Hope Bancorp, Inc. (HOPE) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Third Quarter 2012 BBCN Bancorp Earnings Conference Call. My name is Dianna and I'll be the operator for today. [Operator Instructions] As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today Ms. Angie Yang, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Dianna. Good morning, everyone, and thank you for joining us for the BBCN Bancorp 2012 third 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. In addition, certain statements regarding the proposed transactions between BBCN Bancorp and Pacific International Bancorp, including the expected timelines for completing the transaction, benefits and synergies for the purposed transaction and other statements about the future expectations, beliefs, goals and plans are statements that may be deemed to be forward-looking statements. These statements constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such words as expect, believe, estimates, anticipates, targets, goals, projects, intends, plans, seeks and variations of such words and similar expressions are intended to identify such forward-looking statements which are not statements of historical fact. We wish to caution you that such 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 two separate press releases 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 company cautions that the complete financial results to be included in the quarterly report on Form 10-Q for the three months ended September 30, 2012 could differ materially from the financial results being reported today. The closing of the proposed transaction is subject to regulatory approval, the approval of the shareholders of Pacific International and other customary closing conditions. There is no assurance that such conditions will be met, or that the proposed transaction will be consummated within the expected timeframe right, or at all... Now, we have allotted one hour for this call. BBCN’s President and Chief Executive Officer, Alvin Kang will begin today with an overview of the quarter and our deputy Chief Financial Officer, Doug Goddard 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 Chief Operating Officer, Boni Lee and Chief Credit Officer, Mark Lee. With that, I’d like to turn the call over the Al Kang. Al?

Thank you, Angie. Good morning. Phil isn’t with us, our Chief Financial Officer because he’s quarantined at home. He said he’s a little green in color, but I am sure he is listening. So Phil, hope you’re getting well. And it seems like whenever we have a webcast conference call, there are two things you can count on; one is that overall market will be down and secondly there will be sirens going off outside our office. So with that let me start. BBCN issued two news releases yesterday after the market closed. First we announced our strong financial results for third quarter 2012 and the reinstatement of a quarterly cash dividend. I will start off with some highlights for the quarter and then Doug will go over the financial results in more detail. I will then comment on our second news release, announcing the definitive agreement to acquire Seattle-based Pacific International Bancorp before giving you closing remarks and opening it up to you for our Q&A. We have lot to talk about so let’s start. Following the completion of our systems conversion last quarter, we delivered another strong quarter of operations and profitability with the three months ended September 30, 2012. For the third quarter 2012, we generated net income of $18.4 million or $0.24 per diluted common share. Having redeemed our TARP last quarter, you will note that net income now is equal to net income available to common stockholders. The earnings power of BBCN is demonstrated by our pre-tax, pre-provision earnings which amounted to 2.87% of average assets for our third quarter 2012. Our return on average assets was 1.42% and our return on average equity was 10.11%. The main highlight for third quarter 2012 however was the pickup we experienced in loan production. New loan originations amounted to $313 million for the quarter, and contributed to a 5% increase in loan balances from June 30, 2012. We remain pleased with the success we are achieving with our business development efforts with both existing and new relationships. We continued to focus on commercial lending and have seen positives from a couple of perspectives. Overall, our commercial loan portfolio balances have continued to grow and they were up 2% from June 30, 2012 and if you look at the average size of our new commercial line commitments versus a year ago, we are seeing close to a 20% increase which reflects the larger commercial borrowers we are now adding to our customer base. The largest increase in loans came in our commercial real estate portfolio, which increased 6% from June 30, 2012. We have seen a considerable increase in commercial real estate refinancing activity as borrowers are looking to lock in lower interest rates before they inevitably start to rise again. With our increased scale and lending capacity, we are able to handle larger transactions than we have in the past, which has enabled us to win business both for mainstream and Korean-American banks. SBA loan production continued strong and we funded $64 million in new SBA loans during the quarter. Of this approximately $34 million are salable SBA 7(a) loans and booked in our health per sale portfolio. Our loan product pipeline remains relatively strong and steady. So given that our loan growth year-to-date is 9%, we now believe we will achieve low double-digit loan growth for the full year. This largely reflects the strong loan growth during the quarter and our total assets increased 6% linked quarter to $5.33 billion at September 30, 2012. Since becoming BBCN we have consistently delivered strong financial performance with strong core earnings, steadily improving asset quality trends and increasing loan originations and we exited the TARP program. This performance gives us greater confidence that our vision and mission for BBCN is on track and we are pleased to announce that our Board of Directors reinstated a quarterly cash dividend of $0.5 per common share. With that let me turn the call over to Doug. Doug?

