Hope Bancorp Inc (HOPE) 2016 Q1 法說會逐字稿

Good day and welcome to the BBCN Bancorp Q1 2016 earnings conference call and webcast.

(Operator Instructions)

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

Thank you, Kate. Good morning, everyone, and thank you for joining us for the BBCN 2016 first-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 the expected timeline for completing the transaction, future financial and operating results, and benefits and synergies of the proposed transaction. 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 current expectations, estimates, forecasts, and projections, and Management's 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 and risks and uncertainties, please refer to BBCN Bancorp's Form 10-K for the year ended December 31, 2015, and Wilshire Bancorp's Form 10-K for the year ended December 31, 2015, as well as other filings made by BBCN and Wilshire with the FCC, including the registration statement on Form S-4 that includes the preliminary joint proxy statement prospectus of BBCN and Wilshire.

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 are finished, I'll wrap it up with some closing comments before we open up the call for questions. Let's begin.

We delivered another quarter of consistent execution, highlighted by solid balance sheet growth, stable expense levels, and low credit costs. While new loan originations are down from the seasonally higher and record fourth quarter, we are pleased with the improved mix of new loans, with increased contributions of commercial and consumer loans. We had $334 million in new loan originations during the first quarter, of which commercial real estate loans accounted for 63%, C&I loans 30%, and consumer loans approximately 8%.

We continue to make steady progress in building our newer business lines, including residential mortgage and credit cards, which are driving solid growth in our consumer portfolio. The consumer portfolio increased by $21.5 million in the first quarter, which accounted for 17% of the total growth in our portfolio. Now that we are fully launched with the residential mortgage offering across all of our core markets, we look forward to the ramp-up of this new business line and its increasing contributions to the growth in our consumer portfolio.

As these newer businesses continue to scale, we are seeing the benefits of our more diversified model, as consumer lending helped compensate for the seasonally slower activity we typically see in the first quarter. As a result of the strong growth we saw in the consumer lending, we were still able to grow our overall portfolio at an annualized rate of approximately 8% in the first quarter.

Overall, our 2016 first quarter demonstrates relative stability in terms of our yields on interest earning assets, net interest margin, and operating expenses, along with a continuation of low credit costs. Notwithstanding the lower gains on sales of SBA loans in the quarter, which Doug will discuss in more detail, and merger related expenses of $1.2 million, which lowered our net income by a little more than $0.01 per share, we continue to demonstrate the stability and strength of our earnings platform.

For the first quarter, we generated $23.6 million in net income, or $0.30 per diluted common share. This is up from $22.9 million, or $0.29 per diluted share, in the preceding fourth quarter, and $21.4 million, or $0.27 per diluted share, a year ago.

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

Thank you, Kevin, and good morning, everyone. As Kevin mentioned, we had $334 million in loan production for the first quarter. Coming off of a record first quarter, we needed some time to rebuild our loan pipeline, which is not unusual at the start of a year. However, this year we also had the added headwind of general nervousness and macroeconomic uncertainty to start the year, which reduced loan demand and slowed the rebuild of our pipeline to the latter part of the first quarter.

We saw the most pronounced effect on commercial real estate loan production, where we saw fewer opportunities to finance new purchases of commercial properties. New purchases comprised just 37% of our CRE loan originations in the first quarter and recent reports seem to support that this may be an industry-wide phenomenon.

In terms of the construction lending, our outstandings increased by approximately $19 million, or 16%, from the start of the year. The increase in outstandings is attributed approximately 50%/50% to new construction loans and additional disbursements for previously booked construction projects. In total, we had $298 million in outstanding construction commitments as of March 31, 2016, and while we are not aggressively growing this portion of our portfolio, this is another source of loan growth as fundings increase.

The overall CRE portfolio increased by approximately 1% during the first quarter, with the growth well-balanced across all major property categories. We had between 1% and 3% growth in each of the retail, hotel/motel, gas station and car wash, mixed use, and multifamily property categories. The general slowdown we saw in loan demand also impacted our SBA loan production.

During the first quarter, which typically is the slowest quarter of the year, we originated $54.3 million in SBA loans, of which $37.6 million were sellable 7(a) loans. In contrast to the CRE and SBA markets, we did not see a slowdown in C&I loan production, which helped drive 4% growth in this portfolio from the end of 2015.

We extended $201 million in commitments to commercial customers and funded $99 million in new C&I loans by the end of the quarter, which is comparable to the production we had in the first quarter of last year. Overall, we now have $1.2 billion in total credit commitments outstanding to commercial customers, with a utilization rate of 50% on [life of] the credit at March 31, 2016. The C&I loans booked this quarter were broad-based, with no particular concentration in any one industry.

