Hope Bancorp, Inc. (HOPE) Q2 2015 Earnings Report, Transcript and Summary

Good afternoon. And welcome to the BBCN Bancorp Second Quarter 2015 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Angie Yang, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Ellis. And good morning, everyone, and thank you for joining us for the BBCN 2015 second 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 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 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 June 30, 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; and Chief Lending Officer, Jason Kim is 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. As usual, I'll begin with some brief comments on the quarter before asking Kyu and Doug to provide more detailed information on the financial results. When they are finished I'll wrap it up with some closing comments before we open up the call for questions. Let's begin. We delivered a solid quarter generating $22.9 million in net income, or $0.29 per share. This performance was driven by positive trends in revenue generation, expense management and credit quality. Compared with the first quarter of 2015, we increased revenue by approximately 3% while maintaining stable expense levels which resulted in nice improvement in our operating efficiency ratio. We had a strong quarter in business development with $360 million in new loan originations which were 3% higher than the preceding quarter and 5% higher than the same quarter last year. This resulted in total loan growth of 2% in the quarter and 9% over the past year. On a year-to-date basis, our total loans have increased 5% which puts us well on track to reach our targeted level of loan growth for the year. While we are executing well in our traditional lines of businesses, we also continued to make progress on the development of new businesses and product areas that can help diversify and strengthen our business model. As we indicated on our last call, we began to roll out our new residential mortgage product to Southern California branches during the second quarter. During the rollout, we've recognized that the processing time and customer experience levels were not up to our standards. Changes in the leadership of the residential mortgage program have been made and we are revamping our systems and processes to ensure that we have a competitive offering in terms of responsiveness and processing time. This change however will shift our timeline for rolling out this product on a full scale nationwide to later this year. Even with this delay we remain excited about the opportunity to introduce this product to our customers and build it into a meaningful contributor to our business in the years ahead. On the other hand, we have had a very encouraging launch for our new credit card product with the response from both consumers and business customers exceeding our initial expectations. Although it is still a bit too early to provide more detailed metric related to this product line, we've been pleasantly surprised by the number of customers signing up particularly given that the credit card launch was a soft one without any major advertising campaign. As of the end of June of 2015, we have approximately 1,000 new credit card holders, thanks to the effective cross selling efforts of our front line. In fact, I am pleased to report that our branches have been quite active in marketing our new credit card product to their existing customers as well as providing referrals to our wealth management team. And this underscores the fact that with a more comprehensive offering of product and services, geared for both commercial and consumer customers, our retail branches will become more effective contributors to our overall business development efforts, ultimately leading to greater efficiencies for the company. Now let me turn the call over to Kyu to provide additional details on our business development efforts in the second quarter. Kyu?

Thank you, Kevin. As mentioned earlier, we had $360 million in new loan origination for the second quarter of 2015. Commercial real estate loans accounted for 78% of the origination with balanced growth in all of our major property categories with the exception of retail. Commercial loans accounted for 20% of new origination in the second quarter. We extended approximately $127 million in commitment to commercial customers and funded $72 million by the end of the quarter. Overall, we now had $1.15 billion in total credit commitment outstanding to commercial customers with a utilization rate of 52% on line for the credit at June 30, 2015. The C&I loans booked this quarter was broad based with no particular concentration within any one industry. As part of our efforts to grow our C&I loan portfolio, we continue to focus on developing new businesses relationship with the US subsidiaries of Korean national companies. The largest new C&I relationship developed this quarter was with such a subsidiary. And we believe we will be able to achieve even greater success in the years ahead as we progress with building our brand presence in Korea. After having had a considerably higher mix of variable rate loans in the first quarter due to couple of large C&I loans, we saw a more normalized mix this quarter with originations coming in at 51% variable rate and 49% fixed rate. With this more normalized level of new loan originations, we also saw an increase in the average rate on new loan originations to 4.29% up from 4.07% last quarter. Our SBA business continues to be a strong contributor to our business development efforts. Of the $360 million in loan production for the second quarter, $70.3 million were SBA loan. Of our SBA origination in the second quarter, $58.3 million were 7(a) loans. The [SCB's] [ph] ranking for the first nine months of fiscal 2015 were just published last week, and I am pleased to report that BBCN continues its leadership in this area cutting all other Korean-American banks. Overall, BBCN is currently ranked 12 in the nation as of June 30, 2015. Looking ahead as we've stated from time to time, the second half of the year has typically been a seasonally stronger period of loan production for the bank. And during the third quarter, our loan pipeline was at a high point for the year which leads us to believe that the trend of stronger loan production in the second half of the year should continue in 2015 as well. With that, let me turn the call over to Doug to go over our financial results in more detail. Doug?