Thank you, Al. Our operating results for the three months ended September 30, 2012 include a number of pre-tax acquisition accounting adjustments and expenses related to the merger with Center Bank. In total these have had a positive impact of $6.8 million on our pretax income for the third quarter 2012. This compares with a positive impact of $7.9 million last quarter. In general, we expect the impact of the Center Bank merger related adjustments to continue to decline each quarter. Starting off with the income statement, net interest income for the third quarter came in at $58.2 million and included approximately $6.1 million of loan interest income from the accretion of the acquisition accounting discount on Center’s loan portfolio. Last quarter the impact of the discount accretion was $7.7 million. We expect the impact to continue to decline going forward although there are too many variables for us to project the level of decline with any degree of accuracy. However it is likely that the decline will not necessarily be linear. Our net interest margin was 4.79% of the third quarter 2012. Excluding the impact of acquisition accounting adjustments, our net interest margin was 4.14%, only one basis point lower than the comparable ratio for the preceding second quarter. The yield on our loan portfolio including loan discount accretion was 6.11%. The yield excluding loan discount accretion was 5.39%, a decrease of 20 basis points from the second quarter of 2012. The reduction in yield is primarily attributable to new loans being booked at lower rates than the existing portfolio, as well as higher yielding loans rolling off the book that they matured and refinance the lower rates. The weighted average yield on our Security’s portfolio declined to 2.23% in the third quarter of 2012 from 2.45% last quarter. This is primarily due to some restructuring we did in the portfolio at the end of August. We sold about $90 million out of our MBS portfolio that we had identified as having higher prepayment risk in order to avoid future losses. Proceeds of these sales were redeployed into new securities that have lower yields. Our cost of deposits decreased by three basis points linked quarter to 52 basis points for the third quarter. Excluding amortization of premium on-time deposits assumed at the Center merger, the weighted average cost of deposits was 59 basis points for the third quarter of 2012, reflecting a four basis decrease from the preceding second quarter. The improvement was driven by reductions in the cost of interest bearing demand deposits, as well as the favorable mix shift in the mix of deposits to a higher concentration on non-interest bearing demand deposits, driven by our expanding base of commercial customers. Non-interest bearing demand deposits accounted for 28% of total deposits of September 30, 2012 up from 27% at June 30, 2012. The weighted average cost at FHLB advances declined 39 basis points to 1.56% from the preceding quarter. Excluding acquisition accounting adjustments, the weighted average cost of FHLB advances decreased a 121 basis points to 1.87%. The decline in the cost is due to an increase in lower costs, short term FHLB advances that we have brought on to match [ph] fund our SBA loan production. Going forward, we expect to see some additional compression on our net interest margin. The loans scheduled to mature in the fourth quarter have yields approximately 80 basis points higher than our current pricing. We hope to partially mitigate the impact of the net interest margin compression on our net interest income with our increased loan volume. Moving on to non-interest income; our non-interest income was $7.7million in the third quarter, a decrease of $2.5million from the preceding second quarter. This is primarily due to our decision to retain rather than sell all of our SBA loan production during the quarter. September 30, 2012 we had approximately $55 million of SBA loans available for sale. Although we indicated last quarter that we are planning to retain our SBA loan production for the foreseeable future, we've seen premiums rise in the secretary market in excess of 11%, which provides a greater incentive to sell our SBA loans and given the strong loan production at CRE and CNI loans, we must consider the impact on our liquidity metrics. It is possible that we may sell some of our SBA loan inventory in the fourth quarter, although as always, the decision will be weighed against premium trends in the secondary market and the liquidity and capital needs at any particular point in time. Our non-interest expense in the third quarter was $28.8 million, a decline of 8% in the prior quarter, as we saw declines