Hope Bancorp, Inc. (HOPE) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the third quarter 2013 BBCN Bancorp, Inc. earnings conference call. My name is Chantelle and I will be your facilitator for today's call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (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 of Investor Relations of BBCN. Please proceed, ma'am.

Thank you, Chantelle. Good morning, everyone, and thank you for joining us for the BBCN 2013 third quarter investor conference call. Before we begin, I would 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 words and similar expressions are intended to identify such forward-looking statements and are not statements of historical facts. 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 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. BBCN assumes no obligation to revise any forward-looking projections that may be made on today's call. The company cautions that complete financial results to be included in the quarterly reports on Form 10-Q for the quarter ended September 30, 2013 could differ materially from the financial results being reported today. As usual, we have allotted one hour for this call. With us today from management are Kevin Kim, BBCN Bancorp's Chairman and CEO, Kyu Kim, 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, every one, and thank you for joining us today. I am going to start the call by making a few brief comments before asking our COO and CFO to provide more details on the results for the quarter. When they have finished, I will offer a few more thoughts on our growth strategies and outlook. We are very pleased for the results for the third quarter which reflect consistency in our executions and the high level of profitability in our business model. We generated net income of $23.6 million or $0.30 per diluted share in the third quarter. This represents an increase of 28% in net income and 25% in diluted earnings per share over the third quarter of 2012. Again, comparing with the same period of the prior year, our return on average assets improved to 1.53% from 1.2% and our return on average equity increased to 12.7% from 10.1% last year. This strong increase in earnings and our level of profitability reflects the solid organic growth we have generated over the past year as well as improvement in asset quality. At this point, let me turn the call over to Kyu to provide some comments on our business development efforts in the third quarter. Kyu?

As we expected entering the seasonal from third quarter, we saw a significant increase in loan production. We had $389 million in loan originations during the third quarter, up significantly from the $280 million in the second quarter. Within our customer base, demand for commercial real estate loans is far outstripping demand for commercial loans right now. In particular, we continue to see very strong demand for CRE loans on retail, gas station, mixed-use and multifamily property. We are really disappointed in our underwriting criteria with the loans we are booking having LTVs averaging 65% and having other line business that are generating strong cash flows and debt service coverage ratios that were 1.2 and above. Loan pricing, however, continues to be very competitive and there were a few large high quality loan opportunities in the third quarter that we choose to be aggressive on in order to capture the business. So lower rates on these larger loans pushed our average rate on new loan originations down to 4.44% for the third quarter from 4.71% in the preceding quarter. Once again, loan payouts were on the high side at $178 million in the third quarter and together with the natural level of the paydowns restrained somewhat our overall growth in the loan portfolio on an organic basis. The elevated level of loans payouts is being threatened by the sale of property and refinancing opportunities and there is a lot of competition for this business. In select cases, however, we are electing not to maintain some of the low quality loans. During the third quarter, we had approximately $38 million of criticized and classified loans that were paid out entirely after the borrowers were refinanced by another bank and this contributed to the improvement in our asset quality on a core basis which Doug will discuss later in the presentation. Our SBA loan business was also very strong in the third quarter. Of the $389 million in loan production in the third quarter, $72.7 million were SBA loans. Of this amount, $40.2 million were saleable SBA 7(a) loans. Our loan pipeline has remained relatively strong. So we are expecting another good quarter of loan production in the fourth quarter although not quite at the same level as we did in the third quarter. With that, let me turn the call over to Doug.