And as Kevin mentioned, we are seeing a growing contribution from our consumer lending businesses, which contributed $25 million in loan production in the first quarter. We saw a shift in demand toward variable rate loans in the first quarter, with 62% of our total originations being variable rate, and only 38% being fixed rate.

Despite this shift toward variable rate loans, the average rate on new loan originations increased to 4.29% from 4.24% in the preceding quarter. This was primarily due to a 28-basis point increase in the average rate on new variable rate loans.

Although the year started a bit slower than recent years, we are seeing more opportunities develop and the loan pipeline going into the second quarter building up nicely. As a result, we continue to believe that our organic loan growth will once again approach the low double-digits for the full year.

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 was essentially flat with the preceding fourth quarter. Although we had an increase in average loans of $167 million, a modest decline in our net interest margin offset this benefit.

Compared with the prior quarter, the impact of purchase accounting benefits was more than $900,000 lower at $4 million, which accounted for the vast majority of the decline in our reported net interest margin. Excluding this impact, our core net interest margin increased by 1 basis point from the prior quarter to 3.6%, driven by a 2-basis point increases in our weighted average yield on loans and a 3-basis point increase in a yield on our investment portfolio.

These increases more than offset an increase in our deposit costs, which continue to creep up due to competitive pricing in our markets. Our total cost of deposits was 63 basis points in the first quarter, up from 60 basis points in the prior quarter. Our non-interest income declined by $2.2 million, or 20%, from the preceding fourth quarter. The primary driver of the decline was a lower income from the gain on sale of SBA loans.

We sold just $23.8 million in SBA loans during the first quarter, compared with $41.9 million in the preceding fourth quarter and $32.5 million in the prior-year first quarter. While production of sellable 7(a) loans of $37.6 million was similar to the preceding quarter's production of $39.4 million, we entered the first quarter with very low inventory of 7(a) loans held for sale. Much of the production in the fourth quarter was front-ended and was actually sold during the quarter.

Due to the timing of new SBA production, the overall volume of sales that we were able to complete in the first quarter was comparatively low, which of course impacted the amount of our gain on sale income. The other less controllable factor that has a direct impact on the gain on sale income recognized in a given quarter is the premium available in the market.

The premium for the first quarter increased modestly to 8.94% from 8.74% in the preceding quarter. It was down by more than 200 basis points when compared to 10.96% in the year-ago first quarter. In terms of SBA gains on sales for the balance of 2016, we are projecting SBA originations for the full year will parallel the overall growth in our loan portfolio of high single- to low double-digits.

The gains recognized will be dependent on the actual amounts sold in a given quarter and the going premiums available in the market. Just keep in mind that this is a seasonal business, with the first quarter tending to be the slowest, and volumes being more heavily weighted in the second half of the year.

Turning to non-interest expense, there were minor differences between the quarters, but most items were in the normal range of variation. The most significant difference from the preceding quarter was in our net OREO-related income expense line, where we went from $154,000 in income in the fourth quarter to $1.4 million in expense in the first quarter.

As we've mentioned in the past, this tends to be a volatile line item and somewhat difficult to project. But even with the large swing we saw from quarter to quarter, the amount of OREO-related expense we recorded in the first quarter was still within the typical range that we have seen over the past few years.

Moving on to asset quality, at March 31, our non-accrual loans were $43.5 million, up from $40.8 million at the end of the prior quarter. We had total in-flow of $4.4 million in the non-accruals during the first quarter, which was comprised of a number of smaller loans, with no particular commonality from a geographic or industry perspective. There were unique issues causing each credit to be downgraded to non-accrual.

At March 31, approximately 68% of our non-accrual loans were current on their payments. As a percentage of total loans, total non-performing loans, consisting of both non-accruals and PDRs, increased to 1.51% from 1.43% at the end of the prior quarter, with 85% of non-performing loans current on their payments. Total classified loans of $204 million was essentially unchanged from the end of the prior quarter.

We had $821,000 in gross charge-offs during the first quarter and $769,000 in recoveries, resulting in net charge-offs of $52,000 for the quarter, or well below 1 basis point of total loans. We recorded a provision for loan losses of $500,000 in the first quarter, down from $4.9 million in the preceding fourth quarter, during which we booked a record level of new loans.

Relative to the fourth quarter, the lower provision required this quarter reflects the lower level of growth in the loan portfolio, the more balanced growth within the CRE portfolio, and the low level of net charge-offs. The provision recorded in the first quarter brought our allowance to total loans to 1.21% at March 31, while our coverage ratio of non-performing loans was 80%.