across most of our major expense categories. The largest decline was in merger related expenses, which dropped from $1.3 million last quarter to $183,000 in the third quarter of 2012. We do not anticipate any meaningful expenses related to the merger with Center going forward. We also had a drop in salaries and benefits, which decreased by little more than $1 million from the prior quarter. This was primarily due to the summer vacation season which had the effect of reducing the improved vacation liability and compensation expense and had an increase in capitalized loan origination cost, primarily compensation in accordance with FAS 91. We do not expect to see a significant vacation accrual benefit next quarter and the differed loan origination expenses may not be as large as this last quarter. We have also added approximately 30 full time employees over the last couple of months. The result will be an increase in our salaries and benefits lined in the fourth quarter. During the third quarter we returned to a more normalized FDIC assessment of $644,000 following the reduced rate we had last quarter. Going forward, we believe our FDIC assessment should be at the $700,000 to $750,000 range. From an overall perspective, we continue to see the positive effects of the merger on our expense levels. Our efficiency ratio was 43.7% in the third quarter of 2012, compared to 47.6% for NARA as a standalone company in the same period last year. Moving on to our balance sheet, our gross loans were $4.07 billion at September 30, up from $3.87 billion at June 30. New loan originations of $313 million were offset by aggregate loan payoffs, pay downs, amortization and other adjustments, which totaled a $118 million during the third quarter. Our total deposits were $4.05 billion at September 30, 2012, up from $3.88 billion at the end of the prior quarter. The increases came primarily in our non-interest bearing demand deposits and time deposits. Approximately, $153 million of the increase is attributable to wholesale deposits that we brought in to fund our strong loan growth. We have recently initiated a deposit campaign focused on gathering CDs and DDA deposits so that we can reduce the need for wholesale funding, if we continue to see such strong loan production. Moving to asset quality, we were pleased with the improving credit metrics we saw across the loan portfolio this quarter. Our total Watchlist loans, which is a sum of Special Mention and Classified loans declined to $283 million at September 30, down from $314 million at the end of the last quarter, a 9.9% decrease. It's worth noting that approximately 56% of our Watchlist loans are carried at their fair values determined at the November 2011 merger date. Our nonperforming loans was $74 million at September 30, down from $83 million or 10.8% at the end of the prior quarter. The decrease in nonperforming loans is primarily attributable to charge-offs and payoffs. As a side note, approximately 78% of non-accrual loans are current on payments, combined with accruing restructured loans, which are also current; approximately 61% of our total non-performing loans, as we define it, are current and paying as agreed. Our non-performing assets were $78 million at September 30, compared with $90 million at June 30. On a percentage basis, NPAs declined to 1.47% of total assets at September 30, compared with 1.78% at the end of the prior quarter. Our net charge-offs were $6.5 million in the third quarter, up from $4 million last quarter. The majority of our growth charged off for the third quarter was attributable to two loans. We recorded the provision for loan losses of $6.9 million in the quarter. This provision reflects a level of net charge-offs in the quarter, the strong growth we had in the portfolio and increased qualitative allowances related to higher concentration risk resulting from the stronger growth we had in the CRE portfolio. On September 30 we had an allowance for loan losses of $66 million, or 1.62% of total loans. The coverage ratio of the allowance for loan losses to non-performing loans, excluding acquired loans past due 90 days or more on accrual status, increased to 128% at September 30, from a 105% at June 30. In general, we are comfortable with the trends we are seeing in the portfolio. Finally, we continue to have very strong capital ratios which enable us to both reinstate the cash dividend common stock and pursue strategic acquisitions such as the ones we announced today. At September 30 we had Tier 1 leverage ratio of 13.1%, a tier 1 risk base ratio of 15.19% and a total risk base ratio of 16.45%. Also, our TCE ratio was 12.23%. With that, let me turn the call back to Al. Al?

