was hoping you might give us some more color on deposit flows. Doug, in your comments, you had mentioned some of the larger deposits have [flowed] out.

Could you refresh our memory what kind of deposits those were, and were those in the CD category? And also, could you give us more color on the DDA growth linked quarter, which was very nice?

I'll do the first part, and I'll let KYU jump in on the DDA growth. As far as the deposit outflows, we identified at the end of last year a very, very small list of customers in the neighborhood of $300 million. With the deposits where their relationship was much more less accommodating to them rather than deposits we would be able to invest for the long term.

And as a result, we kept that very short-term liquid assets. With the expectation that they would out flow in the first half of this year, which it did.

It was a mixture of CDs and money-markets that's flowed out over the first half of the year of close to $300 million in those customers. And I'll just add to that, because I always look at it internally what's happening to our growth with and without unusual things. And I look back over the last year, well actually several years, our core deposits, excluding those relationships that we've identified, has been growing at an annualized rate in the high, single digits just similarly to what we've guided on the loan side.

As we've been increasing our line of credit C&I loans, we've been attracting some large commercial deposits. And our commercial lenders have been focusing bringing those larger deposits.

Okay. And to follow-up on those comments. In terms of the relationships that you've identified that are flowing out the $300 million, is there any additional amount that you are looking for to flow out, or is that pretty much done?

And secondarily, as your loan growth and your deposit growth, core deposit growth and loan growth has been keeping lock step in the high, single digits. Could you refresh our memory as to what kind of a loan-to-deposit leverage ratio you'd like to run balance sheet at?

You mixed a lot of things there together. Yes, the customers we've identified the deposits have out flowed as we knew they would, and what's left is what I'd consider a normal mix of business.

In terms of loan-to-deposit ratio, if you look back at our last however many quarters we've been in existence as BBCN, we've been in the very high 90%s, the very high 90%s. That's something we can manage fairly well on our side, it's worked very well for us. Our longer-term goal probably would be to lower that to the mid to lower 90%s, but that's not something I feel like we need to do in the next quarter or two.

And then final thoughts, and I'll step back. So when we think about your growth into a rising-rate environment, should we think about you maintaining this high 90%s leverage and therefore maybe using higher cost of funds to keep the deposits in balance with loans? Or should we be thinking about the fact that you'll be adding more overnight borrowings into the mix?

Well, we used overnight, not overnight borrowings, we used borrowings --

Excuse me, long-term borrowings. Sorry, I didn't mean to say overnight.

As a -- we will keep a mix of borrowings and some wholesale fundings as part of our funding strategy going forward. That as a percentage of our balance sheet is not going to grow dramatically.

It's something we use both to manage interest-rate risk, to fine tune interest-rate risk, and to manage very short-term liquidity needs. But we're not expecting a significant change in the mix of our core versus wholesale funding.

Got it. And then final question on a different topic. In terms of your loan growth, you had mentioned returning back to a more level of fixed versus variable originations this quarter.

As anticipation of rising interest rates are starting to come through, are you seeing borrower demand more for longer term fixed-rate funding? Or any shifts in borrower behavior that you can comment on?

Yes, we always see the borrowers requesting or demanding a longer-term fixed rate. We had even seen a ten-year request, so we are not doing those. We are trying to stay within 5% to 7% if we're doing a fixed rate. And also occasionally we may do a swap, interest-rate swap transaction, if that's the only way to get the deals done.

Got it. Thank you very much for the color.

Thank you.

(Operator Instructions)

Our next question comes from Don Worthington from Raymond James.

Good morning, everyone. Just wanted to see if you had an update on the leasing product. You talked about residential mortgages and credit cards, but how the leasing product is going.

Good morning, Don. This is Jason.

We launched the [incriminating] product last year, and we did training our vendor for the last six months to really engage with our commercial as well as the commercial borrowers. So we did originate a little SFI maybe for the 2Q, but even the cyclical type of finance we believe stays a pretty active activity in the second half. And we do expect to project our originating about $25 million for 2015, so we're really engaging with our lenders to really discuss with our borrowers capital expenditure and better assist in their financing needs.

Okay, thanks, Jason. Appreciate it.

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference 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. Bye-bye.

Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.