Hope Bancorp Inc (HOPE) 2015 Q4 法說會逐字稿

Good day and welcome to the BBCN Bancorp Fourth Quarter 2015 earnings conference call. After today's presentation there will be an opportunity to ask questions.

(Operator Instructions)

I would now like to turn the conference over to Ms. Angie Yang, Senior Vice President Investor Relations. Please go ahead.

Thank you, Andrew. Good morning everyone and thank you for joining us for the BBCN 2015 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 the future financial performance of the company and future events including statements regarding the proposed transaction between BBCN Bancorp and Wilshire Bancorp such as expected timelines for completing the transactions, future financial and operating results, benefits and synergies of the proposed transaction. These statements include 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 current expectation, estimates, forecasts, and projections, and management assumptions about the future performance of BBCN Bancorp and the combined entity with Wilshire Bancorp. These statements are not guarantees of future performance. Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements.

The closing of the proposed transaction is subject to regulatory approvals, the approval of the shareholders of both BBCN Bancorp and Wilshire Bancorp and other customary closing conditions. If the transaction is consummated, we may not achieve anticipated synergies, cost savings, and other benefits from the transaction as a result of higher than anticipated transaction costs, deposit attrition, operating costs, customer loss, and business disruption following the merger including difficulties in integrating the two operations. For a more complete list of descriptions of risks and uncertainties, please refer to BBCN Bancorp's Form 10-K for the year ended December 31, 2014 as amended and Wilshire Bancorp's Form 10-K for the year ended December 31, 2014, as well as other filings made by BBCN and Wilshire with the SEC.

As usual we have allotted one hour for this call. Presenting for 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 and the full year before asking Kyu and Doug to provide more detailed information on the financial results. When they are finished, I will wrap it up with some closing comments before we open up the call for questions.

Let's begin. We finished 2015 with a very strong quarter that reflects the effectiveness of our marketing efforts in driving quality balanced growth and the disciplined expense control that allows us to continue to operate with a high level of efficiency. We had an exceptionally strong quarter of loan production originating $550 million in new loans, which was [$118 million] more than our previous high for loan production in a quarter.

During all of 2015, we supported our customers and communities with $1.69 billion in new loans, which represents a 27% increase over new loan volumes in 2014. In terms of deposits, our total balances increased by approximately 5% during the quarter and 11% during the full year. And total assets increased 4% during the 2015 fourth quarter and 11% over the course of the year reflecting quality organic growth.

We maintained an active focus on cost management while at the same time making progress diversifying our product offering. This enabled us to continue delivering solid earnings performance. We generated $22.9 million in net income or $0.29 per share for the 2015 fourth quarter. The $1.4 million of merger-related expense in the fourth quarter lowered our net income by approximately $0.02 per share. For the full year net income increased to $92.3 million or $1.16 per diluted common share.

Since BBCN was created through the historic merger of equals four years ago, we have benefited from the competitive advantages that exist from being the largest bank Korean-American in the country. Comparing year-end 2015 with year-end 2011 results upon the merger completion, our loan portfolio has grown by 67%. Our total deposit base has increased 61%. Total assets have increased 53%. And as I stated on the last conference call, quarter after quarter we have been consistent in delivering strong financial performance, which has lead to solid earnings growth year after year. Now let me turn the call over to Kyu to provide additional details on our business development efforts in the fourth quarter.

Thank you, Kevin, and good morning everyone. As Kevin mentioned, we had an exceptionally strong quarter of loan production for our 2015 fourth quarter. Commercial real estate loans accounted for 81% of the originations in the fourth quarter with balanced growth in all of our major property categories. Every major property category increased between 3% and 7% during the quarter. With the exception of multi-family, which was up 11% off a much smaller base than the other major portfolios.

We had another strong quarter in commercial loan production. We extended $105 million in commitments to commercial customers and funded $85 million in new C&I loans by the end of the quarter. Overall, we now have $1.1 billion in total credit commitments outstanding to commercial customers. With a utilization rate of [50% online for the credit] at December 31, 2015 The C&I loans booked in this quarter were broad based with no particular concentration in any one industry.

