Earnings Labs

Hope Bancorp, Inc. (HOPE)

Q4 2011 Earnings Call· Wed, Feb 8, 2012

$12.47

-3.41%

Key Takeaways · AI generated
AI summary not yet generated for this transcript. Generation in progress for older transcripts; check back soon, or browse the full transcript below.

Same-Day

-1.60%

1 Week

-2.92%

1 Month

-1.60%

vs S&P

-3.37%

Transcript

Operator

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 BBCN Bancorp Earnings Conference Call. My name is Karma, and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the call over to your host for today, Ms. Angie Yang, Senior Vice President, Investor Relations.

Angie Yang

Analyst

Thank you, Karma. Good morning, everyone. Thank you for joining us for the BBCN Bancorp 2011 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 future events and the future financial performance of the company. We wish to caution you that such statements are just predictions, and 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, specifically the company's most recent 10-Q and Annual Report on Form 10-K, as well as the Safe Harbor statement in the press release issued yesterday. These documents contain important risk factors that could cause actual results to differ materially from the forward-looking statements. BBCN assumes no obligation to revise any forward-looking projections that may be made on today's call. The financial results for the 2011 fourth quarter reflects a further refinement of this estimated fair value calculations and accounting adjustments required under the acquisition method of accounting. The company cautions that complete financial results to be included in the Annual Report on Form 10-K for the year ended December 31, 2011, could differ materially from the financial results being reported today, pending the finalization of the acquisition accounting adjustments. Now, we have allotted one hour for this call. BBCN's President and CEO, Alvin Kang, will begin today with an overview of the quarter, and our Chief Financial Officer, Phil Guldeman, will discuss financial results in more detail. Then Al will wrap up our presentation with closing remarks before we begin the question and answer session. Also joining us this morning from management are Bonnie Lee, Chief Operating Officer; Mark Lee, Chief Credit Officer; and Doug Goddard, our Deputy Chief Financial Officer. With that, I'd like to turn the call over to Al Kang. Al?

Alvin Kang

Analyst · Julianna Balicka from KBW

Thank you, Angie. Good morning, and thank you for joining us for our first conference call as the new BBCN Bancorp. I am going to start today's call by providing an overview of the quarter, and then Phil will walk through our financial results in more detail. Clearly, this was an exciting quarter for us that brought about the completion of a merger between NARA and Center that was almost a year in the making. BBCN Bancorp stands today as the largest Korean American bank in the country by a wide margin, and the positive response we have received from the communities we serve has been very rewarding to see. From announcement to closing, we had a lot of time to be thorough in our integration planning, and we hit the ground running on December 1 under the new banner of BBCN Bank. Our new name is symbolic of the roots of the 2 organizations that came together to form the new company and our long partnership with the growing businesses from the communities that we serve. Looking at our logo, you may have noticed the blue "C" representing Center is interlocked with the red "N" representing NARA. The logo as a whole is symbolic of the complementary and synergistic merger of the 2 banks and represents our collective experience and leadership. Our combined bank's strategic plan includes 4 major initiatives: First, post integration -- post merger integration. We understand that a successful integration is critical to the success of BBCN. Underscoring our focus on ensuring a seamless systems conversion with minimal customer impact, we created a new position of Chief information Officer and brought in an expert in this field. Second, while BBCN is now the largest Korean American bank in the nation, we will also strive to set…

Philip Guldeman

Analyst · Sandler O'Neill & Partner

Thank you, Al. Let me start by saying 2 things up front. First, as mentioned in the opening statement, the numbers we're going to share with you are based on estimates that are subject to change up to the issuance of our Form 10-K. This is more true now than normal because of the magnitude and complexity of the fair market value estimates used to create those projections. Second, the impact of the merger makes a prior period comparison somewhat difficult and in some cases actually meaningless. So we aren't going to spend much time on today's call discussing the differences between our fourth quarter results and prior quarter or prior year. Instead, we'll do our best to give you a sense of how our operations performed in the fourth quarter and provide some estimates for the run rate of key metrics going forward. Our results for the fourth quarter of 2011 reflect 2 months of standalone operations of the former NARA Bank and one month of combined operations following the completion of the merger. We generated net income of $2.9 million or $0.05 per diluted share. Our fourth quarter results were impacted by 3 particularly large items. First, we recorded a $6.4 million charge on the prepayment of FHLB advances as part of a post merger balance sheet restructuring strategy. Second, we had $3.2 million in merger-related expenses. And third, we had $1.9 million in post-merger provision expense for the acquired Center Bank portfolio, which I'll discuss further in a couple of minutes. Collectively, these 3 items reduced our pre-tax income in the fourth quarter by $11.9 million. I should mention that the FHLB prepayment penalty has been reclassified since the preliminary press release from non-interest income to non-interest expense. As you may know, under acquisition accounting, Center's balance…