Thank you, Kyu. We have provided quite a bit of detail in our press release, so I will just discuss a few items where I think some additional color is warranted. We closed the acquisition of Foster Bankshares just about halfway through the third quarter and it had a relatively minimal impact on our income statement for the period. We posted a 4% increase in our net interest income compared with last quarter. This was primarily due to a 5% increase in our average loans outstanding, coming from growth, our strong loan production as well as the partial quarter contribution from Foster. Compared with the second quarter of 2013, our core net interest margin, which excludes the effects of purchase accounting adjustments, was unchanged. On a core basis, our average loan yields declined by six basis points but this was offset by higher yield to the securities portfolio and a slightly more favorable mix of earning assets. Our cost of funds stayed relatively consistent from quarter-to-quarter. Within non-interest income, our net gain on sales of SBA loans was 14% lower than last quarter. We sold $36.8 million in SBA loans during the period compared with $33.8 million in the prior quarter. However the premium on SBA loan sales has declined in the third quarter as we previously guided our last earnings call. For the 2013 third quarter, the average premium was 9% compared with 12.3% in the preceded quarter. After having experienced approximately three quarters at normally high premiums while treasury rates were at their lows, we now expect premiums to remain in a more normalized range of 9% to 10%. Within non-interest expense, our occupancy costs were down 10% from the prior quarter. Last quarter, our occupancy cost included approximately $900,000 in one-time costs related to lease terminations and branch consolidations that was implemented lat in September. Going forward, it will be higher than we experienced in the third quarter as we will recognize a full quarter's impact of the branches we add in the Foster acquisition. Moving to the balance sheet. We added approximately $252 million of loans in Foster, net of the credit mark which was approximately 15%. We also added $321 million in deposits from Foster, of which approximately 30% was non-interest-bearing deposits. From an organic standpoint, we saw a drop in our non-interest bearing deposits during the third quarter. This primarily reflects outflows of approximately $50 million during the quarter from one large deposit relationship that was originally established to fund a sizable construction project in Los Angeles. Aside from the balances from this one customer, our non-interest bearing deposits would have shown an increase for the quarter even excluding the impact of Foster. Turning to asset quality. We continue to see general improvement in our credit trends, excluding the recent acquisitions with notable declines during the quarter in non-accrual loans, classified loans and special mention loans. As Kyu mentioned earlier, some of the decline of these categories was due to loans that were refinanced by other banks and fully paid off. The loans added from Foster contributed $42.3 million to the overall increase we had in classified loans and $12.6 million to the overall increase we had in special mention loans. As with all acquired loans, these loans have been marked-to-market and we believe the loss exposure is minimal. Our net charge-offs totaled $6.7 million in the third quarter or 56 basis points of average loans on an annualized basis. $5 million of this total was related to one CRE related charge off which we reserved during first quarter of 2013. In addition, a $500,000 charge off was recorded during the period related to one pool of acquired credit impaired loans. The loss of this pool of loans had been fully reserved since early 2012. Altogether, we recorded a provision for loan losses of $744,000 in the third quarter. The provision was almost entirely related to the growth in the loan portfolio as well as our improvement in asset quality. At September 30, our allowance represented 1.34% of total loans and 182% of nonaccrual loans. With that, I will turn the call back to Kevin. Kevin?

Thanks, Doug. I am very pleased with what we have accomplished so far this year. We are delivering record earnings while also positioning the company for expansion in some of our smaller markets through the acquisitions of Pacific International and Foster Bankshares. Today, we are the dominant Korean-American bank in five of our core geographic markets including Southern California, Northern California, Seattle, Chicago and the New York Metropolitan area. Since separating the CO responsibilities at the holding company and the bank, we have enable to dedicate a greater amount of resources on strategic plan with a focus on developing new initiatives that will enable us to better capitalize on the foundation we have built as the largest and strongest Korean-American bank in the United States. From a near-term perspective, we are focused on developing new products and service offerings that will provide additional cross-selling opportunities and allow us to increase the profitability of each customer relationship. We plan to add new offerings like equipment leasing, foreign currency services, credit card and residential mortgage products. These are all services that are requested by our existing base of customers. Through the development of these new offerings, we see significant opportunities to deepen our customer relationships, create new revenue streams and diversify our portfolio in the process. Moreover we believe, the addition of these types of financial services will enhance our ability to expand BBCN's market share on a national scale. In addition to being the largest Korean-American bank in the country, providing the best in service convenience and access to our customers, our goal is to provide the most comprehensive offering of financial services for our customer base. Ultimately we believe size, a national platform and a comprehensive financial services offering will be essential to our longer-term plan to establish a meaningful presence for BBCN in Korea. We have already had some success providing financial services to the U.S. operations of small and medium-sized South Korean businesses and we believe targeting relationships in the country even before the corporation enters the United States will better enable us to penetrate this market. We are very excited about the plans that we have been developing. We believe they will be instrumental in taking our company to a new level and significantly enhance the overall value of our franchise. We look forward to providing you with updates on our new initiatives as things develop. With that, we would be happy to take any questions you may have. Operator, please open up the call.