Thank you, Kyu. As usual, we provided quite a bit of detail in our press release. So I am going to limit my discussion to just some of the more significant items in the quarter. We had one large non-core item that positively impacted our results this quarter which was the receipt of a one time special dividend from the FHLB totaling $923,000. This special dividend had the effective of increasing our investment securities income and yield in the quarter and had a positive impact of approximately five basis points on our net interest margin. Our net interest income increased by $2.3 million from the preceding first quarter. Aside from the impact of the special dividend, the increase reflect a $124 million increase in our average loan balances as well as $595,000 increase in purchase accounting benefits versus the first quarter. At June 30, we had approximately $18 million in accretable discount remaining on all of the acquired portfolios. While there will be fluctuations quarter-to-quarter as we have stated on each conference call over the last three and half years, the discount recognize each quarter should continue to trend lower although not necessarily on a linear basis as we can see in the first and second quarters of this year. Excluding the impact of purchase accounting, our core and net interest margin increased by two basis points from the preceding quarter. The improvement in our net interest margin was attributable to the special dividend from the FHLB as well as a favorable shift in our mix of earnings assets which offset a decline of five basis points in average loan yields. As we mentioned over the past couple of calls we had some larger short-term deposits on the balance sheet that we kept in highly liquid assets. We utilized our cash balances and FHLB advances to manage those deposit outflows during the second quarter. We also continued our strategy to bring our securities portfolio back to more normalized percentage of total earning asset after it had decreased to the low end of the range we target. Reduction in cash balances, the increase in the securities portfolio and the growth in total average loans resulted in a positive shift mix in our mix of earnings assets. Moving on to noninterest income. Most items were consistent with last quarter with the exception of net gains on sales of securities as we did not recognize any gains this quarter. Our SBA loan sale activity was relatively similar to last quarter as we sold approximately $35.2 million in SBA loans versus $33 million. The premium in the secondary market has held steady at approximately 10%. As a reminder, the gain on sale from SBA loan that we post is net of growth of these and other payments. Given that the 7(a) production of $58.3 million this quarter was considerably higher than the approximately $43 million in Q1, all things remaining the same, we would expect our SBA gain on sale next quarter to trend higher than the current $3.1 million. Turning to noninterest expense. There were minor differences between the quarters but most items were in the normal range of variance and amounted 1% decline from the first quarter. Overall, it was a good quarter of expense management and realized some improvement in our operating efficiency as a result. Moving to the balance sheet. Kevin and Kyu already discussed loan portfolio, so I'll start with the securities portfolio. The portfolio increased by approximately $63 million, or 8% from the end of the prior quarter. The securities we purchased were primarily mortgage backed securities and municipal bonds and had an average yield in the range of 2.4%. The new securities were consistent with the duration profile that we target and the overall portfolio continues to have duration of around four years. Turning to deposit. Our deposit growth was impacted by the outflow of the larger short-term balances that I mentioned earlier. Outside of the impact of these larger temporary balances, the trends in deposit flow remained consistent with recent quarters with growth overall in our core deposits. Given our success in adding more commercial banking relationships, the strongest area of growth continuous to be non-interest bearing deposits which were up 4% from the end of the prior quarter. Since the end of 2014, noninterest bearing deposits have increased 9%, an increase to 29.3% of total deposits and 27.1% at the end of the year. Turning to asset quality. In general, we saw positive trends throughout the portfolio. At June 30, our non accrual loans were $39.7 million compared with $38.8 million at the end of the prior quarter. But as a percentage of total loans, our non accruals remained unchanged at 68 basis points. Our total classified loans declined to $195 million at June 30 from $210 million at the end of the prior quarter. This continues a longer trend we've seen classified loans which are decreased by 19% over the past four quarters. In general, the decline has been driven by pay offs as well as loan upgrades. We had $1.5 million in gross charge-offs during the second quarter and $975,000 in recoveries resulting in net charge-offs of $476,000 for the quarter or just three basis points of average loan on an annualized basis. Thanks in parts to the success we had with recoveries; we recorded a provision for credit losses of $1 million which more than covered our net charge-offs and provided for the growth we saw in the quarter. This resulted in allowances to total loans of 1.21% and a coverage ratio of nonperforming loans of 72% at June 30 which were essentially unchanged from the end of the prior quarter. With that let me turn the call back to Kevin.

