Hope Bancorp, Inc. (HOPE) Q1 2015 Earnings Report, Transcript and Summary

Good day, and welcome to the BBCN Bancorp Q1 2015 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ms. Angie Yang, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Kate. Good morning, everyone, and thank you for joining us for the BBCN 2015 first quarter investor conference call. Before we begin, I’d like to make a brief statement regarding forward-looking remarks. The call today may contain forward-looking projections regarding 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 and are not statements of historical facts. We wish to caution you that such forward-looking statements reflect our expectations based on information currently available, are not guarantees of future performance and involve 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 the complete financial results to be included in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 could differ materially from the financial results being reported today. As usual, we have allotted one hour for this call. Presenting from the management's side today will be Kevin Kim, BBCN Bancorp’s Chairman and CEO; Kyu Kim, our Chief Operating Officer; and Doug Goddard, our Chief Financial Officer. Chief Credit Officer, Mark Lee; Chief Lending Officer, Jason Kim; and Chief Retail Banking Officer, Cha Park, are also here with us today and will participate in the Q&A session. With that, let me turn the call over to Kevin Kim. Kevin?

Thank you, Angie. Good morning, everyone, and thank you for joining us today. Let me begin today with some brief comments on the quarter before asking Kyu and Doug to provide more details on the financial results. When they are finished, I will close with some final comments, before we open up the call for questions. We got off to a good start in 2015, generating $21.4 million in net income or $0.27 per share. Our results reflect consistent execution across all of our business lines, as quality balance sheet growth helps to offset the continued challenges resulting from the low interest rate environment and the declining contribution of purchase accounting benefits. We had a strong quarter in business development with $351 million in new loan originations, which is 18% higher than the first quarter of 2014 and 15% higher than the seasonally stronger fourth quarter. This resulted in total loan growth of 3% in the quarter and 10% over the past year. We are also seeing solid deposit inflows with total deposits increasing 2% during the quarter and 9% over the past year. We are also making great strides in our efforts to create more diversification within our loan portfolio. Commercial loans accounted for 28% of our total loan originations in the first quarter, which is significantly higher than our recent historical trend. As we scale up some of the new lending areas that we are currently rolling out, including equipment leasing and residential mortgages, we anticipate making steady progress in creating a more diversified loan portfolio over the coming years. We believe this new business lines, as well is our new credit card and wealth management offerings, will not only provide additional catalysts for growing our franchise, but also reduce our overall risk profile by creating diversification in our loan portfolio and revenue mix, and ultimately lead to enhance the earnings and shareholder value in the years to come. Now let me turn the call over to Kyu to provide additional details on our business development efforts in the first quarter.

Thank you, Kevin. As mentioned earlier, we had $351 million in new loan originations for the first quarter, and we are particularly pleased with the strong contribution from commercial loans. We extended $129 million in commitments to commercial customers and funded $99 million in new C&I loans by the end of the quarter. Overall, we now have $1.1 billion in total credit commitments outstanding to commercial customers with a utilization rate of 54% online for the credit on March 31, 2015. Commercial real estate loans accounted for 71% of our loan production in the first quarter. The mix of production was very healthy with balanced growth being generated across most of our CRE property categories. We completed the modest portfolio rebalancing initiative, participating our $32 million of loans in the first quarter. With our current loan production successfully shifting more towards the product types that we want to grow, we do not expect to participate out any meaningful amount of loans for the foreseeable future. With our higher volume of commercial originations we had in the first quarter, we saw a corresponding increase in the mix of variable rate loans. Variable rate loans accounted for 68% of our total loan originations in the first quarter, up significantly from the 52% in the prior quarter. This was the major contributing factor in a decline we saw in our overall average rate on new loan originations in the quarter. In addition, we funded a number of larger commercial credits that we brought on at lower than average interest rates, taking into consideration the borrower's credit quality and the overall profitability of the relationship. All together, the average rate of our new loan originations was 4.07% in the first quarter, compared with 4.39% last quarter. Our SBA business also continues to be a very strong contributor to total loan originations. Of the $351 million in loan production for the first quarter, $65 million were SBA loans, which is 52% higher than our production in the first quarter of 2014 and even 12% higher than the seasonally stronger fourth quarter. The volume of SBA loan originations for the 2015 first quarter was boosted by a few loans that were expected to be funded in the preceding fourth quarter. Of our SBA originations in the first quarter, $43 million were 7(a) loans and have been marked as held-for-sale. We are pleased with the overall level of new business development that we are seeing across the company and we continue to have a strong pipeline of lending opportunities. Given these factors, we believe we are well on our way to generating organic loan growth in the high-single-digits for 2015. With that, let me turn the call over to Doug to go our financial results in more detail. Doug?