Thanks, Doug. We were also pleased to announce yesterday afternoon the signing of a definitive agreement to acquire Seattle-based Pacific International Bancorp. Pacific International has total assets of approximately $200 million and its primary subsidiary, Pacific International Bank has four bank locations in the Seattle metropolitan area. We expect the transaction will close during the first quarter of 2013, after which we would have a total of six branches in the Seattle area. This stock with stock transaction is valued at approximately $8.2 million and Pacific International's $6.5million in TARP will be retired upon completion of the acquisition. We believe that it is an important transaction for a number of reasons. First this deal positions BBCN to be the market leader in the Seattle metropolitan area which has a steadily growing Asian American community. In terms of the Korean-Americans, we estimate that there may be close to 135,000 Korean-Americans scattered through the greater Seattle area and that the vast majority of this population is utilizing mainstream banks. This means there are great opportunities to gain deposit market share in this area. The transaction is a purposeful step toward our goal of being a major player in the various markets that we serve. With this acquisition, BBCN will be the market leader in Southern California, Northern California, New York, New Jersey and the Seattle metropolitan area. Second, Seattle serves as an important port in the Trans-Pacific Trade Lane. In spite of the economic downturn, exports of timber and fishery products have remained stable and we believe the potential demand for commercial loans will increase from the inflow of Korean immigrants and increasing investments by nearby Korean-Canadians. With our strong heritage in international trade finance, we believe there will be increasing business opportunities for BBCN in the years to come given the Korea-U.S. Free Trade Agreement and finally, we believe this transaction underscores BBCN's position as a partner of choice for other Korean-American banks in a challenging regulatory compliance environment. With our strong financial position, greater resources and deep leadership bench, our combination with BBCN provides a considerable platform for smaller peers to serve their customers. We expect to have a smooth and seamless immigration, which will quickly position us to achieve the benefits of this merger for all our constituents, both current and new including our customers, communities, employees and shareholders. In summary, we delivered strong financial results for the third quarter and returned some profits to our shareholders and invested in new growth opportunities. I look back on my statement in last quarter’s earning call and the guidance that we have provided and thanks to the tremendous effort from the Board down to management and staff, I think we delivered. While the impending Presidential Election in the fiscal cliffs are staring at us, we believe that Q4 is going to be a very interesting quarter. We expect another good loan production quarter, however it may not be as robust as Q3 given the uncertainties. We think our Q3 non-interest expense run-rate may go up slightly and we continue to have the flexibility in our SBA loan strategy. As we previously indicated, we are committed to looking for ways to expand our market presence and we are very focused on capital management. Now, we’d be happy to take any questions you might have. Operator, will you please open up the call.

