Hope Bancorp, Inc. (HOPE) Q3 2015 Earnings Report, Transcript and Summary

Good day and welcome to the BBCN Bancorp Q3 2015 Earnings 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 third quarter investor conference call. Before we begin, I'd like to make a brief statement regarding forward-looking remarks. The call today may contain forward-looking projections regarding future events and the future financial performance of the company. 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 fact. 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 companies business. We refer you to the documents the company filed periodically with the SEC as well as the Safe Harbor statement 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 Report on Form 10-Q for the quarter ended September 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 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 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. As usual, I will 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 were very pleased to deliver the most profitable quarter in our history generating $25.1 million in net income or $0.32 per share. This perform was indicative of our consistent execution in developing new business and adding quality assets to help us offset the continuing headwind of the low interest rate environment. We also continue to have success with credit recoveries which offset our provision requirements for the strong loan growth during the quarter, and as noted in our news release, the quarter also benefited from a higher than normal level of OREO related rental income. Altogether, we were able to generate strong earnings growth with net income increasing by 17% over the third quarter of 2014. We also delivered the highest quarter of loan production in our history with $432 million in loan originations which was 20% higher than the preceding second quarter and 13% higher than the same quarter of last year. This resulted in total loan growth of 3% in the quarter and 10% over the past year. On a year-to-date basis, our total loans have increased more than 7% which keeps us well on track to reach our targeted level of loan growth for the full year. It is important to note that unlike many smaller community banks, we are not reliant on a few key relationship managers to drive our loan production. We have a well respected franchise with that breadth and strong brand awareness as the premier Korean American bank in the United States. We have been successful in leveraging our brand and market positioning to great advantage in our business development efforts and we believe this has allowed us to deliver the consistent application quarter-after-quarter which ultimately creates loan for value for our shareholders. I will let Kyu talk in more detail about our loan growth but I would like to note that we have been able to generate the growth in our loan portfolio while managing our overall expense levels. Notwithstanding the investments we have been making in our organization on a year-over-year basis, our total revenue increased 3.4% while our non-interest expense declined by 2.1% as a result, our operating efficiency ratio improved to 47.3% in the third quarter of 2015 from 49.7% in the prior year period. Now let me turn the call over to Kyu to provide additional details on our business development efforts in the third quarter. Kyu?

Thank you, Kevin, and good morning everyone. On our last earnings conference call, we noted that the second half of the year is typically a seasonally stronger period of the loan production for the bank and our third quarter certainly helped towards this trend. As Kevin stated earlier, we originated a $432 million in new loans for the third quarter of 2015, the highest level ever in any one period. That said, the level of originations in the third quarter is actually not surprising when considering the consistently strong volumes we have posted quarter-after-quarter and at BBCN, the consistency of our performance is equally as important, if not more than the performance in any one quarter. In terms of what we are experiencing in the market, it is pretty much business as usual. We are seeing reasonably healthy economic activity and loan demand in our markets and the competition continues to be fierce from both our niche competitors as well as the larger mainstream banks. Commercial Real Estate loans accounted for 80% of the originations in the third quarter with balanced growth in all of our major property categories. Commercial loans accounted for 18% of new originations in the third quarter. We extended approximately $105 million in commitments to commercial customers and funded $77 million in new C&I loans by the end of the quarter. Overall, we now have $1.2 billion in total credit commitments outstanding to commercial customers, with a utilization rate of 51% on lines of credit at September 30, 2015, and again, this quarter, the C&I loans booked were broad based with no particular concentration in any one industry. Our SBA business continues to be a strong contributor to our overall originations. Of the $432 million in loan production for the third quarter, $55 million were SBA loans and $46 million of this production were seven-eight loans. As most of you probably know the small business administration fiscal year end is September 30 and their national rankings have already been published for the year. BBCN is again the top Korean American Bank in SBA origination volumes ranking 13th in the nation among all SBA lenders. For the fiscal year ended September 30, 2015, BBCN originated in excess of $240 million in SBA loans up 11% over the prior years' originations, so congratulations to our SBA team and front line for another strong performance in SBA lending. Overall, our third quarter originations consisted of 54% fixed rate loans and 46% variable rate reflecting the highly competitive market for loan pricing, we saw a drop in the average rate on new loan originations to 4.23% in the third quarter from 4.29% last quarter. Entering the fourth quarter, we continued to have a very healthy loan pipeline. In particular, our SBA loan pipeline is exceptionally strong and we expect to have one of the strongest quarters ever in SBA loan originations for the three months ending December 31, 2015. Overall, we are expecting to close out 2015 with another solid quarter of loan production. With our loan growth year-to-date at 7.3% and given the healthy loan pipeline that we currently have, we are revising our previous guidance of high single-digit loan growth and now expect loan growth for the full year to reach the low double digits. With that, let me now turn the call over to Doug to go over our financial results in more detail. Doug?