Alvin Kang

Analyst · Julianna Balicka from KBW

Thank you, Phil. Can you believe we cut back his speaking part. From an overall perspective, we feel pretty optimistic about 2012. As I've said before, we ended 2011 with a lot of momentum, and we see that accelerating as the new year progresses. However, it's worth reemphasizing that merger-related expenses will have a greater impact on the first 2 quarters of 2012. Also, reestablishing general valuation allowances on acquired loans, which generally accepted accounting principals requires, will affect provision expense throughout the year. We are seeing some modest improvement in loan demand, and the loan pipeline remains consistent with levels we were seeing in the fourth quarter. We anticipate that the growth rate in the C&I portfolio will be higher than the commercial real estate growth rate, and that is consistent with our objectives. However, when you look at the total portfolio, it will not have the effect of changing the needle significantly in terms of concentrations. The loan production that we are anticipating should lead to solid revenue growth this year resulting from both increasing net interest income and consistent gains on sales of SBA loans. We believe we'll see an increasing amount of operating leverage as we move through the year, complete the remaining steps in our integration and take out redundant expenses. With a higher revenue and higher efficiencies, we should see a nice increase in our earnings power, particularly in the second half of the year. On a final note, with the strength of our balance sheet and the internal capital we anticipate generating on a go forward basis, we also expect to repay TARP funds as quickly as possible without having to raise additional capital. Now we'd be able -- we'd be happy to take any questions you might have. Operator, can you please open up the call?

Operator

Operator

[Operator Instructions] The first question comes from the line of Aaron Deer from Sandler O'Neill & Partner.

Aaron Deer

Analyst · Sandler O'Neill & Partner

I guess, let me begin with a couple of the items that you mentioned, Phil. I appreciate you've given the spot rates on the margin. Just one question with respect to your guidance there, you said flat to up, and when you're saying that, are you referring to the core margin excluding the accretion impact that you saw this quarter?

Philip Guldeman

Analyst · Sandler O'Neill & Partner

No, that would be including it. We have a positive impact of the accretion coming in and then the negative impact of market condition, the competitive market conditions. So that would include the impact of the accretion.

Aaron Deer

Analyst · Sandler O'Neill & Partner

So the accelerated accretion if you will, the 14 basis points, that's inclusive?

Philip Guldeman

Analyst · Sandler O'Neill & Partner

Yes, that's correct.

Aaron Deer

Analyst · Sandler O'Neill & Partner

So is the rate of -- I guess call it early prepays that you saw on the Center portfolio, was that -- which had in the fourth quarter, or at least in the December, was that faster than you would expect going forward or is that -- because it seemed like that would be relatively high given kind of the normal pay downs that you might see in the portfolio?

Philip Guldeman

Analyst · Sandler O'Neill & Partner

Well you do have -- we have a lot of shorter-term loans, the trade finance loans for instance, which are paying off in the first quarter. So there is going to be a slightly more accelerated impact in the earlier quarters, and it will trail off as time goes on but, Mark, why don't you add to that if you would?

Mark Lee

Analyst · Sandler O'Neill & Partner

In the month of December there were about $74 million that was refinanced, of which, $26 million was the trade finance notes. These are typically 90 to 120 days sub notes to finance these import activity. These were -- as of November 30, it was on the Center book, but as of December 30 for the purchase accounting purpose, it was captured in our book, our combined book, and subject to the allowances.

Aaron Deer

Analyst · Sandler O'Neill & Partner

Okay, that's helpful. So I guess with that accretion then running off pretty quickly, the margin will, I mean not withstanding this early increase during the first quarter, should drift down pretty quickly after that?

Philip Guldeman

Analyst · Sandler O'Neill & Partner

I don't think it will drift down tremendously quickly, no. If it does, there will be some negative impact by the accretion diminishing overtime, but you have to keep in mind that the same thing that is driving the income coming in from accretion is also driving the need for provision expense. So I think the 2 of them are going to move in the same direction, although not necessarily at the exact same speed, but the faster we have refinancing and repayments, the quicker the accretion comes in, but then the quicker those loans become rewritten under BBCN standards and require a provision expense or an allowance requirement which drives a provision expense.

Aaron Deer

Analyst · Sandler O'Neill & Partner

Okay. And then one other question with respect to the guidance, just I'm gather that your non-interest expense guidance does include your expectations for merger targets?