[Operator Instructions] Your first question will come from the Aaron Deer, Sandler O'Neill & Partners.

One question about the DOB, the credit quality of Pacific International, looks like its maybe little on the weaker side. I'm wondering what you’re assuming in terms of the marks that you are going to be taking on the loan book and maybe where they're nonaccruals, OREO and classified assets stood most recently.

Well it’s really early to call that number because the mark of course will be determined at the date of close based on market conditions and then -- on what happens to the portfolio between now and then. But now clearly with the kind of performance you see in those portfolios in that part of the country you’re going to see marks, I would say north of 20%.

Okay. And then on the funding side, you mentioned a deposit campaign. I’m wondering where your current pricing stands relative to the market currently and also if you’ve given any thought to repaying any additional trups or if that’s just going to stay put?

Yes. I’ll cover the deposit campaign. We are, the celebration of first year anniversary of the merger, we have a target of raising 100 million in CDs and along with the 50 million in DDA and as we speak we have achieved about 30% of the campaign votes.

I think on the trup question, we have approximately 28 million of trups in. We have the ability to redeem at par, so we are currently looking at that and also EI [ph] has trups of about $4 million. So we will take all that into consideration.

And your next question comes from the line of Gary Tenner, D.A. Davidson.

I just wonder on the transaction, could you talk about your expectations in terms of will there be any branch organizations, cost saves, things of that nature?

This is Doug. For an acquisition of this size, the opportunity to consolidate a branch or two, we have some sizable cost saves there. It’s achievable and it’s probably in the range you would expect as an analyst. Given the size of the deal and the strategic nature of the deal, we want to reserve the thought that we may choose to reinvest or be a little more slow about consolidating and cutting cost to try to grow strategic in that area. So, we do have one or two branches that may overlap but we are not going to shoot ourselves in the foot in terms or our growth opportunity by being too aggressive early.

I think an important point is that this acquisition is accretive and there is slight dilution to Tangible Book Value, but we believe we can earn that back pretty quickly. The more important point is what we do with this increased market presence. We think we have great opportunities to grow and I think that market is underserved. I think based on what we’ve seen with the combination of Center and NARA, we believe that we can attract a whole new subset of customers in the Pacific Northwest area and so we believe the opportunities are clearly what we do with the expanded presence that we will have in that Seattle metropolitan area.

And then just in terms of the elevations for the loan deposit ratio this quarter getting over 101%. You talked a little bit about the deposit campaign, which obviously would help to address some of that. Should we think of your potential selling of SBA loans as sort of a number to get that loan deposit ratio to not go much above 100%?

Yes. Let me talk a little about that and then I’ll have Boni and Doug add to it. Obviously, we watched that loan deposit ratio. On our flexibility on the SBA strategy we talked about gives us one way to assist on managing that liquidity ratio. Also we do have a deposit campaign and Boni can give you some details on that. So I think we have a number of different ways that we can address, managing the balance sheet from asset-liability perspective.

So as I said earlier on the deposit campaign, we set specific goals and we have to distribute among all of our branch and profit center networks. So we think that we will be able to achieve the goals that we set for the remainder of the quarter.

Well, I agree with what Al said. The fact that our loan deposit ratio is high and the premiums are high and the SBA market makes that a lever we could pull pretty easily if we want to.

Actually on our SBA strategy, last quarter to hold, we computed the net interest income effect and that was about $300,000. So just holding loans we made an addition $300,000 in interest income and/or interest income but we didn’t lose on anything on the premium and if anything, the amount of the premium has gone up over a quarter’s time. So I think it was all positive. So I think the flexibility that we have with our SBA production really helps us to manage the balance sheet.

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

Just, with regard to the provision expense, a little higher in amount this quarter. I guess that loan growth also higher in amount. Should we think about targeting maybe a reserve to loan ratio going forward?

This is Mark. Looking forward, with the positive trends we’re seeing in the portfolio and the fact that the provision was driven by a couple of the loans this quarter, we expect that provision to be low provision going forward at this time

And as you think about the provision this quarter, and you think about the breakout, was most of it due to the higher loan growth or was it more attributable to, you mentioned a couple of loans maybe?

It was a combination of the higher loan growth and also we had two large charge-offs.

And then we also look at our concentrations and we added qualitative allowances for certain concentrations

And then on the loan growth, you said very strong on the loan growth. You mentioned CNI and commercial real estate driving the growth. Anything in particular drove that? Is it more macro, the economy getting better or is it the result of maybe, you mentioned business development, maybe seeing a marketshare shift?

You know we are definitely seeing the merger effect, as we have been commenting that some of the larger deals, that new relationships that we acquire, like even in this quarter was the relationship from companies related to Korean national companies and overall in terms of the CRE markets specifically, hospitality industry, we do see more increased activities within that market.

Okay. And then one follow-up question and I'll get back in queue. Regarding the fiscal cliffs, you kind of alluded to it, maybe generally. Anything you're hearing from customers specifically when you talk to them about business and their product demands? Are any of them specifically point to a fiscal cliff as a reason why we’re holding off on investment or borrowing?