Thank you, Kyu. As usual, I will limit my discussion to just some of the more significant items in the quarter since we provide quite a bit of detail in our press release. Our net interest income increased by $1.4 million from the preceding second quarter; the increase was driven primarily by a 3% or $176 million increase in our average loan balances and to a lesser extent an increase in our securities portfolio. Compared with the prior quarter, the impact of purchase accounting benefits was unchanged at $4.3 million. At September 30, we had approximately $15 million in accretable discount remaining on all of the acquired portfolios. Excluding the impact of purchase accounting, our core net interest margin decreased by three basis points from the preceding quarter. The decline was due to lower FHLB dividend income than the preceding quarter where we benefited from a special one-time dividend of $923,000. Also impacting the NIM was a modest decrease in average loan yields of four basis points and a two basis point increase in the cost of deposits. Moving on to non-interest income, we saw an increase of $2.7 million or 25% from the preceding second quarter. The increase was driven by a few particular items. First, our gain on sale of SBA loans was 9% higher than last quarter. We sold $42.4 million in SBA loans during the third quarter compared with $35.2 million last quarter. The premium in the secondary market continues to average approximately 10%; however, the actual premium depends on the type and dollar size of the property. Of our SBA loan sales this quarter, we had a couple of larger sales which demanded lower than our usual average premiums. This impacted the overall average for the quarter. Second, we had $334,000 in gains on sales of OREO compared with $73,000 in gain last quarter. Third, we recognized a higher than normal level of OREO related rental income this quarter of $1.7 million, which was recorded in the other income line. Net of related expenses and taxes this benefited our bottom line by approximately $670,000. Turning to non-interest expense there were minor differences between the quarters, but most items were in the normal range of variance and overall expense levels were essentially flat with the preceding quarter. Our salaries and benefits expense was up by approximately $500,000 from the second quarter, it was primarily due to project-related temporary staffing costs and although we incurred approximately $500,000 of expense associated with the OREO properties that generated the rental income just discussed, our overall credit-related expense was approximately $600,000 lower than last quarter. So overall, it was another good quarter of expense management and with our revenue growth, our efficiency ratio improved to 47.3% from 49.6% last quarter. Moving on to the balance sheet. Kevin and Kyu already discussed the loan portfolio so let me start with some brief comments on our securities portfolio. The portfolio increased by approximately $102 million or 12% from the end of the prior quarter. This continues the ongoing build up we have had in the securities portfolio to get it back within our targeted percentage of earning assets. The securities we purchased were primarily mortgage-backed securities and municipal bonds and had an average yield in the range of 2.35%. The new securities were consistent with the duration profile that we target and the overall portfolio continues to have an effective duration of approximately 3.4 years. Turning to deposits; our total balance has increased by approximately 5% during the quarter. The growth primarily occurred in money-market and time deposits. Our end of period balance of non-interest bearing deposits was down by approximately 3% from the end of the prior quarter which was attributable to a few transactions associated with larger client relationships. On an average basis, however, our non-interest bearing deposits were up a bit from the preceding quarter. Moving on to asset quality. We were very pleased with the positive trends we are seeing throughout this portfolio as well as the low inflow of new loans into the problem asset categories. On September 30, our non-accrual loans were $32.4 million down 18% from $39.7 million at the end of the prior quarter. The improvement is largely attributed to the pay off a few non-accrual loans. As a percentage of total loans our non-accruals dropped to 54 basis points from 68 basis points. Total classified loans declined to $179 million at September 30 from $195 million at the end of the prior quarter. This continues a longer trend we have seen in classified loans which have decreased by 22% over the past four quarters. In general, the decline has been driven by pay offs as well as loan upgrades. We had $1.8 million in gross charge-offs during the third quarter and $2.2 million in recoveries resulting in net recoveries of $392,000 for the quarter. This continues the extremely low loss experience and strong collections we have had in 2015. Through the first nine months of the year we have had total net recoveries of $252,000. Reflecting the low loss experience and strong recoveries our provision requirements for the quarter was only $600,000, which covered the growth we saw in the quarter. This resulted in a slight decrease in our allowance to total loans which was 1.19% at September 30 while our coverage ratio of non-performing loans increased to 82%. With that let me turn the call back to Kevin.

