Hope Bancorp, Inc. (HOPE) Q4 2012 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Fourth Quarter 2012 BBCN Bancorp Incorporated Earnings Conference Call. My name is Erin and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference has been recorded for replay purposes. I would now like to turn the presentation over to your host for today’s conference, Ms. Angie Yang, Senior Vice President of Investor Relations. Please proceed ma’am.

Thank you, Erin. Good morning everyone and thank you for joining us for the BBCN 2012 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. These statements constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Such words as "expects," "believes," "estimates," "anticipates," "targets," "goals," "projects," "intends," "plans, "seeks," and variations of such other 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 and are not guarantees of future performance, and involve certain risks and uncertainties and assumptions that are difficult to assess. Actual results may differ materially as a result of risks and uncertainties that pertain to the company's business. We refer you to the documents the company files periodically with the SEC, as well as the Safe Harbor statements in the press release issued yesterday. 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 annual report on Form 10-K for the year ended December 31, 2012, could differ materially from the financial results being reported today. We have allotted one hour for this call. With us today from management are Alvin Kang, BBCN's, President and CEO; our Chief Operating Officer, Bonnie Lee; and our Chief Financial Officer, Phil Guldeman. Our Chief Credit Officer Mark Lee and our Deputy Chief Financial Officer Doug Goddard are also here with us and will also be available to respond to questions during the Q&A session. With that I would like to turn the call over to Al Kang. Al?

Thank you, Angie. Good morning, everyone, and thank you for joining us today. I just want to say a few words before handing the call over to Bonnie, who will walk you through our fourth quarter results. As we announced earlier this month, I will be leaving the company on January 31. Having completed the integration of Nara and Center, capturing the synergies that we have projected for our merger and raising the company’s performance to the level of the high performing bank we envision, it’s time for me to step away and for new leadership to take the reins as the company moves on in its next phase of building the franchise. I am extremely grateful for my time at Nara and now BBCN. I had both the good fortune and bad timing to be named CEO of Nara during the worst financial crisis in decades. We were able to navigate through that crisis and come out stronger on the other side, due in no small part to the phenomenal efforts of the team we have built here. As a CEO, you are only as good as the team that surrounds you, and I’m surely grateful for the support and commitment that are received from the nearly 700 members of the BBCN family. I want to thank all of our analysts and shareholders. I have enjoyed in getting to know many of you over the years and I appreciate the support that you have given us. When we needed to raise capital during the financial crisis and again prior to closing our merger, the investment community believed in our story and our vision and supplied the funding we needed to make it a reality. I appreciate the confidence you showed in us and I’m very happy that many of you have been well rewarded for the investment you have made in our company. As I leave BBCN, I know that it is in good hands and the future is very bright. The senior management team, which includes the people sitting around the table with me today, is as fine a group as I have ever worked with in my career. I will miss seeing them every day and working together to build a company that provides a satisfying, enjoyable work environment for the employees, while also delivering strong results for our shareholders. It’s been a fun and challenging ride as a CFO and CEO of this organization, and I look forward to seeing it prosper and grow for many years to come in the future. Now, I will turn the call over to Bonnie. Bonnie?