(Operator Instructions) Your first question comes from the line of Lana Chan of BMO Capital Markets. Please proceed.

Hi, good morning. A couple of questions. Could you give us an idea, in terms of the large loans that you mentioned early on? How big were those credits? And just going forward, I guess with the loan pricing we are on those, and going forward what the appetite is to continue to compete for those larger credits?

I will give you three largest in new credits we had in third quarter. A $30 million loan for a medical facility and we had a $28 million loan for a multitenant retail property and also $12.6 million loan for a multitenant retail property. The interest rates for these loans.

Can we provide that offline?

Okay.

And the question you had, yes, we do have increase in larger loans. We have steady increase we see, after we became BBCN.

Okay, and could you provide any outlook on the margin going into the fourth quarter and early 2014, if you continue to compete on the loan pricing? Are there expectations for the margins will continue to come down a bit?

Yes, this is Doug. We saw a very, almost flat core margin this quarter. I think we are still slowly declining on the loan yield. So I would expect, maybe if I took a midpoint of the range, three or four basis points decline in loan yield next quarter. Just because the loans, whether we are competing or not, the market rate for new loans is still a little bit lower than what was rolling off every quarter. But that decline has definitely slowed in the last few quarters. So I would expect it to be a fairly moderate pace in the fourth quarter.

Okay, and I guess one more question, if I could. Kevin, you talked about expanding into some new products. Is that through acquisitions, team hires? How do you think you are going to get into those new areas?

Well, it could be either. We may build infrastructure from the ground or we could acquire an existing entity. That varies from the service or product item and that's the guidance that I can give at this point.

Okay. Thank you.

Your next question comes from the line of Gary Tenner of D.A. Davidson. Please proceed.

Good morning. I have two question. First on core margin staying flat at the $386 million. Doug, was there any benefit from interest recoveries this quarter on interest that have previously been charged off that was maybe larger than the second quarter?

I am sorry. I am not sure I caught all of that but basically, no, there was nothing very unusual in the quarter at all. It was fairly normal activity.

Okay, and then just secondly, in terms of the SBA loan sales with the premiums a bit lower. You guys obviously still sold a fair amount here in the third quarter but if the premiums were in that 9% to 10% range, does that change your thought process on selling those in the secondary market? How do you look at that?

Yes, Gary, this is Jason. In the last call, we guided, there was a correctional stage in the SBA premium market and on average, there has been about 20% correction. This is a norm, given our 20 years plus of operation in the SBA lending. This is a normal market. So you see the steepening curve that have occurred. In May through the June, we saw a correctional stage of the premium market. So we expect to see 9% to 10% range on those SBA gain on sale.

To the extent of your question whether it changes our view on whether we are going to sell, I would say, at this point, no. I always caution that we re-evaluate that every quarter based on every factor, returns, market, our liquidity, our capital position. But at this point, it has not changed our position on whether we would sell.

Okay, and is the liquidity and deposit ratio the number one trigger for whether or not you sell anything in a given quarter right now? Or is it anything else?

So our current position, it's probably higher than capital is because we have such a strong capital position but we have to look at every factor every quarter. But it's still a fairly healthy return. It's a very nice ROE when we sell it. As Jason said, we think it's a normal market. I think as Kyu's numbers indicated, we are still doing well in terms of generating assets for our balance sheet. So it still does not makes sense to sell, I think.

Okay. Thank you.

Your next question comes from the line of Julianna Balicka of KBW. Please proceed.

Good morning.

Good morning.

Good morning.

Good morning. I was hoping if you could breakdown for us the accretion income on loans this quarter between the Center, the Foster and the Pacific acquisitions and then also maybe, how should we be thinking about run rate of accretion given the three new acquisitions you have weighted [ph] on?