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

Thank you, Doug. Considering BBCN's consistent financial performance, our ongoing progress in becoming a more diversified financial institution, and the pending combination with the second strongest commercial lender in our space, we remain quite optimistic about the prospects of our Organization and believe we are very well-positioned to further enhance the value that we provide to our customers, communities, employees, and shareholders.

Now, before we open up the call for Q&A, let me just provide a few comments on the progress we're making with the merger. As you should all know by now, we filed our registration statement on Form S-4 in early March, with year-end audited, financials which includes a preliminary joint proxy statement prospectus of BBCN and Wilshire. We would hope to have the definitive joint proxy statement prospectus filed in the coming weeks, followed by the shareholder votes likely in June.

Given the current timeline, we would expect to complete the merger vehicles with Wilshire some time in the third quarter of the year, and we are working diligently together in planning for the merger completion and integration of our two organizations, so that we can realize the synergies of this combination as soon as practicable. We still have a lot of work ahead of us, but considering the dedication and commitment of the collective Boards of Directors and Management teams of BBCN and Wilshire, I am confident that we are up for the task.

I would just like to say thank you to all of our shareholders who have shown such strong support for BBCN, as well as for the pending transformational merger with Wilshire. I would also like to thank all of our employees for their hard work and dedication. M&A transactions, especially ones that are positioned as mergers of equals, tend to be extremely challenging for the employee base. Without their full participation in the merger planning activities, in addition to their continued focus on the day-to-day responsibilities, we would not be as well-positioned as we are today.

We very much look forward to keeping everyone apprised of our progress. With that, let's open up the call to answer any questions you may have. Operator, please open up the call.

(Operator Instructions)

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

Good morning, everyone.

Good morning.

Good morning.

It looked like a pretty solid quarter. I just have a few questions. First for Doug, you mentioned the swing in the OREO costs in the quarter. I'm curious, with the $1.4 million OREO charge, how big was the property that was sold there, and when was that last appraised and what was the mark on that at the time of the last appraisal?

That isn't one large transaction. That's a mix of OREO-related expenses, including things like property taxes, and there's some seasonality to that. There wasn't anything -- I don't think there was an item related to one property more than a couple hundred thousand dollars in the quarter.

Okay. Very good. And then Kyu, on the C&I growth in the quarter, it's encouraging to see you continue to make progress on that. Was that all self-originated or are there any participations that are contributing to that growth?

One.

The majority of that is self-originated.

Okay. Any percentage in terms of the split of self-originated versus participation?

Hold on for a second. Majority of that is the self-originated. We did have one participation -- national syndicated participation.

Okay. And then on the residential mortgage platform, now that, that's built out across the franchise, in terms of the products that are being offered through that, is that all QM? Are you doing any one-off product offerings on your residential offering?

Yes, Aaron. The majority of our residential mortgage loans have been five-year hybrids, both conforming and nonconforming, and the breakout between the purchase and refinanced transactions has been about 50%/50%. So additionally -- want to give you a little color. We're pretty pleased of the fact that our branch has been a very active -- cross-selling this offering and we completed our regional rollout last year, and we're seeing very active referrals within our BBCN retail network.

Okay. So a combination of conforming, nonconforming, but all fully documented borrowers?

[Obah] AQ, asset qualifiers, which yields a little bit more higher yield, so that's helping our portfolio, building the consumer residential portfolio.

Okay. Good stuff and good luck with the continued progress on the merger. Thanks for taking my questions.

Thank you.

The next question is from Matthew Clark of Piper Jaffray. Please go ahead.

Good morning.

Good morning.

Just wanted to clarify your organic loan growth guidance. It sounded like in your prepared remarks you used the term approach low double-digits, and then the commentary on SBA for originations would be up in the high single-digits to low double-digits consistent with the loan growth. Just want to clarify and make sure that we're on the same page in terms of your organic loan growth guidance. Is that also high single-digits to low double-digits?

Yes, that's correct. We've been talking really for a couple years, we've been saying high single-digits. At least half that time we dipped over the 10%, and we're giving guidance consistent with that history.

Okay. And then can you just remind us of the -- I can easily pull it but if you have it, the originations, SBA originations for last year?

Yes, Matthew, just to give you a 2015 figure, let me just give you some of the stats from the past three years. For the past three years, our projection has been high single digit-growth, which we have achieved. For 2015, we had originated $272 million in total SBA originations, and 2016, our projection is high single-digit growth to low double-digit growth for 2016.

Got it.

Were you looking for the specific quarter or full year?