Thank you, Al, and good morning, everyone. We have finished our 2012 with a very good momentum highlighted by our highest level of our quarterly net income for the year and strong inflows of both loans and deposits. For the first quarter we generated net income of $21.5 million or $0.28 per share, an increase of 17% from our earnings per share last quarter. We continue to have a high level of profitability with an ROE of 11.55% and ROA of 1.57% and pre-tax pre-prevision income to average assets of 2.83%. We had a very strong quarter of loan production with our loan originations totaling $371 million, up from $313 million last quarter. This drove a 6% increase in both average loans and end of period loans. 90% of the loan production this quarter came in our commercial real estate portfolio, as we have seen a notable increase and demand for CRE loans in our market. The demand has been professed across both geographies and property type. During the fourth quarter, our hotel/motel, mixed use facilities, multifamily and other property type categories each increased by at least 10% over the balances at September 30, 2012. At least some of the CRE activity appears to have been driven by transactions that were accelerated ahead of year end in anticipation of a potentially higher tax rate, going into effect in the New Year. The new CRE production was split fairly evenly between refinancing and new investments. In particular we are seeing quite a bit of refinancing opportunities in the hospitality sector. This sector was somewhat late into the refinancing boom but it is catching up now and many properties have shown improved occupancy rates, revenue, and cash flow trends over the past year. We continue to experience the benefit of being a larger bank with higher lending limits. We are consistently having success, attracting new larger customers as well as winning back business from former customers that have left us in the past for mainstream banks that could accommodate their larger borrowing needs. We also had a very strong quarter in terms of SBA loan production, with total loan origination of $84.3 million, the highest level we have seen in one quarter to date. This represents a 32% increase from $63.7 million produced in the preceding third quarter. For the full 2012 calendar, year we originated $250 million in SBA loans. One of the new synergies we highlighted prior to the merger was the opportunity to leverage [indiscernible] strong SBA lending platform across a larger customer base and [we believe we are seeing this synergy materialize. In fact, among the 100 Most Active SBA 7(a) Lenders in the country BBCN ranked ninth by lending volume for the SBA's fiscal year 2012 ended September 30, 2012. On the deposit side we mentioned in our last call that we initiated a deposit campaign in the fourth quarter to help bring down our loan-to-deposit ratio. The campaign was centered around the 1-year anniversary of BBCN and was very successful contributing to an 8% increase in our total deposits. We were particularly pleased that we were able to meet our deposit gathering goals without negatively impacting our deposit costs. We increased our net interest bearing deposit balances by $79 million or 7% in the quarter. This helped to offset the higher rate promotional CDs offered as a part of this campaign and our total cost of deposits remained the same as last quarter at 52 basis points. Of course some of this growth is being driven by our loan origination, as even with our CRE loans we are typically able to capture some DDA deposits with each lending relationship. With that let me turn the call over to Phil. Phil?