No, I think our customers really aren’t focused on those macro issues. It’s more managing their businesses on the ground.

The next question comes from the line of Tim Coffey, Fig Partners.

Al I was wondering, does the company have a target payout ratio for the dividend going forward?

Well, I think we set the dividend at an amount that we felt would be sustainable and we’ll look at it from quarter-to-quarter but we consider both the dividend payout ratio as well as the yield and I think starting off we were pretty conservative.

Okay. Do you have any concerns about managing the capital at this point?

We are very well capitalized. I think the concern as like every other CEO is what the regulatory requirements are going to be down the road. I think, over the near medium term we really don’t have any issues. I think longer term, we share the same concerns about where the capital rules are finally going to end up.

And just kind of nuts and bolts question on the Pacific International acquisition. Do you have any feeling one way the other that TARP the company had could be redeemed at below par?

I seriously doubt that Serashi [ph] would negotiate with us to pay off their discount.

[Operator Instructions] Your next question comes from the line of Julianna Balicka, Keefe, Bruyette & Woods.

To continue the capital management conversation, what are your thoughts about buybacks or special dividends and possibly that in 2013 you will initiate some of those actions?

No and no.

2014?

2014. It’s too soon for us to make any calls on that. As we said before, the first use of capital, or excess capital, would be to support the growth of the bank. And secondly was to return profits to shareholders in the form of common cash dividends. And then thirdly, if we have no opportunities and we've reach the state in dividend payments then we may consider those other alternatives.

And do you have a TCE target ratio where you would kind of want to manage down too?

No. Not at this time. What do you think?

I don’t know, I’m asking you. And then final question --

Our TCA ratio is very high so I think we have a lot of capital to work with and deploy.

And in terms of the Pacific International deal, you talked about the cost save opportunities earlier in the Q&A. Do you have accretion target guideline you can give us in terms of what you are thinking, off this deal?

Well, we are simply looking at a payback period in the neighborhood of three years and less which we always try to look in at a deal. Is that what you were asking?

No. The incremental impact to your EPS for next year for example?

This is not a big transaction in dollars. So you’re probably talking $0.02 to $0.04.

Your next question is the follow-up question from the line of Aaron Deer, Sandler O'Neill & Partners.

Hey guys, just a quick follow-up on the personnel add. It sounds like a pretty big increase sequentially over the past couple or three months. Can you talk about the types of employees, are they just loan production officers or what are we talking about?

Yes, about two thirds of that and then I think 31, two thirds of that were frontline people, with another 25% in the credit administration area and the balance was back office.

The next question comes from the line of Don Worthington, Raymond James.

I just had one follow-up on the deposit campaign. Can you give a little color in terms of the terms of the CDs and the rates that you’re offering?

Yes. We are mainly looking for non-jumbo CDs and we are offering a rate of 1% for one year.

Your next question comes from the line of Oliver Brassard, BMO Capital Markets.

We’re wondering if we could get some more color on the loan pricing, you’ve seen across the categories, some of the recent trends over the quarter?

Yes. Loan pricing it seems like in every quarter in average there's about 25 basis points movement downwards. For us this quarter, in terms of new origination we averaged about 4.5% between the fixed and the variable, fixed coming in at around 4.86% and variable rate at about 4.25%.

Okay. And is there a big difference between like the CNI and the CRE?

Most of the CNI loans are variable and it’s pretty difficult to afford some of these days. So there is somewhat of difference in the CRE and CNI. CRE we averaged at 4.6% this quarter and CNI 4.18%. So there is about more than 40 basis points difference.

And there are no more questions at this time. I'd like to turn the call back to the company for closing remarks.

Well, once again thank you for joining us today and we look forward to speaking with you next quarter.

And thank you again, ladies and gentlemen, for your participation. This concludes today's conference; you may now disconnect and have a great day.