Philip Guldeman

Analyst · Sandler O'Neill & Partner

Yes, that is correct.

Operator

Operator

The next question comes from the line of Brett Rabatin from Sterne Agee.

Brett Rabatin

Analyst · Brett Rabatin from Sterne Agee

I wanted to ask a question, I think there was a comment about the large or the loan yield excluding accretion being 5.69% for the quarter, if I heard that correctly. I was curious the comment about pricing pressure, where you're seeing new commitments extended in terms of commercial real estate and C&I from a pricing perspective?

Bonita Lee

Analyst · Brett Rabatin from Sterne Agee

Yes, we do see very high pressure in terms of both CRE and C&I pricing even through the loans that we generated in the fourth quarter.

Brett Rabatin

Analyst · Brett Rabatin from Sterne Agee

Okay, but can you give us some idea of where it is either relative to current portfolio yields or where it is relative to LIBOR or market rates?

Bonita Lee

Analyst · Brett Rabatin from Sterne Agee

So for example for the new CRE loans that we booked in the fourth quarter, the average may come in at about 5.2 and for C&I loans the average rate is coming at around 4.8.

Operator

Operator

The next question comes from the line of Julianna Balicka from KBW.

Julianna Balicka

Analyst · Julianna Balicka from KBW

I have a couple of questions. One, on the SBA loan sale gains that you are anticipating for next year, do you have a sense of how much more ramped up to be, it feels like quarter is a little bit less sales than otherwise it would have been because of the transfer to held for investments?

Philip Guldeman

Analyst · Julianna Balicka from KBW

Yes, that's correct. That $84 million that might have been available for sale did get transferred to held for investments.

Julianna Balicka

Analyst · Julianna Balicka from KBW

So what kind of a run rate we should be thinking about the next year, I mean increasing from this $1 million from this quarter, I mean how we should we'd be thinking about that for our models.

Philip Guldeman

Analyst · Julianna Balicka from KBW

I think we mentioned somewhere that we expect production to be -- did we give guidance on that?

Alvin Kang

Analyst · Julianna Balicka from KBW

Yes, 200 for the year.

Julianna Balicka

Analyst · Julianna Balicka from KBW

And percent of sales, is that like similar to this year?

Alvin Kang

Analyst · Julianna Balicka from KBW

If you were to look at 2 things on a combined basis, you'd have to take into consideration that both banks had a pretty good first quarter because of a spillover of the loss of the premium and the loss of the governments charge in the end of 2010.

Julianna Balicka

Analyst · Julianna Balicka from KBW

Okay. And then on the expense run rate that you were discussing, I mean that includes some merger-related charges, which we can maybe back out, but then even once you back out the charges related directly to merger expenses, when you think about your base run rate of expenses, how much of that is actually also somewhat inflated from still kind of integrating, which is not specifically an accounting assignments in merger charges or accounting, but just more like expenses that will naturally kind of runoff and kind of go away overtime in the next couple of quarter, you know what I mean?

Philip Guldeman

Analyst · Julianna Balicka from KBW

I think I do, Julianna, the $4 million to $5 million in merger-related expense, most of which we expect to incur in the first 2 months, does include the cost of integrating systems, so…

Julianna Balicka

Analyst · Julianna Balicka from KBW

Is there any like other inflated expenses that are not specific to merger-related, but more just like, you just got out of a merger and you're going to be kind of excess, not cost saves -- never mind.

Alvin Kang

Analyst · Julianna Balicka from KBW

Well, Julianna, the cost saves will kick in more towards the second half of the year and then on into the next year.

Operator

Operator

The next question comes from the line of Scott Valentin from FBR Capital Markets.

Scott Valentin

Analyst · Scott Valentin from FBR Capital Markets

Just as it pertains to, I guess, the loan origination bonds, you mentioned $200 million was the total origination, pro forma, for both companies in the entire quarter. And another account was made, you're seeing the pipeline about where it was in the fourth quarter. So should we expect this $200 million kind of run rate to persists for a quarter or 2 and then increase after that?

Bonita Lee

Analyst · Scott Valentin from FBR Capital Markets

This is in line with the trend that we have seen throughout 2011. So -- but I am not sure about increasing, but it should be fairly consistent given some improvement in the market that we may have a slightly higher payoff that we really didn't experienced in 2011. So I would say just to be fairly consistent.

Scott Valentin

Analyst · Scott Valentin from FBR Capital Markets

Okay. And then just going back to capital management, you mentioned repayment of TARP is probably top priority for use of capital. After that, I mean would buyback or a reinstatement of dividend or those 2, maybe can you prioritize those 2?