We continue to be very consistent with our SBA loan production. During the fourth quarter we originated $82 million in SBA loans of which $39 million were sellable 7(a) loans. Overall, our fourth quarter originations consisted of 53% fixed-rate loans and 47% variable rate. Fairly similar to what we saw in the proceeding quarter. The average rate on new loan originations also remained fairly consistent increasing one basis point from the prior quarter to 4.24%.

Looking forward into the first quarter of 2016, our pipeline remains strong and at higher levels than where it was comparatively a year ago. But understandably at a lower level than where we were entering the seasonally stronger second half of the year. Overall, for 2016 we expect to continue being an active lender in our markets and are projecting organic loan growth to approach the low double digits.

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

Thank you, Kyu. As usual I will limit my discussion to just some of the more significant items in the quarter since we provide quite a bit of detail in our press release.

Our net interest income increased by $3 million from the preceding third quarter. The increase was driven primarily by a 3% or $185 million increase in our average loan balances and to a lesser extent an increase in our securities portfolio. Compared with the prior quarter the impact of purchase accounting benefits was approximately $600,000 higher at $4.9 million. But the impact on our net interest margin was fairly minor.

Our core net interest margin was relatively stable from the prior quarter at 3.59%, with not much change in our average loan yields or our cost of deposits excluding the impact of purchase accounting adjustments.

As I move to non-interest income, I want to note that we have reclassified our OREO related income and expense in to one amount that is netted out under non-interest expense to be more consistent with the prevailing accounting treatments. And we've adjusted all the historical periods reported today to reflect this change.

Our net interest income declined $200,000 or 2% from the proceeding third quarter. We had slight decreases in deposit service fees and gains on sales of SBA loans, which was partially offset by higher other income. We sold $41.9 million in SBA loans during the fourth quarter compared with $42.4 million last quarter. However the gain on sale is lower due to a decline in the premium to 8.75%. We had been seeing fairly consistent premiums in the 10% range for the past few years, but the secondary market softened a bit in the fourth quarter. In addition the mix of loans that we sold this quarter included a number of larger SBA loans, which called for lower premiums than the average.

Turning to non-interest expense, there were minor differences between the quarters but most items were in the normal range of variation. Excluding the merger-related expense our overall expense levels were essentially flat with the prior quarter. The most significant difference was the aforementioned net OREO related income expense lines as we had lower OREO rental this quarter after the unusually large amount we recognized in the third quarter. On a core basis excluding the merger-related expense, we were very pleased that we were able to maintain our expense levels essentially flat on a quarter-to-quarter basis while increasing total revenue by approximately 3.5%.

Moving on to asset quality at December 31 our nonaccrual loans were $40.8 million up from $32.4 million at end of the prior quarter. The increase was primarily due to one relationship with an export company consisting of a CRE loan and C&I line of credit aggregating $11 million. We have established a specific reserve of $1.7 million related to this credit relationship. With additional guarantees from the parent company, we would not expect any further losses on this relationship beyond what we have already reserved.

Within the broader non-performing loan category we had a $6.3 million decline in TDRs resulting from upgrades and payoffs. As a percentage of total loans, our non-performing loans, consisting of both non-accruals and TDRs, dropped to 1.43% from 1.45% at the end of the prior quarter. Total classified loans were $204 million at December 31, up from $179 million at the end of the prior quarter. The increase was driven by some migration of credits from special mention to substandard.

We saw a $13 million decline of the broader category of total criticized and classified assets during the fourth quarter, which was driven by a low-level of inflow into the special mention category. We had $557,000 in gross charge offs during the fourth quarter and $955,000 in recoveries resulting in net recoveries of $398,000 for the quarter. This makes for three quarters in 2015 that we have been in a net recovery position and continues our very low loss experience. For the full year we had net recoveries of $650,000.

We recorded a provision for loan losses of $4.9 million in the fourth quarter. There were three primary drivers of the provision this quarter. First, the overall rate of growth in the total loan portfolio was higher than normal at 18% on an annualized basis, which increased our reserve requirement. Second, the rate of growth in certain segments of the portfolio played a role in the provision requirement as well. And third, as I mentioned we set aside a $1.7 million specific reserve for one relationship that migrated to non-accrual status.

With the provision recorded this quarter, both our overall allowance and our coverage ratio of non-performing loans increased from the end of prior quarter. At December 31 our allowance to total loans was 1.22% while our coverage ratio of non-performing loans was 86%. With that let me turn the call back to Kevin.