Thank you, Doug. All around the 2015 third quarter was a strong quarter reflecting solid execution across all aspects of our business. We continue to make progress with our new business initiatives including equipment lease financing, credit card, wealth management and residential mortgage. As we are looking forward to this new business lines ramping up to make more meaningful contributions to our overall business development efforts. With a growing pipeline of loans, we have very strong momentum heading into the fourth and final quarter of 2015. As we approach the fourth anniversary of the creation of BBCN, I would like to express a few words of thanks to all of our team members and business partners without whose efforts and contributions we could have not have achieved so much. To-date since the merger of Equals, total assets have increased 47%. Our loan portfolio has grown by 60%. Our total deposit base has increased 53% and quarter-after-quarter we have been quite consistent in delivering solid financial performance which has lead to solid earnings growth year-after-year. Thank you, everyone for your trust and partnership. Supported by strong and consistent financial performance and steady execution of our strategic initiatives, we believe BBCN is well-positioned to enhance the value proposition to our customers, employees and shareholders as the premier Korean-American Bank in the United States. With that let's open up the call to answer any questions you may have. Operator, please open up the call.

We will now being the question-and-answer session. [Operator Instructions] The first question comes from Aaron Deer of Sandler O'Neill & Partners. Please go ahead.

Hi, good morning everyone.

Good morning.

Good morning.

I was hoping to get a little bit more color on the SBA volumes in the quarter and the drop in the gain on sale permit. Sounded like, if I heard you correctly that the reduction in the aggregate premium stemmed from just maybe a couple of larger loans that were sold but you generally see the overall premiums holding in at about the same level where they've been running over the past several quarters?

Yes. Good morning, Aaron. This is Jason. Yes, the third quarter sale we did have two large SBA loans which we had to provide competency rates, so in terms of premium, it is really indexed by the margin over the [indiscernible] general price. So higher interest rate, higher the premium, so in that sense, we kind of brought down the premium overall in the third quarter. But overall, the secondary market, premium market is holding very well and I had a call with one of the secondary market traders and they also expect 2016 will be also a very steady in the secondary market for the SBA lending.

Great that's very encouraging. And also it sounds like the pipeline of business that you have coming in, in the SBA heading into the fourth quarter is also very strong. Can you -- what do you attribute the strength to it? Have you significantly increased your hiring of SBA lenders or is that just more -- that they are getting more traction themselves?

Well, Aaron, SBA lending is a very competitive lending area, but we mentioned that in the call before. But again, we open up loan production office in the second quarter this year and we brought in two experienced business development officers whose hitting a really good number and bringing a very solid credit -- loans that we are very comfortable and 2016 next year, we anticipate to increase two additional LPOs as well as continue to increase the business development officers. So I think we're in the right direction in the given area.

Okay, great. Thanks for taking my questions.

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

Good morning.

Good morning.

Good morning.

Very nice quarter. And I have a few follow-up questions please and then I'll step back into the queue. Kind of continuing on into the SBA conversation, in terms of your comments that the 2016 loss will be steady in the secondary market, the last few years, the premiums do seem to be, I think you'd said it before a couple hundred basis points above kind of historical levels. So could you maybe give us some thoughts as to what would make those premiums come back down to historical levels not in 2016 but in the hypothetical some future year?

Well, SBA, secondary market really determined by the supply and demand, but most importantly, the demand for this guaranteed product is very high and even the rate, even the Fed tightens up and increases the rate, given the SBA product is a variable rate, so the premium market will hold-up. We noticed the secondary market increased since the third quarter of 2012, so this is actually a third year holding up a very steady premium market, but I think the reason why it is holding well and continue to well in the foreseeable future is the fact that I think that there's a lack of investment opportunity out there from the investment perspective. So until that landscape changes completely, I think we will make a very steady secondary market.

Okay, that makes sense. And then in terms of the originations this quarter was there any impact from the SBA administrations running out of authorization and being renewed or that was just barely a blip?

Just barely a blip, yes.