Alvin Kang

Analyst · Scott Valentin from FBR Capital Markets

Well I think dividends would be on the table, but also we need to see what opportunities there are for our use of capital in terms of supporting growth, so whether that's organic or acquisitive.

Scott Valentin

Analyst · Scott Valentin from FBR Capital Markets

Okay. And you did say, just to clarify, that you don't perceive to having to raise or issue any equity capital or debt capital to repay TARP?

Alvin Kang

Analyst · Scott Valentin from FBR Capital Markets

Yes, that's our current thinking.

Operator

Operator

[Operator Instructions] The next question comes from the line of Gary Tenner from D.A. Davidson.

Gary Tenner

Analyst · Gary Tenner from D.A. Davidson

Just a question on the SBA sales. It looks like the premium this quarter was down around 7% as compared to about 8.5% in the third quarter. Are you seeing some pressure there, and what are your thoughts going further?

Alvin Kang

Analyst · Gary Tenner from D.A. Davidson

Doug?

Douglas Goddard

Analyst · Gary Tenner from D.A. Davidson

No, I don't know that. I am just telling you where he got the 7%. It's from our -- the premium we disclosed divided by the loan sale volume.

Alvin Kang

Analyst · Gary Tenner from D.A. Davidson

Yes, I'll have to get back to you on that. Unless, Bonnie, do you have?

Bonita Lee

Analyst · Gary Tenner from D.A. Davidson

Yes, over a premium yield, it looks like it dropped about 70 basis points from the third quarter. But just looking at the quarter-to-quarter 2011, the variance of about 70 basis to 80 basis points up and down during the whole quarter. So we'll have to see, how it's going to roll out. Whether it's going to be a continuous pressure or not.

Philip Guldeman

Analyst · Gary Tenner from D.A. Davidson

And some of that might depend upon the mix of the loans, whether we have loans that had brokers involved, and then we had a commission that we had to pay, as opposed to those which were generated internally. So I can see that as being a variable in the next premium that we record after we defer those origination expenses.

Gary Tenner

Analyst · Gary Tenner from D.A. Davidson

Okay. And then on the occupancy expense line item, the increase from third quarter to fourth quarter seemed to be much more, I would have expected just from one additional month of Center. Was there anything unusual in that line item for the quarter?

Alvin Kang

Analyst · Gary Tenner from D.A. Davidson

Well we had some lease termination costs and other write-downs, and also we're starting -- we're incurring some costs to improve some of the branch locations.

Gary Tenner

Analyst · Gary Tenner from D.A. Davidson

Okay, great. And then finally, one last question just regarding TARP repayment, Al, you mentioned you'd like to repay it as soon as possible. Do you think regulators will require a full quarter or 2 of results from the client company or do you think there is any other sort of pushback on repayments?

Alvin Kang

Analyst · Gary Tenner from D.A. Davidson

Well I think I really can't speak for the regulators. I think they are obviously going to want to see what our performance is, what our capital levels are, if we were to repay TARP, what would be our post TARP capital levels. And they make an assessment based on the perceived risk that we have. There are 3 regulators involved and 4 if you count U.S. treasury. So we have already actually initiated conversations with each of our supervisory regulators. And so we have an idea of what they are thinking. So in terms of a timeline, I think an aggressive payback would be the June 30 time. And if we were on a more conservative basis, then we would be talking about the end of the year.

Operator

Operator

The next question comes from the line of Lana Chan from BMO Capital Markets.

Lana Chan

Analyst · Lana Chan from BMO Capital Markets

Just a couple of follow-up questions, one on the expense side, I just want to come about that a different way. The $11.2 million of cost savings, what kind of run rate would you expect to be on with those cost savings by the end of this year post the systems conversions?

Philip Guldeman

Analyst · Lana Chan from BMO Capital Markets

We just went through our budgeting process, and our current estimates are basically the same as the original ones that about half of that will be captured in this year, and the remaining half will be captured in the following year.

Lana Chan

Analyst · Lana Chan from BMO Capital Markets

Okay, great. And second question on the balance sheet restructuring, has that helped in terms of positioning the margin or lowering the risk to the margin from a lower for longer interest rate environment, possibly through 2014?

Philip Guldeman

Analyst · Lana Chan from BMO Capital Markets

Well we did it for 2 reasons, one of which was to increase our interest income, which we did to the tune of about 3 quarters of $1 million. The other was to eliminate the prepayment risk associated with a lot of the securities. Many of the Center securities were marked to market, which meant that they ended up having a higher premium associated with them. And, of course, if prepayment speeds increase, that premium would be written off more quickly. So we thought it was prudent to move into securities where we thought there was less prepayment risk and less opportunity to get hit by quicker amortization of the premium discount.