Thank you, Kyu. As usual, let me just discuss a few items where I think some additional color is warranted, given that we provide quite a bit of detail in our press release and the quarter was relatively consistent with the recent performance. Our net interest income decreased by $1.1 million from the preceding fourth quarter. The decline was driven entirely by the decline in purchase accounting benefits, which was $1.1 million less than in the preceding quarter. This decrease more than offset the $109 million increase we had in average loan balances during the quarter. We recognized $3.9 million in purchase accounting benefits during the first quarter 2015, compared with $5 million in the preceding quarter. At March 31, we had approximately $22 million in accretable discount remaining on all of the acquired portfolios. While there will be fluctuations quarter-to-quarter as we stated on each conference call over the last three years, the discount recognized each quarter should continue to trend lower, although not necessarily on a linear basis. The decline in purchase accounting benefit drove the 3 basis point decline in our net interest margin from the preceding quarter. However on a core basis, excluding the impact of purchase accounting, our net interest margin improved 4 basis points, reflecting the following factors. First, we had a favorable shift in the mix of earning assets as we redeployed some of our excess liquidity out of cash and into the loan and securities portfolios during the quarter. And second, repayment fee income was about $300,000 higher in the first quarter. Moving onto non-interest income. The decrease from the preceding quarter is primarily due to a decline in our net gain on sale of SBA loans. On a year-over-year basis, our net gain increased by 12%, which is more reflective of the growth we are seeing in this business line on an annual basis. During the first quarter, we sold approximately $33 million in SBA loans versus $48 million in the fourth quarter. The premium in the secondary market has held steady at approximately 10% and the gain on sale from SBA loans that we post was net of broker fees and other payments. We also had $424,000 in gains on sales of securities in the quarter, which reflects the normal balancing effort of our portfolio during the quarter. Turning to non-interest expense, most items were in the normal range of variance. As it’s typical in the first quarter, we saw an increase in our salaries and benefits line due to the impact of higher payroll taxes that hit in the first half of the year and higher vacation accruals, the higher payroll taxes largely due to the annual bonuses which are paid in the first quarter, and we typically experienced higher vacation accruals in the first quarter, even that fewer vacation are taken during this period. The other significant change from the last quarter was a 19% decline in our credit-related expenses. As we've indicated previously, this line item largely reflects expenses related to OREO properties and related property taxes, most of which are the result of the Foster Bank acquisition. Moving to the balance sheet. Kevin and Kyu, already discussed the loan portfolio, so I'll start with deposit trends. We saw good inflows during the first quarter, resulting in an annualized growth of 8%. We typically see outflows of deposits in first quarter, which were more than offset by a couple of factors. Our success with commercial lending in the recent quarters contributed to a 5% increase in non-interest-bearing deposits from the end of the year. Second, we conducted deposit gathering campaigns targeted at both, existing and new customers. And we also took advantage of attractive rates in the wholesale CD market which contributed to the increase - through the increase in our balances of jumbo CDs. The wholesale rates are substantially lower than the prevailing interest rates and jumbo CDs in our local markets, and the addition of these new CDs helped us keep our cost of deposits flat during the first quarter. Turning to asset quality. We saw positive trends throughout the portfolio with improvements in all of our major credit categories. Our non-accrual loans at March 31 decreased to $38.8 million, down from $46.4 million at the end of the prior quarter. The decrease largely reflects the combination of loan upgrades and payoffs of problem loans. As we alluded to last quarter, we are expecting a gradual improvement in our asset quality given the current performance of our problem loans. Greater than 48% of our non-accrual loans or 79% of our total non-performing loans are current and paying as agreed. Our total classified loans were $210 million at March 31, down from $224 million at the end of the prior quarter. This continues a longer trend we have seen in classified loans, which have decreased by 17% over the past year. We had $1.1 million in gross charge-offs during the first quarter and $1.5 million in recoveries resulting in net recoveries of $336,000 in the quarter. With the positive trends in the portfolio and net recoveries in the quarter, we recorded a provision for credit losses of $1.5 million. This kept our allowance to total loans at 1.22% unchanged from the end of the prior quarter and increased our coverage of non-performing loans to 72% at March 31, 2015. With that, let me turn the call back to Kevin.