Thank you, Doug. Financial results for the three months ended June 30, 2015 reflect solid execution across all areas of our business operations. We are particularly pleased with the consistency of our financial performance as we continue to transform BBCN into a more diversified financial institution. Aside from the new product offerings that are currently underway, we are also expanding our CMS offerings with two new cash management solutions in business payroll and merchant processing. In addition, we are also making progress, enhancing our branch network. Later this year, we expect to add our presence in the Washington DC metropolitan area with the opening of our second full service branch in Centreville, Virginia. As you may recall, we acquired our current branch in Annandale, Virginia as part of the Foster Bank acquisition and we are now looking forward to more active business development efforts in this geographic market. As I stated on our last conference call, the Board and management of BBCN remain highly focused on operating the company with a long-term perspective. Ultimately, it is our goal to deliver greater value to our customers, employees and shareholders as the premier Korean- American bank in the nation. Underscoring our Board's confidence in the long-term prospect of BBCN and commitment to enhancing shareholder return, we announced our third consecutive annual increase in our cash dividend. For shareholders of record as of to close of business on July 31, a cash dividend of $0.11 per share will be paid on or about August 14, 2015 representing a 10% increase. We are in the midst of exciting times at BBCN with growth happening all around us. And we look forward to keeping everyone apprised of our ongoing progress. With that let me open up the call to answer any questions you may have. Operator, please open up the call.

[Operator Instructions] And our first question comes from Matthew Clark of Piper Jaffray. Please go ahead.

Hi, good morning, everyone. May be first on expenses, you guys have done a great job of holding a line there for the last few quarters, just want to get a sense for how we should think that $39 million run rate going forward with the new initiatives in place and any additional hiring you might need to do.

Yes, this is Doug. While we still as we’ve talked to last several quarters consider ourselves the net investment mode and there are a number of new ventures that Kevin alluded to you. That net investment in terms of G&A is really fairly minor as a percentage of our G&A for the next few quarters. So I am not expecting a big ramp up in G&A. The cost control that you have seen is not any one large item, it is very, very careful attention to a lot of little items that we've been able to get little phase to try to offset some of the investments we make in new adventures with some improvements and efficiencies in other areas.

Okay. Any seasonality that we should think about going forward or you are going to hold the line on $39 million?

There is no particular seasonality. The longer term trend in terms of the absolute dollar amount probably is still upward, that’s to say just because we are adding growth to some new business units but we expect to maintain a very good and tight efficiency ratio through that growth.

Great. Good and then on your reserves and coverage ratios, looks like reserves to loans down a couple of basis points 1.21%, can you just help us understand where we might see that ratio bottom and maybe overall kind of provisioning outlook for the year? For this year.

That actual coverage ratio I think is bouncing around in a fairly narrow range right now. And I don't see the coverage ratio moving very quickly at either direction. As far as provisioning as the finance guy, I look at each quarter trying to figure out what's recurring and what's maybe a little bit special. Then as I looked at the provisioning in the current quarter, the only thing that it was a little bit special I would say was our recoveries were little higher than normal. I might expect-- I am looking across the table at Mark here, maybe $500,000 or $600,000 recovery we got close to the $1 million. So if we had lower recoveries and our provisioned to 1.4 or 1.5 this quarter, I would say that's a very completely normal provision for us in this part of the cycle.

Our next question comes from Aaron Deer from Sandler O'Neill. Please go ahead.

Good morning, everybody. This is Alex Morris stepping in for Aaron. Just had a quick question regarding paydowns, saw those ticked up a little bit in the second quarter. Is there kind of anything you can attribute that to or provide any color on that? And do you have any expectations of where that should run in the coming quarters?