Thank you, Doug. Since this is our year-end call, let me take a few minutes to discuss some of the highlights of another successful year for BBCN.

2015 represents a solid year of achievements marked by robust loan origination volumes, disciplined cost management and strategic business expansion. For the full year we were able to deliver total loan growth of 12%, which exceeded our initial guidance for the year of high single digits. We continued to build our commercial lending platform, which made a significant contribution to our overall loan originations last year. We've strengthened our leadership position in SBA lending with our best year ever. We finished as the top Korean-American bank in SBA originations when the SBA published its annual rankings for the fiscal year ended September 30. And we had an excellent start to the current fiscal year with our fourth quarter originations.

We also had a strong year of deposit gathering with our total deposits increasing 11%. We've continued building the foundation for a more diversified business model in the future with investments in new areas including equipment leasing, residential mortgage, credit cards, and wealth management. While these businesses are not large enough to have a meaningful impact on our financial results at this point, the financial strength we have as the largest Korean-American bank provides us with the ability to truly think long term and make investments in the business that will pay dividends in the years ahead.

And of course the most significant development of the year was the signing of our merger agreement with Wilshire Bancorp. We have been very pleased by the positive response that we have received from our shareholders and the broader Korean-American community who have clearly understood the merits and strategic rationale for this merger.

In the four years since BBCN was created, we have benefited from the competitive advantages that exist from being the premier Korean-American bank in the nation. From brand awareness and recruiting to higher lending limits and more resources available for investments in technology. Being the clear leader in the Korean-American community has created growth opportunities for BBCN that neither of the predecessor companies would have had as standalone companies.

As our financial performance clearly demonstrates that one plus one can equal greater than two. With the combination of BBCN and Wilshire, we anticipate that the competitive advantages we have enjoyed to date will be taken to an even greater level resulting in even more opportunities to profitably grow our franchise and create additional value for shareholders. The combined entity will enjoy a significantly stronger competitive position with unrivaled leadership among our niche peers and unparallel opportunity to cross-sell a comprehensive offering of products and services. We will be the only Korean-American bank with a true national footprint and solid presence in all of the top geographic markets of our targeted communities.

Undoubtedly we are very excited about the opportunities that lie ahead for the first and only super regional Korean-American bank. It is well understood that mergers of equals are challenging, but thankfully we have been through this before and we have succeeded. And with this experience, we are working diligently together to ensure that our closings and integration process allows us to realize the synergies from this merger of equals as quickly as possible.

Since taking on the leadership at BBCN, I believe I have stated a number of times that these are exciting times for us at the company. With the planned combination of the top two lenders in the Korean-American banking space, we believe the prospects for improving upon the value proposition for our customers, employees, and shareholders are significantly enhanced. And we look forward to keeping everyone apprised of our progress.

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

We will now begin the question-and-answer session.

(Operator Instructions)

The first question comes from Aaron Deer of Sandler O'Neill & Partners.

Please go ahead.

Hello, good morning, everyone.

Good morning.

The growth again this quarter was very impressive. And, in fact, the growth at Wilshire this quarter was also quite impressive.

I guess in seeing most of the balance sheet increases come in commercial real estate, I was hoping to get an update -- particularly in light of the reiterated regulatory guidance -- of how you're viewing the commercial real estate concentration. And if you could give what your kind of estimated pro forma for the merger, CRE to risk-based capital ratio is going to be.

Good morning, Aaron.

I don't have the pro forma CRA concentration against lease space capital right now. I had it, but it's off my head. I can provide that offline.

Regards to the new guidance, actually it's not a new guidance. As of December 2015, that was the reminder on the inter-agency guidance of December 2006. And all the recommended practices and procedures have been already incorporated into our policy and procedures.

I don't think it's going to have a meaningful impact what we do day-to-day. The focus is more on the measuring/monitoring side of the ledger.

Okay, so you wouldn't anticipate any need to dial back growth on the CRE side and maybe strengthen efforts in the CNI or other categories?

It is true, we have to continue to focus on CNI growth and continue to invest in that arena. At the same time, CRE is also continues to be a bread and butter for our institution and our space.

Relatably, with all the focus on the merger, I want to instead maybe get an update on some of your other lending initiatives and leasing credit card and wealth management and maybe talk a little bit about how those initiatives are progressing.