Barely a blip, okay. And in terms of your other originations in your remarks, you'd said 80% was coming across from commercial real estate and it was very strong business as usual. Two follow-ups to that. One, in the 18% of C&I, if that includes SBA, could you talk about your outlook and plans from growing just traditional C&I, non-SBA, and two, could you also comment about the -- seems to be a lower share of reductions or prepayments and repayments this quarter as a relative to your BOP ratio, so is there any trends we should think about there going forward?

First of all, we do focus on growing C&I loans, so we expect to grow our C&I loans in the coming quarters. What was the second question?

The pay off lower than --

The pay off lower than the third quarter of last year but pay off was pretty high compared to the second and first quarter.

Right.

And we tried not to compete with the low interest rates so we did let go of the loans with the lower -- by getting the lower interest rate offer.

Okay, thank you.

The next question comes from Tim Coffey of FIG Partners. Please go ahead.

Thank you, good morning, everybody.

Good morning.

Well, I had a question about kind of expenses. Do you have any big planned projects other than kind of the stuff we've talked about in previous quarters that would have a material impact on expense growth in forward quarters?

This is Doug. No, well yes and no. We have an ongoing slate of projects for working on it. In fact this quarter we probably had more net investment in new projects than most and the thing we try to do was at all times have a number of cost containment and cost control strategies going to try to offset that. So in terms going forward we continue to hope to grow our revenues faster than expenses. We clearly target to have our efficiency ratio less than 50% and I don't see any big blips upward in expenses coming in the near term.

Okay, thanks, Doug. And then the OREO rental income, is that something that could stick around for a little bit?

Not at that level. It was a bit of a protracted settlement process involving a couple of large properties so we ended up collecting a sizeable amount of rental income and in fact paying about half a million dollars of related expenses on those same properties in the same quarter. It's certainly not unusual to have rental income but we won't have it at that level necessarily in future quarters.

No, you're absolutely right. It's not unusual. What would be a normal level for any quarter?

Fairly minor.

Okay. Well, great. Those are all my questions. Thank you.

Thank you. [Operator Instructions] Next is a follow-up from Julianna Balicka of KBW. Please go ahead.

Good morning once again. Thank you for letting me step back in. In terms of expenses and regards to developing the new business, could you give us maybe some dollars, some quantification around your expense spending that you've been making that's related to business development or maybe infrastructure versus how much because you referenced cost containment in your press release how much dollars of expense savings you've been able to achieve this quarter and maybe some outlook for efficiency ratios going forward?

Boy that's a lot in one question. I will say we probably had half a million dollars of what I would consider project related expenses in the quarter which we would consider not run rate. As far as those particular projects in recurring I think we always expect there to be some of that in every quarter, however, so maybe the next quarter might be a couple hundred thousand dollars less than that. The key thing for us is and having spent that money our expenses were still flat for the quarter to down slightly which is basically the magnitude of the other things. The nature of cost control in a bank when I've been working on, it's not one thing. It's not two things. It's 40 things. I don't have a half million dollar answer for one thing we've done, but we're trying to work on 40 things which are $20,000, $40,000 or $50,000 or $100,000 which is why we keep coming back to talking about the efficiency ratio which is the net impact of all those internal efforts and we are aiming and expecting to stay under 50% there for the near term.

Okay. Very good. And then, in terms of the deposits you talked about in your prepared remarks, could you give us a little bit of thoughts as to I mean your loan to deposit ratio is consistently around 100% plus or minus 1% for quite some time. So is this a level that we should do you feel comfortable going into a rising rate environment or do you think you might need to at any point expand the deposit growth and maybe how come your DDAs didn't grow as strongly this quarter?

Well, as I -- we alluded to the comments; our DDA growth has really been fairly steady and nice over the entire history of the merger. We've also had pretty steady growth of DDA, and we have quarter-to-quarter aberrations in that longer term trend driven by the activity and a handful of very large dollar customers and that variability in this quarter was downward as we had some money move out in a couple of our very large customers. I don't see any change in the longer term trend that we're bringing on net DDA of core customers on a quarter-by-quarter growing basis going forward.

Okay. And then, final question and I'll step back. Could you give us an update on your opening of the branch and so around any or the branch just in general color on what's going on there?

Julianna, this is Kevin. We are currently in the process of discussing with Korean regulators and we don't believe that we have any obstacles in opening a branch in the first quarter or first half of next year as we originally planned.