I'll let Kyu jump in if she knows something I don't. But I look at that number and it bounces around in a range and I don't think - I mean the current [quarter] [ph] higher than the average but I don't think it was wildly abnormal. Do you have anything?

I think he is asking for paydowns right, not pay-offs or both --

Oh excuse me, yes, paydowns, yes, correct.

And yes, there is a little bit higher but a one or two borrowers doing a large refinancing or selling a building or something can cause that kind of movement quarter-to-quarter and that's really all I attribute that variation to current quarter. I would love more like -- like add a year average rather than any one quarter to try to project it.

Got it, thank you very much for that. Then just on the SBA front. Could you -- have you guys seeing any more competition in the market place? Any kind of competition and are there any new markets that you guys looking out for SBA?

This is Jason. SBA given the profitability of the product, I mean it has been a competitive for a number of years. It will always be competitive but we've been adding our business development officers in the areas that we know the market so in terms of competition very strong but we are doing a lot of initiative to really increase our production.

All right. That's great. Thank you for that. And then just finally if I could saw a slight uptick in special mention and I guess overall credit size loans for the quarter, anything that drove the rise in special mention.

Yes, this is Mark. We did have little uptick in the special mention, it is really due to the couple of relationship, one, it’s a CRE that had a buyer and really covered by insurance until it is renovated, cash flow is a little bit up in the air so we took it down to special mention. And another one [indiscernible] relationship, they are undergoing the ownership change so we took it down to special mention until we find out exactly how everything is going to stack up. Other than that it was just two relationships that drove the downgrade but we are still making a pretty good progress on the improving the overall classify level.

That's great. And just kind of moving forward, would you expect today hang around in this range maybe improve a little bit, is there any kind of forecast you can provide?

Well, it’s always hard to forecast what’s going to be going forward but the trend line is that we are continuously making progress on the classify over last four quarters and special mention tend to be little bit more noisy depending on a borrowers [indiscernible].

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

Good morning, everybody. I had a couple of questions. Kyu I think you had mentioned that the largest new credit commitment in the quarter was to a US sub of a Korean company, I wonder if you could give us any sort of idea of any magnitude of the credit commitment there. And maybe also kind of talk about what you expect to occur there on the deposit side over time?

It was a manufacturing company, subsidiary from Korea. And the commitment was $25 million, we funded about $10 million last quarter. And we do expect that we will continue the business from the subsidiary. We do require -- we do request the parties for all the commercial loans and we do service both deposits out of [state] [ph] with our CMS product and services.

If I could just add the deposit amount typically runs at low seven figures.

All right, great, thanks for that. And then just curious about the service charge line, year-to-date your -- it is about 10% lower than it was first time for 2014. Has anything changed there in a way that either the accounting showing up on the fee line or whether there has been any changes in your fee structure?

Are you talking about the service charge on deposits?

Yes.

Yes. We have a couple of headwinds in that line. Most of that is coming from NSS fees. The negative part, we have some growth in other categories. In part of that is industry trend with NSS fees being down in general on the industry. And the other part is that the natural client selection process we go through and the clients we target are not necessarily clients that are going to generate lot of NSS fees. And the combination of those things has caused a decline in that one line item within service charges over the last year.

Okay, great. And then just one final question on the Annandale market where you are opening a second branch. Is the kind of market leadership in Annandale is that -- has that changed since you acquired the one branch there in the Foster's deal or is that the existing leadership that came over?

We cannot say we changed the leadership. It has been as before but we would like to.

So you have added -- you are adding a branch but you are still looking for new market leadership in that, in Northern Virginia?

Are you talking about staffing?

Well, I am talking about like the market president or your head lender in that market because the branch was -- was part of the acquisition so I am just curious if you had changed over the leadership in that market.

We believe that geographic market is currently underserved by the Korean-American banks. And there are a few competitors in the area but I don't think there is any one single dominating Korean-American bank servicing the area and we want to be the dominating player there. So we are adding one branch there and hopefully we will capture the underserved, the portion of the Korean-American population in the metropolitan Washington DC area.

Great, okay. And maybe I didn't ask question clearly enough but I am just -- when you acquired Fosters and you inherited this branch in northern Virginia, did you change the people running that franchise or is it the people that were there when you acquired it?