Good morning, Aaron. Jason Kim here.

As you mentioned about the three initiatives that we started about a year ago, let me give you an update on the equipment leasing business. We are seeing a lot of interest within our customer base, and for originations are currently running at about $45 million per quarter range. Based on the volume of opportunities that we are seeing, we expect this business to ramp up nicely this year.

In the credit card business, we are adding about 1,000 new cardholders per quarter. It's a nice mix of consumer business accounts. And the outstanding balances are significant, as we are seeing the majority of customers are paying off the balances each month.

But we are seeing a lot of transaction activities, particularly from the business accounts. So the interchange fee that monitors income are ramping up nicely. And we expect to see a pretty good boost in that area.

On the residential mortgage side, Southern California and the Midwest are fully up and running. And we posted about $14 million in origination in the fourth quarter.

We're currently in the process of launching the New York and New Jersey operation. And the final launch in the Pacific Northwest and Northern California at the beginning of next quarter. So we expect to see a steady acceleration of volume quarter over quarter in 2016.

Aaron, following up on your first question in regards to the pro forma, I don't have the exact figure. But my recollection is that on a combined pro forma basis, the CRA concentration actually goes down slightly because new share is slightly less CRE-sensitive.

Okay, terrific. Thanks for taking my questions this morning.

Aaron, in addition to what Jason gave to you, I will give you a little update on the wealth management offering.

Oh, great, thank you, Kyu.

It's important to know that our strategy with our new business lines is to cross sell these products to our existing customer base to deepen the client relationship. And I think we are meeting that goal continuously.

For the wealth management side, we launched the product last April. And we actually are pleased to see that we are getting increasing number of reports from our branches. And we did meet our projection in 2015, and we hope to bring forward the improvement into 2016. And I do have confidence that we will do so.

As that business grows, will you start sharing what the assets under management are?

Yes, at some point, as it becomes more significant. I mean, that is not a meaningful number really toward [discolures] today. And as Kyu mentioned, our near-term value is cross selling our valued customers. But over the next year or so that will be a growing AUM that we will probably start disclosing.

All right. Thank you very much.

Thank you.

(Operator Instructions)

The next question comes from Matthew Clark of Piper Jaffray.

Please go ahead.

Good morning, everyone.

Good morning.

Maybe just first on reserves, obviously you mentioned a portion of that was related to a specific reserve. You had also faster growth this quarter. So I think it's fair to assume that provision will come in a little bit here going forward.

But just in thinking about coverage ratios, the reserve-to-loan ratio in particular for legacy BBCN, is it fair to assume that we've troughed here at $122 million of total loans? Or do you think there might be some additional release going forward?

Oh, I don't think it goes back dramatically lower. But I don't think it's at absolute bottom.

Okay. And then just within the non-interest expense run rate, just want to make sure that's a good run rate going forward. You know, thinking about seasonality, also looking at the credit-related expense line, that being down over $1 million, whether or not that's sustainable.

Yes, I mean, the credit-related expense is never going to be straight line. It's going to bounce up and down. But overall, if I look at all the pluses and minuses that went in in the quarter, this was a pretty normal quarter as far as expense run rate.

Okay. And then just on deposit costs, up a few basis points this quarter -- I think to 60 basis points all in. Can you give us a sense for the posted rate on your new deposits,? Just trying to get a sense for whether or not we might see a continued creep up in deposit costs or not?

You know, we've been watching that very closely, particularly since the Fed raised our rates in December. We're not seeing much of an increase in posted rates. We didn't really see a lot of change in rates with the Fed move. But we did really see, in the three months before that, a lot more pressure in terms of promotional pricing. And that's been causing a one or two basis points creep in our deposit cost for the last really five or six months.

And I think that is still the direction we're in, with a 1 or 2 basis-point creep for the current rate. We probably saw the trough in that about six months ago in terms of our absolute low in this part of the cycle.

Okay, great.

And then maybe just on the margin, if I may, and the outlook there. Any update on your comfort with the pro forma margin with Wilshire, both on a reported and core basis? Obviously some benefit, but just curious if you have any update on that front.

No, no update on the projections with Wilshire. I mean, we've been talking for the last, it feels like forever, that we will still have some margin pressure because the loan we're originating in the low [420s] is lower than our portfolio. But that pace of margin pressure has been very, very slow.