Thanks Doug. After considerable efforts in 2014, we are now actively engaged in rolling our three additional new product offerings in 2015. We successfully funded the first group of residential mortgage loans under a pilot program and we began rolling out a new offering in our Southern California branches in April of 2015, and expect to have all retail locations nationwide up and running by the middle of the year. We also launched our wealth management business at the beginning of the second quarter of 2015. While this is a more targeted product offering, given the maturation of our core immigrant customer base, we expect that there will be a growing need for this service in the years to come. The launch of our new BBCN credit card offering is on schedule for next week. Unlike the cards offered by other Korean American banks, BBCN sets the rates, terms and rewards, enabling us to customize the products for more effective targeting. Given BBCN’s large retail customer base, we expect this business line along with our residential mortgage product will significantly increase our customer lending portfolio, consumer lending portfolio in the years ahead. Initially, all of the new product offerings are designed to target our existing customer base, together with our current capabilities, including the most comprehensive offering of cash management services in our niche market, we believe BBCN’s expanded offering of products and services will help build deeper and stronger relationships with our customers and will result in a more diversified loan and deposit portfolio. As we progress through 2015, we remain highly focused on operating the company with a long-term perspective. We are making investments today to lay a stronger foundation for more diversified banking franchise. This is a very exciting time for us at BBCN. We have a great position in our market. We have a clear vision of the bank that we want to become and we have an elite team of experienced bankers to execute on our growth strategies. We look forward to showing the results of our progress in the years ahead and enhancing the value of the BBCN franchise for our stockholders in the process. With that, let's open up the call to answer any questions you may have. Operator, please open up the call.

Thank you. We would now begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. The first question comes from Aaron Deer, Sandler O'Neill and Partners. Please go ahead.

Hi. Good morning, everyone.

Good morning.

I'd like to start with the outlook for loan growth. Kyu, you mentioned that you felt pretty confident about high-single-digit pace. But it seems - you guys have been getting really strong originations and it seems like maybe the pay-down activity has slowed and then the pipeline is strong. Any chance we might actually see better growth than that?

Well, for the second quarter, it's about the same as we were answering the beginning of the first quarters. The level of loan [indiscernible] would be pretty close to first quarter.

Okay. And then, it sounds like you’re having very good success with the new initiatives. I was wondering if we could get maybe kind of a break-out in terms of the earnings drag that each of the residential mortgage, the wealth management and the credit card businesses are currently having on earnings, and at what point we might expect those to turn to contribute into the bottom line?

Well, I can give you an overall answer, but we're not going to break-out an individual segment P&L. The segment that's farthest along obviously is signal family. And we've had that G&A for a good part in the back office there in there for a year and a little bit of a ramp-up in the first quarter. I think we are very excited about how that is starting to take hold and we should start to see profit contribution in the second half of the year for single family. Two of the other initiatives; wealth management and credit cards are, we are very excited about what that's going to do for our customers and our long-term profitability, but the actual impact on 2015 is fairly immaterial. We've got some G&A drag in there and we will start to see fee income in the second half of the year, but it's not going to be a big driver of our performance in 2015.

Okay. Thanks. I'll step back.