We kept the staff from the Foster Bank.

And for the new branch?

For new branch we are currently in the selecting process for hiring people.

[Operator Instructions] Our next question comes from Julianna Balicka from KBW. Please go ahead.

Good morning. I was hoping you might give us some more color on deposit flows. Doug in your comments you mentioned some of the larger deposits have flown out. Could you refresh our memory what kind of deposits those were and were those in the CD category? Also could you give us more color on the DDA growth during the quarter which was very nice?

I'll give the first part. I would like Kyu jump in the DDA growth. As far as the deposit outflows, we identified during the -- at the end of last year a very, very smallest customer with -- in the neighborhood of $300 million with a deposit where the relationship is much more less accommodating them rather than deposit we will be able to invest for the long term. And as a result we kept those very short-term liquid assets. With the expectations it would outflow in the first half of this year which it did. It was a mixture of CDs and money market that slowed down over the first half of the year a close $300 million in those customers. And I would just add to that because I always look at it internally what's happening to our growth with a new without unusual thing. And I looked back over the last year and like several years; our core deposit excluding those relationships we've identified has been growing at an annualized rate in the high single digit just similarly to what we guided on the loan side. That's it for me.

As for DDA part, as we have been increasing our line of credit C&I loans, we've been attracting some large commercial deposits and our commercial lenders have been focusing bring those large deposits.

Okay. And to follow up on those comments. In terms of the relationship that you have identified that were flowing out of $300 million, is there any additional amount that you are looking for to flow out or is that pretty much done? And secondarily as your loan growth and your deposit growth -- quarter on growth I mean core deposit growth and loan growth has been kind of keeping long step in the high single digit. Could you refresh our memory as to what kind of loan to deposit leverage ratio you like to run the balance sheet at?

You mixed a lot of things there together. Yes, the customers we have identified their deposits have out flowed as we knew they would and what's left is what I would consider a normal mix of business. In terms of loan and deposit ratio, if you look back at our last how many quarters we've been in the existence as BBCN, we've been in the high 90s very high 90s, that something we can manage fairly well on our side. It is worked very well for us. Our longer-term goal probable below that to the mid to lower 90s, but that's not something I - I feel like we need to do in the next quarter or two.

And then final thought and I'll step back, so when we think your growth into a rising rate environment, should we think about you maintaining this high 90s leverage and therefore maybe using higher cost to fund to kind of keep the deposits in balance with loans or should we be thinking about the fact you will be adding more overnight borrowings into the mix.

Yes. We use overnight, not overnight borrowings, we use borrowings --

Excuse me long-term borrowing, sorry, I didn't mean to say overnight

As a -- we will keep a mix of borrowings and some wholesale fundings as part of our funding strategy to report, that as a percentage of our balance sheet is not going to grow dramatically. It is something we use both to manage interest risk, to fine tune interest rate risk and to manage very short term liquidity needs. We are not expecting a significant change in the mix of our core versus wholesale funding.

Got it. And then final question on a different topic. In terms of your loan growth, you had mention returning back to more normal level of 6 versus low origination this quarter. Is interest rate -- is anticipation of rising interest rates starting to come true, are you seeing borrower demand more for longer-term fixed rate funding or any shift in borrower behavior that you can comment on.

Yes, we always see the borrower requesting or demanding a longer term fixed rate. We have even seen a 10 year request. So we are not doing loans, we are trying to stay within 5 to 7 if we are doing a fixed rate. And also occasionally we may do a swap, interest rate swap transaction if that's only way to get the deals done.

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

Hi, good morning, everyone. Just wanted to see if you had an update on the leasing product. Talked about residential mortgages and credit cards but how the leasing product is going?

Yes, good morning, Don. This is Jason. We launched the incrementing product last year and we've been training our vendor for the last six months to really engage with the commercial as well as commercial borrower. So we did originate little less than $5 million for second Q but given the cyclical type of finance, we will expect pretty active activity in the second half and we do expect to project our originating about $25 million for 2015. So we are really engaging with our vendors to really discuss with our borrowers capital expenditure and better adjust in their financing needs.

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Once again thank you all for joining us today. And we look forward to speaking with you next quarter. Bye, bye.

Thank you.

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