Thank you, Bonnie. We're going to take a slightly different approach to our conference call this quarter. We've put a lot of information in our Press Release that details the specifics of each line item. So rather than reviewing each line item on our call I'm just going to discuss the items where I think some additional color is warranted. Of course in the Q&A session we would be happy to address any questions you may have on the items that I do not discuss. I'm going to start with our income statement. Our net interest income was up 2% from last quarter. This was primarily attributable to the loan growth we saw in the quarter. It was partially offset by an 18 basis-point decline in our net interest margin. Our reported net interest margin in Q4 was 4.61%, while our core NIM, net interest margin, which excludes the effects of acquisition accounting was 4.06%. The acquisition accounting adjustments had a positive impact of 55 basis points on our net interest margin this quarter. Excluding this effect, our core net interest income declined by only 8 basis points from the prior quarter. When looking at this core net interest margin before any purchase accounting adjustments, the decline was primarily attributable to a 15 basis-point decline in our average loan yields, partially offset by 4 basis-point reduction in our cost of deposits and a 47 basis-point decrease in the cost of our FHLB advances. Again this is all excluding the effects of acquisition accounting adjustments. Within our non-interest income, the most significant change from the prior quarter was the $2.8 million in gains we recorded on the sale of SBA loans. Last quarter we did not sell any of our SBA loans. With our loan deposit ratio at an elevated level and premiums at a historically high level, it’s likely that we will continue to sell at least some, if not all of our SBA loan production as part of our net balance sheet management strategy. We sold $30.8 million of SBA loans during the fourth quarter, which represents slightly more than the amount of 7(a) loans we produced during the fourth quarter. Moving to non-interest expense, let me just speak through a few items. Our professional fees were up almost $0.5 million from the prior quarter, which is attributable to increased recruiting costs, IT consulting expenses and legal fees. We had $505,000 in merger and integration expense, which related to our pending acquisition of Pacific International and our other expense was up by almost $1 million, which was attributable to adjustments to our FDIC receivable. Moving to the balance sheet, our cash balances were up by a little more than $80 million from the end of the prior quarter. We built up some excess cash balances in anticipation of potential outflows, following the expiration of the TAG program on December 31, 2012. However, to date we have not seen any outflows of non-interest bearing deposits related to that expiration. Our total loans held for investment were up 6% during the quarter, with most of the growth coming in the CRE portfolio and our total deposits were up 8%, due in part to the deposit campaign that Bonnie mentioned. Another contributing factor to the growth is an institutional money desk that we have opened to bring in out-of-market CDs, which serve as a relatively less expensive additional source of funds to support our loan growth. Moving to asset quality, we continue to experience a stabilization in the portfolio, highlighted by a decline in our non-performing assets of almost $2 million during the quarter and the lowest level of net charge-offs we have seen prior to the financial crisis. I’ll quickly go over some of the significant changes in our various credit categories from the prior quarter. Our total delinquencies increased by approximately $13 million and our substandard loans increased by approximately $10 million. $8.4 million of the increase in both categories is related to 2 loans. We have purchase and sale agreements on both of those loans and we expect these sales to be completed this quarter. Since these credits had previously been mark-to-market, we have no loss exposure. Our performing TDRs increased by almost $8 million. This was primarily driven by a reclassification of a loan that was reported as non-accrual last quarter. The borrower has shown improvement and the loan was upgraded to approval status. But since there were changes in the contractual terms as part of our workout process, it is now reported as a performing TDR. We recorded a provision for loan losses of $2.4 million during the fourth quarter, which is down from $6.9 million last quarter. The lower provision reflects the improving historical loss rate, as well as the low levels of charge-offs we had this quarter. Our allowance for loan losses was 1.5 per 6 of total loans at the end of the year, with a 252% coverage of our non-accrual loans. During the quarter, we made a modification to our loan loss methodology. We increased the look back period for our loss exposure to 16 quarters from 12 quarters. We did this so that we can capture the full duration of this credit cycle in our formula. At the same time, the qualitative factors portion of our allowance has moderated to reflect improving environmental factors, most notably, some of the positive trends and appraisal values over the past year in many of our property types in our CER portfolio. Given the positive trends we are seeing in the portfolio, we expect our credit costs to continue to be manageable. We would expect that our provision for loan losses should be in the range of $10 million to $15 million for 2013. With that I’ll turn the call back to Bonnie. Bonnie?

Thanks, Phil. I just want to wrap up with a few remarks about our outlook for 2013. We entered the year with a lot of momentum and we expect 2013 to be another solid year of profitability. We typically see some seasonal drop off in loan production during the first quarter and we expect to see a greater impact this year due to the loans that were pulled forward as a result of our concerns about the fiscal cliff. After this seasonal issue in the first quarter, our loan production should pick up for the remainder of the year. We remain on track to close the Pacific International acquisition this quarter. We are excited to begin integrating our operations, building out our presence into Pacific Northwest. We believe this region of the country strengthens our dominance along the West Coast and longer term will serve as an important area of growth for the bank. With that, we would now be happy to take any questions you might have. Operator, please open up the call.

[Operator Instructions] Your first question comes from the line of Aaron Deer with Sandler O’Neill and Partners.

If I may, a question for, I guess, Phil. With so much of growth coming this quarter in commercial real estate, I’m curious where your current -- where that stands now as a percentage of total risk based capital and how would you characterize your excess capital today? Is being above the 300% kind of regulatory threshold, what does that give you in terms of ability to continue growing the balance sheet and do acquisition?

This specific number I have to get back to you but in terms of excess capital on an overall basis, we do a pretty comprehensive internal analysis that quantifies 5 different elements of risk and it shows that we have a substantial amount of capital over and above that which our internal calculations suggest we need, which of course is higher than that required by the regulators to be well capitalized.

Aaron, in regards to the CRE constitution, we are well below the 300% threshold.

Right, no. I understand that, I’m just trying to gauge -- but that's partly due to the fact that you have a lot of excess capital right now. So I'm just curious, how you think about the volume of excess capital that you have and what that would afford you to do in terms of additional balance-sheet growth for acquisitions.