Full year. That's all I needed. Thank you. Okay. Then just on the core margin, saw a nice little uptick here this quarter. Is it fair though to assume we'll see some modest pressure going forward, given what you're putting on the books relative to the core portfolio, and maybe some more inching up of deposit costs?

Yes, but that really has been a moderating trend. I look not just what you see every quarter, but every month at the average rate we book loans at versus our current coupon, which is lower than the yield you see because of fee income. That spread has been just a handful of basis points the last quarter or two, so that compression has slowed quite a bit, but yes, directionally, we're still probably off a couple basis points a quarter (multiple speakers).

Okay. And then just last one from me, on the reserve coverage on loans, down to 1.21% here. I assume we're getting close to a trough, excluding the Wilshire deal, which will obviously distort that number?

That's always a hard one for me to answer because we do not manage to that number. We do a bottom-up very detailed analysis, but the end result of that analysis has been very close to that level for several quarters in a row.

Okay. That's it from me. Thank you.

The next question is from Julianna Balicka of KBW. Please go ahead.

Good morning.

Good morning.

Nice to see a very nice quarter, especially for the first quarter -- sets up well for the rest of the year. I was hoping you might be able to provide us -- I have a couple follow-up questions on the quarter and I was hoping you might provide us an update on the merger. In terms of on the merger, the SEC comments should have come back by now. I was wondering whether you've gotten any comments from regulators or any other interested parties at this point in time, and what the SEC comments were focused on, so we can get a sense of the important issues as we look forward to the merger close?

I'll comment on the SEC side. I won't get very specific, but I don't anticipate any issues there and I expect to be filing the final version of the S-4 very shortly. And the regulatory, I'm not sure there's much we can say. As far as we can tell from our perspective, things are moving along on schedule.

Okay. And then we saw earlier in the quarter -- recently, I know you had made an agreement with CRA activist groups. Could you talk to us a little bit more about, do you -- how the CRA side of the merger is proceeding because if that can get resolved amicably and quickly, then that means that your timing can be much faster?

Yes, Julianna, this is Kevin. We have been very proactive in dealing with the community-based organizations. As you saw in our press release, we were able to come to an agreement with a major organization, with a few major organizations, and we certainly hope that there will be no oppositional protest by those groups, because we already have reached an agreement. Absent such opposition, we expect our approval from the regulators will be in the time frame that we originally expected when we signed the merger agreement.

Very good. Then skipping ahead to the post-merger, could you talk a little bit about Mark Lee's proposed new role in terms of developing corporate banking. Any thoughts about that vertical size, or in general how you're thinking about the direction of the Company and the business model once you're over $10 billion in assets and therefore maybe shifting more towards middle market banking?

As you may be aware, we have made most of the first merger title decisions and we are very far along the process of setting the organizational structure of the combined Company. But until the merger is completed, all of our respective officers will continue in their existing roles, which I believe takes priority at this point.

About Mark Lee taking the head of our corporate banking unit, that corporate banking unit is something that we believe will take a very, very important role for the Organization when the Organization is about $12 billion, $13 billion in assets. We have full confidence and trust in Mark's capabilities, commitment to the new role, and we feel very optimistic about the future of that new unit that we will be starting as a new combined bank.

Okay. Then I have a question on the quarter and I'll step back now. Thank you for the color on the merger. Kyu, in your remarks, you talked about that your production in C&I was broad-based and did not see headwinds from the macroeconomic uncertainty.

Also you had mentioned there was a shift in your borrower demand to variable rate loans, which, given the environment, which has suggested that there should have been more of a fixed rate preference. So could you talk about how your C&I managed to withstand the first quarter so well, and also why do you think your borrowers are preferring variable rate loans this particular quarter into a presumably rising rate environment? Can you give us a little more color around those two remarks?

As you know, C&I loans it takes long time to build the relationships, so the largest C&I loans we booked this quarter, it started probably minimum six months ago. So that's the reason that we didn't really have any headwinds that we felt for the C&I loan production and we've been constantly pushing for C&I loans.

Our field managers, they do focus on getting C&I relationships. So we've been doing that. Some quarters we do better than others, but this quarter, we were successful in booking large C&I loans that we've been working on for quite some time. And second question--?

Related to customer preference for variable--?

Okay. When you have many C&I loans, of course you have more variable loans. Also for CRE loans, because we don't want to compete with the pricing and we offered more variable rates to customers, and it was more intended effort from our part.

Got it. That makes sense. Thank you very much for taking my questions.

Thank you.

(Operator Instructions)

The next question comes from Tim Coffey of FIG Partners. Please go ahead.

Thank you. Good morning, everybody.

Good morning.