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

Good morning. If I can follow-up on the question that Aaron just asked. In terms of your answer to wealth management and credit card, you said it’s immaterial to 2015. But how should we think about the impact of all three initiatives including residential on 2016 and 2017?

Wildly favorable. Looking out two years, I mean that's further we’ve given guidance. We are very optimistic that if you’re looking at 2017, all of those would be contributing profit with single family being a significant driver to both profit and to our balance sheet diversification by then. We will see tipping point in credit card and wealth management, where they go from being a very mild drag on G&A in this year to being a net contributor at the end of - second half of 2016.

And then in terms of the expense outlook for the remainder of the year. You said that the residential expenses already in from last year, and a little bit of increase in the first quarter. Should we be thinking as you continue to rollout the products nationwide, should we be thinking about additional increases in expense run rate or anything like that?

Well, we will still see some increases in expenses. We are adding some people in all of those units. So we will see some increase in headcount. We've usually answered that question in terms of expense efficiency ratio, which while it did tick up this quarter - it ticked up almost entirely because of the decline in revenues driven by the purchase accounting. I do not expect an increase in the efficiency ratio in the second quarter. We're looking to be improving that ratio in the second half of the year, not in the first half.

Great. Very good. And could you provide an update for us in regards to the opening of the South Korea branch, please?

Well, we are working on it. It involves a lot of regulatory steps, and because we have to deal with the Korean regulators as well as the U.S. regulators. I think, all I can say at this time is, we still expect to be able to open up a branch toward the end of this year or latest by only next year.

Very good. And then if I could switch topics and I'll step back. In terms of your loan growth this quarter, it's very good and the pace of repayment seems to have slowed. And from your remarks about your success in C&I lending, it seems that - is it fair to say that perhaps your success in C&I originations are going to going forward, mitigate some of the seasonalities typically seen in the first quarter, or is there something else driving the excellent growth on the balance sheet from this quarter?

Generally speaking, our C&I platform has shown some improvement over the year, but the first quarter of 2015 was somewhat really unique with two large credits. On an average basis, our target is for C&I loans to account for approximately 20% of our new loan originations. But it's going to take some time for our C&I loans to really grow.

Okay. Very good. And you said two large credits accounted for some of the growth this quarter. How large were those?

Well, we usually don't disclose specifics for the competitive reasons, but I guess we're going to have those under our largest credits.

Yes, we have two large C&I credit. One was 35, another one was also 35.

You said 35, yes?

Yes.

Okay, great. Very good. Thank you very much.

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

Thanks, good morning. Actually I have a couple of questions that were answered, but in terms of the C&I growth, was it in the California franchise, or any other parts - newer parts of the franchise?

One from California and one from New York.

Okay. And in terms of the credit card business, it sounds like it's going to be, not just a fee business but a portfolio business. Do you have any sense of where the perspective yields for that line of business might shake out?

Well, Gary, BBCN will be the first Korean American bank as a credit card issuer. The credit spectrum will be basically a full credit card but the range of the yields is anywhere between high-single-digit to anywhere between 20%. So, 9.49% to about 19.9%. So I think that building up the portfolio there is a potential. But all in all, we have a broad commercial clients, as well as consumer clients. So I think we'll be very effectively cross-selling this product. So we are pretty excited about this product launching next week Monday.

Okay. And the expenses for this product, the fixed expenses are fully embedded in first quarter?

I don’t know if fully embedded. But the growth in expenses will not - in that unit will not be material impact on 2015, I would say.

Okay. All right, thank you.

[Operator Instructions] Our next question is from Don Worthington of Raymond James. Please go ahead.

Good morning everyone. In terms of the - I think you mentioned an increase in FTEs of about 18 in the quarter. Roughly what areas were that in? Was it primarily the new products, or compliance or any color you can add there?

Well, there is three things. One is, there is always a sort of - we always have a certain number of empty positions, so in any given month or quarter we might fill some that will cause some noise in that number. The second is we're probably going to be, for the rest of my lifetime being net adding to our compliance side of the bank. That's a few at any given time. The rest is mostly out of the sales side with the new business units. I mean its things like mortgage lending officers or wealth management investment officers.