Well, as we've always said Aaron, the first use of our capital is to support growth, both internally and acquisitively and we think that this is a good environment to make that happen. So that’s really where our primary focus has been on in terms of deploying capital.

Right. And then in terms of the new growth that should be put on in the quarter, what was the average size of the loans added and how big were, say, the top 2 or 3 credits?

For the CRE, average loan size is about $2.4 million [indiscernible] and our PNI was about $700,000 and you asked for the largest 2 credits. One was actually a church loan that we did. It’s actually a customer that we used to have. They left us for one of the mainstream banks and they came back to us and another loan is a hospitality loan that we financed the purchase. And also the customer -- a past loan customer is existing deposit customer.

And how big were those credits?

Twenty -- the church property was $28 million and the hospitality was $24 million.

Okay, and then just one more if I may and then I’ll step back. The average yield on the new production this quarter relative to loans that paid down during the quarter?

Average daily book is at 4.54% and I will have to get back to you. Do you have…?

I don’t have the average yield that was paid off. We will have to get back to you on that Aaron, but obviously it was significantly higher than the stuff that’s coming on the books at this time.

And your next question comes from the line of Lana Chan from BMO Capital Market.

Question around the margin, if you could talk about what your expectations are for the decline in purchase accounting creation for 2013?

As you know, that number has a tendency to bounce around. It’s not a linear number and it’s hard to predict because it is driven so much by pre-payments on loans and re-financing but if you look at the last 4 quarters, you’ll see that the benefits were $12.1 million, $9.4 million, $7.0 million and $6.3 million. So that’s a declining trend that’s likely to continue with some with ups and downs as we go forward.

And could you remind us how much is left over the next couple of years?

Doug?

It’s just over $50 million.

Okay. And then in terms of the market share gains, or taking back some of the commercial real estate customers from the bigger banks, is it -- are you getting the relationships really through more competitive pricing or is it better service? What do you think is driving that market share gain back?

We are known in the community to deliver our loans on time. So I would go with more of a service than pricing. As you can see on the new loans, the rate that we booked, the loan yields were actually 1 basis point higher than the third quarter.

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

I would like to ask, if you can -- just exactly the point you were just touching upon to elaborate, you mentioned the stabilization of competitive pricing in the marketplace during the fourth quarter. Is that specific to commercial real estate? Is that more general loans? Is it more from the national banks or is it from your peer Korean-American banks? And also can you discuss the pricing environment in terms of deposits as well?

Yes, let me touch base with -- on the loans first. Loan pricing with the Korean-American banking space have gotten really competitive. And we are seeing on the commercial real estates that are below 4%, especially when the occupied properties are rates coming in as low as 3.45 on the 5 year fixed-rate loan. On the deposit side, again it’s very, very competitive. We had our deposit campaign in the fourth quarter and we had a deposit campaign within the DDAs as well as -- demand deposits as well as CDs. So we were able to maintain the margin. But it seems to be both loan and deposits; pricing is getting to be very competitive.

So the stabilization that you referenced, is that in terms of -- the stabilization in terms for yourself specifically in what the loans you are able to put on or is it more of just generally for your peers as well? It sounds like it’s just stabilization in terms of your old loan yields.

Well in terms of pricing, which came below too low. So we have worked putting some discipline on our pricing structure.

Very good, and I have a housekeeping question before I step back. In terms of your tax rate, it went up to 41% this quarter. Thinking about 2013, are there any tax charges you have in place to lower your tax rate?

Well we are constantly looking at that. As you can appreciate the tax credits that we get for some of our CNR investments diminish as the rest of P&L statement gets larger. So we are always looking for opportunities to decrease that but of course we understand that a low tax rate does not necessarily mean a low after-tax net income. So we are always looking at the balance.

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

Just wanted to ask on the hotel portfolio growth in the quarter, maybe if you could provide a little more color around how structures are holding up in those kind of loan originations and then just generally if that was where the brunt of the year end activity-related tax kind of stuff was located?