Lana Chan

Analyst · Lana Chan from BMO Capital Markets

Okay. And just one more question for me. Do you think there is more opportunities to lower the cost of funds that 86 basis points now, is there are other repricing of the deposits or other borrowings that you can possibly pay down?

Philip Guldeman

Analyst · Lana Chan from BMO Capital Markets

We are always looking to push that, but the market is very, very competitive, and I don't think we'll -- clearly we will not be able to achieve the kinds of reductions we did last year, that's just not going to happen. Bonnie, would you like to…

Bonita Lee

Analyst · Lana Chan from BMO Capital Markets

Yes, I'll have to agree with that.

Operator

Operator

And the next question comes from the line of Julianna Balicka from KBW.

Julianna Balicka

Analyst · Julianna Balicka from KBW

I have one follow up. On the accretion income that you are expecting over the course of the next couple of years as the Center loans mature and kind of roll into the combined portfolio, what's the total dollar amount that we should be kind of mentally thinking about and spreading out overtime?

Alvin Kang

Analyst · Julianna Balicka from KBW

I'll ask Doug, our Deputy CFO to -- Doug?

Douglas Goddard

Analyst · Julianna Balicka from KBW

We'll be breaking out a lot of that detail when we have the 10-K. We have don't have file numbers for you. The number we booked in December was probably a pretty representative month without any unusual prepays. It's absent unusual prepays, that's a declining curve, but so I mean I would start with that $1.9 million in December and look at it declining slightly. But in terms of breaking out the total accretable, that's a fairly detailed disclosure that we're a week or 2 away from finishing.

Philip Guldeman

Analyst · Julianna Balicka from KBW

That number was $2.5 million. The $1.9 million was...

Douglas Goddard

Analyst · Julianna Balicka from KBW

I am sorry, $2.5 million. Yes. Thank you, Al.

Julianna Balicka

Analyst · Julianna Balicka from KBW

So just to kind of highlight what you just said, that $2.5 million accretion, that's absent any unusual prepayments, so to speak, that's almost a core component of your income, because if you hadn't had value accounting, that would have just been part and parcel with net interest income?

Philip Guldeman

Analyst · Julianna Balicka from KBW

Yes, it's core, but I'd guess, to remind you, it is declining slowly.

Julianna Balicka

Analyst · Julianna Balicka from KBW

Right, okay. So but it's not going to be like as lumpy as some peers who have run off portfolios from the FDIC, for example, down the street?

Philip Guldeman

Analyst · Julianna Balicka from KBW

Correct.

Operator

Operator

[Operator Instructions] The next question comes from the line Jonathan Elmi from Macquarie.

Jonathan Elmi

Analyst · Macquarie

Just a couple of, well, primarily housekeeping items. I guess, one, in terms of TARP repayments, can you just remind us how much cash you guys have available at the holding company either directly or potentially from dividend capacity from the bank. Just trying to get a sense, I mean it sounded like you guys don't need to raise either debt or equity for repayment but just wanted to be clear on that matter?

Alvin Kang

Analyst · Macquarie

We don't have that number right now, but we would have to dividend out from the bank to the holding company to be able to make the TARP repayments. So that will all be in the application process and approval from the regulators. So both the bank and the holding company regulators will want to look at that and that will be part of their determination. So currently we don't have enough cash at the holding company.

Jonathan Elmi

Analyst · Macquarie

Okay. And then what was the Tier-1 common ratio for the fourth quarter?

Philip Guldeman

Analyst · Macquarie

Who can find it the fastest?.

Alvin Kang

Analyst · Macquarie

You're asking for the Tier-1?

Jonathan Elmi

Analyst · Macquarie

Yes, the Tier-1 common ratio, and we can follow-up after the fact on that. If you guys don't have it handy, it's not a big deal. My only other question which is thinking about the tax rate going forward, just for purposes of model?

Philip Guldeman

Analyst · Macquarie

I think we were assuming 41.

Alvin Kang

Analyst · Macquarie

41%.

Philip Guldeman

Analyst · Macquarie

41%.

Operator

Operator

This concludes Q&A session for today. I would now like to turn the call back over to Mr. Al Kang, President and CEO.

Alvin Kang

Analyst · Julianna Balicka from KBW

Well we thank you for joining us today. And we'll talk to you next quarter. Thank you very much.

Operator

Operator

This concludes the presentation for today. Ladies and gentlemen, you may now disconnect. Have a wonderful day.