I am going to hold off on the breakup between those two loans for a 10-Q because when we have an acquisition they will record and those are numbers we are really rushing at. But I guess I could give you a really rough ballpark. The Foster deal is probably less than $0.5 million out of that in total. Once again, I don't in aggregate, the current quarter accretion number is unusual. It's not widely affected by unusual prepayments. I would say, it's a kind of normal number, still any long-term decline, just because that's the nature of the level yield method which we accrete over.

And because, I know, the healthy bank acquisition, we shouldn't see as much of volatility in the numbers we are seeing at some things that are coming to the end of their FDIC loss hearing?

I am sorry. I didn't hear all that.

So since Central is a healthy bank acquisition, the volatility and accretion that we are seeing from some FDIC acquisition, we shouldn't be expecting that in your numbers?

I am no speaking that should cause wild variation other than to say the long-term trend is down just because the portfolio has declined.

Okay, very good, and then, if I may. Could you discuss the loan growth that has been coming from New York and then how is Pacific's contribution in Seattle growing and stuff like that?

The loan they manage is pretty much proportional to our footprint. The strongest loan demand is in Southern California than the New Jersey region. For PI, our priority were just in consolidation and branch consolidations and we were successful completing all that and we do believe they will take a couple more quarters for any meaningful growth that we can expect from that market.

Very good. Thank you very much.

(Operator Instructions). Your next question comes from the line of Steve Marascia of Capital Securities Management. Please proceed.

Good morning, everyone.

Good morning.

I have a questions for you. It is actually two. One is a follow-up to the margins you talked about. Saying that you saw that you might see a three or four basis point decrease during fourth quarter. What do you see happening to that in 2014? Also, looking at the weighted average of your loans, I am sorry, weighted average yield on the loan portfolio, you guys are looking at about 4.43%. Same question there. What do you see happening to the yields there going into 2014?

Well, the longer you go into future, the harder it is for us to forecast. We don't give a concrete guidance. As I said, the margin net decline has been slowing. If you can tell me exactly what the Fed is going to do over the next year, as rates rise, particularly the five-year treasury rates, you will see our margins stabilize. I expect that to happen some time during the year, but it's really too early for us to pinpoint when it happens.

Has there been any blip in rates or what we can expect for fourth quarter based upon the run up in rates, well many run up in rates last month in the bond market?

Well, I get an anecdotally second hand, but yes, but I think the first impact is we saw a slowdown of the plunging rates of the previous quarter. There was a really, really hot competitive market for fixed rates at the end of the second quarter which slopped a little bit into the first part of the third quarter just because of the lag time between an application and an approval in funding. The backup of, particularly the five and seven-year treasury did slow that and perhaps turned it around. And I think we will start to feel the effect of that over the next two or three quarters.

Thank you very much.

Your next question comes from the line of Aaron Deer of Sandler O'Neill & Partners. Please proceed. Aaron Deer - Sandler O'Neill & Partners: Hi, good morning, everyone.

Good morning. Aaron Deer - Sandler O'Neill & Partners: Kevin, it's encouraging to hear you talk about some of the strategic plans to help to diversify your loan book. I am curious, over what period of time do you expect to see this benefit? Do you have a goal to which you would like to see the commercial real estate concentration brought down to?

We expect that, the home mortgage products and equipment leasing would most likely be launched in the first quarter of next year. The other service offerings will follow those two items. Aaron Deer - Sandler O'Neill & Partners: Okay, and now with the Foster deal closed and integration seems to be well underway, have you turned your attention to the additional deals and has there been much discussion in the marketplace?

Well, we have our eyes open for the possible opportunities out in the market. As I mentioned, we are the dominant Korean-American bank in all five of our geographic markets but there are other markets which have large concentrations of our core customer base. So we still have our eyes open, our mind open towards possible transactions. Aaron Deer - Sandler O'Neill & Partners: Okay. Lastly, Doug, and I might have missed this earlier, but can you give us a sense of what the expense run rate is going to be with the full load of Foster here in the fourth quarter and to what extent there might be cost saves heading into the New Year?