Yes. In terms of the activities related to the fiscal cliff, we did have the hospitality loans, as well as the multi-tenant commercial real estates, where the sellers in anticipation of tax rate change, they wanted to close the deal before the year end. So we have that phenomenon happening.

Okay and then are the structures holding up in the hotel book in terms of new originations or -- what do those look like versus maybe what they did a year ago, in terms of how you’re making those loans?

Well in terms of our credit structure, it’s pretty standard 5 to 7 years, 65% value on average [ph] basis this year above our minimum standard 125.

Okay, and then secondly was just curious about SBA volumes in the fourth quarter versus the third. I don't know if that was a seasonal thing and then just kind of the outlooks for that for 2013?

Well, as Bonnie said, there were a lot of people that were trying to accelerate some things and we had a lot of 504 loans that come on in the fourth quarter, a larger percentage of the total population of new SBAs were the 504s as opposed to the 7(a)s.

A couple of transactions on the 504s were informed by the borrower that if they don't close by December 31, deal is off. So it was very clear that it was driven by the seller’s motivation to close the transaction before the tax rate -- capital gain tax rate changes.

As Bonnie said, the first quarter is typically our slowest quarter in loan production and I think that will probably likely hold true for SBA production as well.

And your next question comes from the line of Gary Tenner.

I wonder if you could quantify how much of the fourth quarter loan growth you think was accelerated and pulled forward from the first quarter?

Just to give a color on our top 10 new loans, which contributed about 37% of the loan origination, I would identify, from that top 10 relationship, 3 properties were related to the declaration.

Okay, and you had mentioned that you thought that perhaps first quarter growth then would be not as strong and then catch up later in the year. Is that what you had said earlier?

Yes, historically our first quarter loan origination is the slowest among 4 quarters.

Okay so this year is probably just going to be a little bit more extreme in terms of the seasonality?

No in terms of the -- looking at what's in the pipeline, it's similar to what we saw in the 2011 and 2012.

[Operator Instructions] Your question comes from the line of Joe Stieven from Stieven Capital.

Most of my questions have been asked but I'll ask this one. Your capital obviously at year end is fabulously strong and you guys did announce your first dividend, a nickel a share. Can you just explain your rationale on how you came up with the first dividend you started at? That’s number one. And number two, with your credit quality, where do you think, or where would you like to see your tangible common equity at as a ratio?

In terms of reinstating the dividend, what we looked at was some of our peer banks in terms of payout ratios and dividend yields, and we sort of targeted where they were at this point in time and we will constantly read this as that as time goes forward. In terms of the target for the tangible capital equity, again we show that we have perhaps a couple of 100 million of excess capital and we are focusing that again to try and support our acquisitive and balance sheet growth. So I’m not sure I’d want to put a specific number in terms of the target because what will happen will depend upon circumstances that we don’t necessarily have full control over, particularly in the acquisition front.

And your next question comes from the line of Don Worthington from Raymond James.

Just had a couple of questions on the deposit campaign. You may have said this before, but what kind of premium rate did you offer in order to attract the deposits?

On a one-year CD we offered 1%.

Okay, and then would you expect those deposits to, or any of them to flow back out at some point?

Well, hopefully not for a year.

Yes.

That was a deposit campaign, but as you know we have operations now around the country. So we would expect that this will not be the last of our deposit campaigns and we will use our regional pricing capabilities to rotate campaigns throughout the various markets throughout the country.

Okay, and then in terms of the wholesale jumbo CDs, average rate in term on those?

Well the money desk deposits, the institutional deposits that we are bringing in, they are coming in for a one-year money around 50 basis points. The one thing I didn’t mention about the CD campaign is that we did tie that CD promotional campaign to brining in some additional DDA accounts and we brought in about $0.40 in new DDA accounts for every dollar worth of CDs -- new CD money that we brought in.

And then last question, what is the max through the merger cost you would expect for first quarter?

I think what we saw this quarter is probably representative.

And I would now like to turn the call over to management for closing remarks.

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

Thank you for your participation and this say conference. This concludes the presentation. You may now disconnect. Good day.