Okay, great. And then are you seeing any weakness in any of the CRE segments? It looks like you're getting growth in most of them, but anything starting to weaken at all, or everything is still build up pretty good?

We’re actually seeing a pretty steady performance within the CRE segment. We're not seeing any specific segment within the portfolio weakening at all at this time.

Okay. All right, thank you.

The next question is from Tom Alonso of Macquarie. Please go ahead.

Good morning or good afternoon, everyone. Just quickly on these larger C&I credits. Earlier in the call, you made some comments that they were lower yielding because you thought the overall profitability of the relationship would be better. I assume that these came with some lower cost deposits attached to them and/or there is a fee income opportunity that you think these larger credits will lend themselves to?

Yes. They come with the general operating accounts and the cash management opportunities. One of them was actually existing deposit customer that had maintained large deposit with us.

Excellent. Okay, great. Thanks for that guys.

[Operator Instructions] The next question comes from Lana Chan of BMO Capital Markets. Please go ahead.

Hi this is actually Oliver Brassard in for Lana. I just want to go over what your priorities for capital are over the next couple of years. Is it the mix of organic growth versus acquisitions versus returning more capital to shareholders?

Well, I think the first priority is obviously giving the highest possible return to our shareholders. So our internal rate of well-priced organic growth always meets the threshold for us. A share repurchase or acquisition deal makes the criteria based on price and strategic fit at any given time. And right now we’re very excited about our ability to both grow organically the loan portfolio, but also new business lines. We do think there is potential for M&A out there. So it's a constant process internally of looking at the return to shareholders of all those alternatives.

Just a follow-up. On the M&A, can you be a little more - I mean not too specific but is it other Korean American banks, is it mainstream banks or is it fee businesses?

Well, I’ll go back to our two criterias. Fit to our strategic plan and the numbers working. It would not have to be a Korean American bank.

Yes, we are interested in opportunities to enhance our presence in both existing and new markets.

Okay. Thanks for taking my call.

Thanks.

Next we have a follow-up from Julianna Balicka of KBW. Please go ahead.

Hi, I was hoping to follow-up on some of the deposit comments you made earlier in the call. In regards to your deposit campaign, if you can maybe give us a little bit color as to the rates and the magnitude of deposits you gathered? And two, in regards to the wholesale CDs that you brought on, could you tell us the rate, the duration and the amount and what kind of securities may have been pledged against those? Thank you.

I'll start with the wholesale and we don’t - none of them have a security pledged against them. They’re mostly wholesale CDs. The average duration is really a year, that’s where most of the market is. And the price tends to be between 45 and 50 basis points for a year. I'll talk about the price again and let Cha talk about volume on the deposit campaigns because I don't remember and hopefully she is looking at her notes over there. But the pricing there that tends to be very similar to what we've seen in campaigns over the last years. So when we’ve got a promotional CD or a promotional money market, it looks very similar to the promotional rates that we were doing a year ago that come up to you and they tend to be around 1% the promotional part. We do with that focus ourselves and trying to get other accounts with those functional products to help bring the average costs down and trying to get DD [ph] account in every possible case. You want to tell us about the volume?

Doug, this is Cha Park. And I know Doug went over sort of the overall strategy for our campaign and he is absolutely right. We are trying to track total relationship, not just the single product. So that was focus of our campaign. Another focus we had was that in the past a lot of our campaign tends to be very short-term duration. The campaign that we ran this year were really focused a lot more in longer term accounts. So one was two year product and another one was 15-month product. So we are really hoping that that will add to our product a little bit more diversification.

And do you have a volume of how much deposits you raised or is your deposit campaign still ongoing?

We are still in the midst of it, the hybrid. Okay, so we actually had in excess of $100 million in the first campaign, and the second one we are targeting $200 million and we are fairly confident that we should be able to hit that within probably by the end of April based on the demand that we'll be having.

Very good. Thank you much.

Thank you.

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

Thank you. I once again thank you all for joining us today and we look forward to speaking with you again next quarter.

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