And do you have any updated expectations for them as contribution to growth fees? I know before you'd talked about the fees from that branch will offset what you other wise now spend on corresponding banking expenses, but do you have any updated color on what the impact will be?

I think that guidance is still pretty good. The near term prognosis is that after opening the branch, the net contributions within really a couple quarters will be positive just from the benefit of foreign exchange fees. Longer term you're going to see the benefit in related to some of the questions we had earlier in things like C&I growth in the United States as we helped penetrate that market starting overseas.

Okay, very good. Thank you very much.

Next is a follow-up from Aaron Deer of Sandler O'Neill & Partners. Please go ahead.

Hi, guys. Kyu, I just had a difficult time hearing you earlier. I think you're away from the microphone but could you repeat what was the number that you gave for the line you said amongst your commercial customers? And can you tell us where that was a year ago?

It was 51% the quarter and if you have another question while you're talking about that, I'll look that up.

Maybe just give us the total balances as well relative to -- in terms of dollar amount.

Total dollar amount outstanding on commitments?

Yes, on the line of commercial line commitments.

So it's about $570 million.

Okay.

And you also wanted the utilization rate?

I was just curious what the utilization rate was a year ago relative to this 51% number here in the third quarter of 2015.

Unfortunately, I don't have that data on hand. I only have data last couple of quarters.

I'll have it in just a second. It was 53% a year ago.

Perfect. Great. Thanks so much.

The next question comes from Don Worthington of Raymond James. Please go ahead.

Good morning, everyone.

Good morning.

Good morning.

Just wondering if you could provide a little color in terms of the strength of lending in the markets outside California during the quarter?

As we have mentioned in the past, we are very pleased to see that we are making progress in the Northwest market. For the Midwest market, it's a little slower than we expected but our Midwest market continues to be a very good source of deposit gathering for us to fund our loan growth.

Okay. Great. Thanks, Kyu. And then, any comments on the outlook for M&A, any opportunities that may be there?

Well, Don, as we have stated many times we are in a growth mode of both organic and strategic. So we remain very interested in M&A opportunities that would enhance our presence in both existing and new markets. Obviously, any deal which is large or small would have to make financial sense and fit in -- fit within our acquisitioned models, but so the short answer is we are very interested in pursuing deals which would make sense for us.

Okay, great. Thanks Kevin.

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

Thank you. Good morning. Just had a quick question about kind of future expansion on a de novo basis. If you look at the markets where you've got LPOs but don't have branches today which of the markets do you think would be the most likely avenue for you guys to put a full service office in?

Well, obviously, Texas is a good candidate area, so is Alabama and Georgia area, southeastern states are the area that we do not have full service -- physical full service branches, but where we have some good size potential customers, so logically those areas have priorities over the other possible areas.

Okay. And as you look at that, Georgia, Alabama market and you've had the LPO there, how was the -- as you've tried to cross sell into the Korean automakers and suppliers, how has the success been there from a production standpoint?

Well, we've been very active in making loans in the area for the Korean subsidy. And we also have good CMS, cash management service product that we offer to those companies and we attract sizeable deposit from that area.

Okay. Thank you.

And next is another follow-up from Julianna Balicka of KBW. Please go ahead.

In terms of the -- hi thank you. In terms of the Washington D.C. branch that area branch that you are applying an opening, do you have any outlook for how quickly that can ramp up in terms of deposits or loan size contribution?

Well, we expect to open the branch the end of this year and we see that the area is pretty good for deposit gathering for us. Probably next -- first or second quarter that we will see meaningful contributions on that market.

Okay. And then kind of going back to the capital growth and M&A question that was posed. For the -- I guess nine quarters now you've been at an 11% TCE, and you've been in growth mode all of those nine quarters, so should we think about the 11% TCE as your steady state and that is kind of where you are not going to vary from there or at what point do you think about a more active capital management from the perspective of dividend increases, you increased a penny today, yesterday, or maybe buybacks or anything like that in regards to how much capital do you need for the growth that you've been achieving?

I still think we're looking at a year to 18 month period where we are thinking of a lot of potential ways to deploy that capital internally through growth or special projects or through deals and probably want to keep that tighter powder dry for the next few quarters to not miss those opportunities.

And the Korean branch does not require any particular capital levels or anything like that?

That's correct.

Okay. All right, thank you.

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

Thank you. Thank you, again, for joining us today and we look forward to speaking with you next quarter. Thank you, everyone.

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