To follow on that last question, is there had an internal focus on generating C&I loans in light of regulatory concerns about commercial real estate and/or the acquisition of Wilshire's CRE-heavy portfolio?

Let me try to answer that question. It's always a good thing to diversify your portfolio as much as possible, and historically, BBCN has been very CRE concentrated. Not necessarily CRE concentrated from the regulatory perspective, but we do want to diversify our earning income -- earning asset bases. Therefore, the focus always has been enhancing our C&I capability, so it's not necessarily related to the regulatory side.

Okay. One of the -- if you continue to generate more commercial loans and more of the resi products, what impact would that have on your provision expense going forward, assuming everything else is equal?

I'm sorry, what--?

I don't think we heard part of -- what impact does that have on your -- I didn't hear?

Provision. Your provision expense going forward, all else equal?

Oh, provision expense? It could go either way. If you just go industry-wide, you expect the provision on the single family to probably be lower on average than, and CRE and C&Is probably a little higher on average. I'm not sure the mix would be much different.

At the end of the day, you're booking the past-grade loans, so the impact to the overall provision is manageable.

Okay. And then the increase in loan deposits, the average cost of deposits this quarter, would there be an expectation for that to rise in the next quarter?

I would say yes, but not very much. We're talking 1 or 2 basis points might be the range.

Okay. What is driving that?

What's driving that? Mix tend to be very much short-term fluctuations. We do have some very large customers we have with some seasonality to their deposits, so we had a little bit of an unfavorable mix change in the current quarter. But the rest of it's purely competition in our markets and us wanting to maintain market share in some places where we're competing with some people with some aggressive rates and we would rather keep the customers.

Okay. All right. Thank you very much. Those are my questions.

Thank you.

The next question is from Gary Tenner of D.A. Davidson. Please go ahead.

Thanks. Good morning. All my questions have really been answered, so I'll just -- in terms of merger-related expenses for the next couple of quarters, can you give us a sense of where you think they'll shake out?

That's a little bit tough. The current quarter, we had two major things going on, which is really the registration process and the merger application process. We have some tails from that in the current quarter and just slowly ramping up some of the more integration-related projects. I would expect that level to be down from the first quarter, but it's going to be still several hundred thousand dollars a quarter until the deals.

Okay. And just in terms of the deal and size of the bank, any early indications in terms of what the requirements might be, in terms of adds to compliance or BSA, as well as just more generally, the financial department of the Bank?

We're spending a lot of time on that on an ongoing basis, so there's not any one big revelation there. But we're making good and steady progress in terms of understanding the details of everything we need to do and nothing that we're discovering and learning and starting to build is inconsistent with the kinds of cost projections we gave initially yet. But yes, we're getting down the learning curve on that.

And if the deal closes in July or in the third quarter, would the first DFAS be 2018 or 2017?

We would be filing in 2018 for the 2017 year, so the actual filing date is at July 2018.

Okay. All right. Great. Thank you.

The next question is from Don Worthington of Raymond James. Please go ahead.

Good morning, everyone.

Good morning.

Just curious whether the increase in CDs during the quarter included any specific deposit campaign?

Not in first quarter.

No, not particularly. It does include our reacting to the promotions at other banks.

Okay. But no specials or anything like that. Okay. And then just some color on -- you mentioned, in terms of the lending, that it was diversified by type. Are you also getting proportional loan growth in your markets outside of California?

Yes. Mostly Southern California and New York/New Jersey for the C&I loans.

Okay. Thank you.

The next question is a follow-up from Julianna Balicka of KBW. Please go ahead.

Hi. Thank you. I have just one quick follow-up. To follow-up on the merger expenses question, in terms of your operating expenses, which are not directly tied to the merger such as registration costs, have you started to incur any infrastructure building costs related to just simply being a much larger bank, any new system upgrades, more compliance people, or is that still pending in your expense run rate?

I'm going to give no -- both answers for that. I would say no in terms of any significant new expenditures. We're obviously trying to be careful about that. But the yes answer is I feel like we've been doing that for the last 1.5 years. We've been anticipating this need and the level of our investment in risk management and BSA and in cyber-security, in any number of areas, has been an anticipation of crossing over some thresholds fairly soon. But we haven't signed up for any big ticket items in the last few months between then and the merger.

And do you plan on signing up for any big ticket items, especially in BSA, or you're pretty much good to go on that?

Once again, I would say there's no individual big ticket item. The level of investment we think we need to make is still consistent with the projections we gave at the time we announced the merger.

Got it. Okay. Thank you.

There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Management for any closing remarks.

Thank you everyone again for joining us today and we look forward to speaking with you again next quarter. Thank you, everyone.

Thank you.

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