I will give you a couple of pieces of data because I know you like to model these things yourself. But the run rate for G&A for Foster on a standalone basis was probably about $18 million a year. So its about $1.5 million a month or $4 million plus a quarter. So in the current quarter we have half of the normal quarter of expense plus the merger related expenses we have identified. In the fourth quarter, we will have our systems conversions. So between contract terminations and the systems work and contractor and everything else, we could in the neighborhood of $2.5 million of merger-related expenses. Going forward, as an out of market merger but with the size of this, we would expect to get 25% savings off the run rate. Aaron Deer - Sandler O'Neill & Partners: Okay. That's all very helpful. Thank you, everyone.

Your next question comes from the line of Tim Coffey of FIG Partners. Please proceed.

Hi, good morning, everybody.

Good morning.

Good morning.

Good morning.

Well, I just wanted some clarification for myself on the new product offerings. Is it your intention to portfolio those at least in the home mortgage or it would be signed into the secondary market?

Well, our main focus is to supplement our services and products to our existing customers. So although the sale in the secondary market would be obviously part of the mortgage business, our main focus, albeit at the beginning stage would be to service our existing customer base.

Right. I was assuming you would retain servicing rights on them, but, okay, so portfolios. Then was there any disruption to the SBA program or the SBA funding the channel from the government shutdown?

Well, despite the temporary government shutdown, we are accepting the application on a business as usual and we had a strong third quarter SBA origination and we expect a strong fourth quarter SBA origination.

Okay, great. Well, I am all out of questions. Everything is answered. Thank you very much.

Thank you.

Thank you.

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

Good morning. Thanks for taking my question. With regard to the five core markets you are in, I know mentioned M&A is looking at other markets, but as far de novo branching, are you seeing opportunities. I know the Washington D.C. market is a new market for you with one branch here. Do you see opportunities to open additional branches?

Well, that is part of our strategic considerations and if we believe that the Washington D.C. market would be a more presence for BBCN branches and obviously we do but the question is the timing. We either open up more branches or we may purchase a few branches from other institutions. We have all the possibilities open.

Okay, and an additional follow-up on the new initiatives. I think you mentioned the four, what could be the impact on the expense side? Do you see these things having a meaningful impact on initial increase in expenses with revenues to follow?

The level of investment required to start up a new line of business, it depends on so many variables like as Lana questioned whether we invest in people and system to build infrastructure from the ground or whether we acquire an existing business entity. There are so many variables and I think it is really difficult at this time to provide any meaningful guidance at this point.

Okay, and then just my last question. With regard to loan officers, I am just wondering if you are finding opportunities out there to hire additional loan officers and maybe it is more in the C&I side or the commercial real estate side.

Yes, we are constantly looking to hire more people and also train inside and we are looking for more opportunities in C&I market also get us into new cities [ph].

Okay, but nothing outside of normal, do you guys are just, kind of the consistent addition of loan officers, nothing big planned?

Nothing special big plan. No.

Okay, all right. Thank you very much.

Thank you.

Thank you.

Your next question comes from the line of Don Worthington of Raymond James. Please proceed.

Thank you. Good morning, everyone.

Good morning.

Good morning.

Just wanted to follow-up a little bit on, I think it was Tim's question on the SBA. With the shutdown, is there any lag in the gain on sale that you might realize, basically push from one quarter to another because of any processing delays?

No, the processing delay was specifically on the closing side of the SBA origination. So we do normal wholesale during the quarter but it would impact any delay or recognition of the premium going forward.

Okay, and then on the acquired non-performers from Foster. Any color on expected timing to dispose of those?

Well, that's a good question. Keep in mind, Illinois is a traditional state. So anytime we do an equal closure as such, it is going to take a while, one to two years. That is, we will like to work with the customer to the extent we can. Working with the customer is always preferable than to go through the foreclosure process.

Okay. Thank you.

At this time, there are no additional questions in the queue and I would like to turn the call back over to management for closing remarks. Please proceed.

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

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.