I think that it is really slow going in to the first quarter. We're talking about 2 basis points, give or take.

Got it, thank you.

The next question comes from Julianna Balicka of KBW.

Please go ahead.

Good morning.

Good morning.

A couple questions, if I may. One, to follow up on the deposit question, you had said that you're looking at a 1- or 2-basis point deposit creep per quarter kind of due to promotional pricing pressure.

What is your expectation post the Wilshire deal close? Is that pressure going to abate, given your new balance sheet? Or what are your thoughts of post close deposit pricing movement?

Well, you want me to tell the future, huh?

You know, all other things being equal, there is one less competitor. I think it is less us competing with Wilshire. It's more of the mind set of the consumer base is that we're in a rising rate environment. This has it made it a little bit tough on the margin?

Would you agree Kyu?

Kyu is nodding. She agrees. (laughter) But, yes, it helps a little bit. But I wouldn't look for that for some big windfall.

Okay. And in regards to your merger with Wilshire, what has been the response in your market by your smaller competitors in regards to their behavior as far as deposits or loans or employees, etc?

Well, let me first cover the employee part. This is Kevin.

Our competitors are always targeting us at BBCN, top bankers. So that's not anything new for us. With the prospect of being a banker for the only super regional Korean American bank in the country, I think there are greater than the usual competitive barriers that any offer would have to overcome to steal our employees.

We believe the combined Company will certainly provide the best opportunities for the top-performing bankers in the market. So I don't see anything really different in terms of employee recruiting before and after the merger announcement.

And in regards to your competitor's behavior as far as loan or deposit growth -- pricing, I mean?

I'll speak for Kyu here, too, because I think Kyu and I usually agree. No, it was competitive before; and it was competitive after the announcement. I don't think there's been any sea change caused by the deal.

Yes, even after merger our custom base doesn't change overnight.

We'll continue to be nurturing our customers, and we will do everything to defend our position. I'm sure they will try to steal away our customers, employees, and all that. But I don't think we will lose our customer base or any of the employees to our smaller competitors.

Okay. And then maybe if I could switch. On the SBA gain in premiums, you had remarked that this last quarter you had some larger loans that you sold. And also, premiums have tried to come down a little.

What is your outlook quarter-to-date as far as the trends that are going on right now in SBA and your thoughts for 2016?

Hi, Julianna.

Well, actually this question was released last quarter in our call. We kind of discussed about kind of a stable market, from the perspective and expectations from the secondary market analyst.

They were correct for the last three years, exception of fourth quarter in 2015. And I think we need to probably see a couple more quarters to really better understand the clarity of the secondary market. So maybe I'll keep you updated in our next call.

That sounds good. Thank you very much.

(Operator Instructions)

The next question comes from Gary Tenner of D.A. Davidson.

Please go ahead.

Thanks, good morning.

Just had a follow up on the provision comments for the quarter. You mentioned the overall pace of growth, as well as the specific reserve. And then the pace of growth in some specific segments.

Just taking a look at where most of the growth came from the quarter, it was in the commercial real estate segment and pretty ratable across that segment. I wonder if you could just comment on which of the underlying portfolio segments are requiring a larger reserve today.

I can address that.

If you see our press release table, Retail had a significant growth in this quarter. Retail commercial properties had a significant growth. That has pulled in extra reserve requirement.

Okay. And do you typically provide at a higher level for that? Or is there anything in the underlining environment that's driving the higher reserve?

No, it's really more of a matter of most of our reserve is based on qualitative factors now. You have to have a consistent and directionally correct methodology. And our consistent methodology is to assign higher loss factors in periods where we have above-normal run rate growth rates.

So by definition in our methodology, a portfolio that's growing at an annualized rate of 15% to 20% rather than 8% to 10% is riskier for that quarter. And it gets added to the qualitative factors.

And just a sheer value drive, the loan outstanding growth has the additional impact to be a reserve requirement.

I'm sorry, I missed that last comment. Can you repeat that?

The qualitative factor is also outstanding driven. So as we cross over $6 billion in loans outstanding, it requires a higher reserve requirement.

Okay, thanks very much.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Thank you, Andrew.

Once again, thank you all for joining us today. We look forward to speaking with you next quarter. Bye, everyone.

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