BBCN Bancorp's (BBCN) CEO Kevin Kim on Q1 2016 Results - Earnings Call Transcript

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BBCN Bancorp's (BBCN) Q1 2016 Earnings Conference Call April 19, 2016 12:30 PM ET

Executives

Kevin Kim – Chairman, President and Chief Executive Officer

Douglas Goddard – Executive Vice President and Chief Financial Officer

Kyu Kim – Senior Executive Vice President and Chief Operating Officer

Jason Kim – Executive Vice President and Chief Lending Officer

Angie Yang – Senior Vice President, IR

Analysts

Aaron Deer – Sandler O'Neill & Partners

Matthew Clark – Piper Jaffray

Julianna Balicka – KBW

Tim Coffey – FIG Partners

Gary Tenner – D.A. Davidson

Don Worthington – Raymond James

Operator

Good day, and welcome to the BBCN Bancorp Q1 2016 Earnings Conference Call and webcast. 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 Ms. Angie Yang, Senior Vice President, Investor Relations. Please go ahead.

Angie Yang

Thank you, Kate. Good morning, everyone, and thank you for joining us for the BBCN 2016 first quarter investor conference call.

Before we begin, I'd like to make a brief statement regarding forward-looking remarks. The call is today may contain forward-looking projections regarding the future financial performance of the company and future events, including statements regarding the proposed transaction between BBCN Bancorp and Wilshire Bancorp such as the expected timelines for completing the transaction, future financial and operating results, and benefits and synergies of the proposed transaction. 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 current expectations, estimates, forecast and projections, and management assumptions about the future performance of BBCN Bancorp and the combined entity with Wilshire Bancorp. These statements are not guarantees of future performance. Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements.

The closing of the proposed transaction is subject to regulatory approvals, the approval of the shareholders of both BBCN Bancorp and Wilshire Bancorp, and other customary closing conditions. If the transaction is consummated, we may not achieve anticipated synergies, cost savings and other benefits from the transaction as a result of higher than anticipated transaction costs, deposit attrition, operating costs, customer loss and business disruption following the merger; including difficulties in integrating the two operations.

For a more complete list of descriptions of risks and uncertainties, please refer to BBCN Bancorp’s Form 10-K for the year ended December 31, 2015, and Wilshire Bancorp’s Form 10-K for the year ended December 31, 2015, as well as other filings made by BBCN and Wilshire with the SEC including the registration statements on Form S-4 that includes the preliminary joint proxy statement/prospectus of BBCN and Wilshire.

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?

Kevin Kim

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 will wrap it up with some closing comments before we open up the call for questions. Let's begin.

We delivered another quarter of consistent execution highlighted by solid balance sheet growth, stable expense levels and low credit cards. While new loan originations are down from the seasonally higher and record fourth quarter, we are pleased with improved mix of new loans with increased contributions of commercial and consumer loans. We had $334 million in new loan originations during the first quarter of which commercial real estate loans accounted for 63%, C&I loans 30% and consumer loans approximately 8%. We continue to make steady progress in building our newer business lines, including residential mortgage and credit cards, which are driving solid growth in our consumer portfolio. The consumer portfolio increased by $21.5 million in the first quarter, which accounted for 17% of the total growth in our portfolio.

Now that we are fully launched with the residential mortgage offering across all of our core markets, we look forward to the ramp up of this new business line and its increasing contributions to the growth in our consumer portfolio. As these newer businesses continue to scale, we are seeing the benefits of our more diversified model, as consumer lending helped compensate toward the seasonally slower activity we typically see in the first quarter.

As a result of the strong growth we saw in the consumer lending, we were still able to grow our overall portfolio at an annualized rate of approximately 8% in the first quarter. Overall, our 2016 first quarter demonstrates relative stability in terms of our yields and interest earning assets, net interest margin and operating expenses along with a continuation of low credit costs.

Notwithstanding the lower gains on sales of SBA loans in the quarter, which Doug will discuss in more detail and merger related expenses of $1.2 million, which lowered our net income by a little more than $0.01 per share, we continue to demonstrate the stability and strength of our earnings platform.

For the first quarter, we generated $23.6 million in net income or $0.30 per diluted common share. This is up from $22.9 million or $0.29 per diluted share in the preceding fourth quarter and $21.4 million or $0.27 per diluted share a year ago.

Now, let me turn the call over to Kyu to provide additional details on our business development efforts in the first quarter. Kyu?

Kyu Kim

Thank you, Kevin, and good morning, everyone. As Kevin mentioned, we had $334 million in loan production for the first quarter, coming up of a record fourth quarter we needed some time to rebuild our loan pipeline, which is not unusual at the start of a year. However, this year we also had the added headwind of general nervousness and macroeconomic uncertainty to start the year, which reduced loan demand and slowed the rebuild of our pipeline to the latter part of the first quarter.

We saw the most pronounced effect on commercial real estate loan production where we saw fewer opportunities to finance new purchases of the commercial property. New purchases comprised just 37% of our CRE loan originations in the first quarter and recent report seem to support that this may be an industry-wide phenomenon. In terms of the construction lending, our outstandings increased by approximately $19 million or 16% from the start of the year, the increased in outstandings is attributed approximately 50-50 to new construction loans and additional disbursements for previously booked construction projects.

In total, we had $298 million in outstanding construction commitments as of March 31, 2016, and while we are not aggressively growing this portion of our portfolio, this is another source of loan growth as fundings increased. The overall CRE portfolio increased by approximately 1% during the first quarter with a growth well balanced across all major property categories. We had between 1% and 3% growth in each of the retail, hotel/motel, gas station and car wash, mix-to-use, a multifamily property categories. The general slowdown we saw in loan demand also impacted our SBA loan production.

During the first quarter, which typically is the slowest quarter of the year, we originated $54.3 million in FDA loans of which $37.6 million was sellable 7(a) loans. In contrast to the CIE and FDA market, we did not see a slowdown in C&I loan production, which helped drive 4% growth in this portfolio from the end of 2015. We extended $201 million in commitments to commercial customers and funded $99 million in new C&I loans by the end of the quarter, which is comparable to the production we had in the first quarter of last year.

Overall, we now had $1.2 billion in total credit commitments outstanding to commercial customers with a utilization rate of 50% on lines of the credit at March 31, 2016. The C&I loans booked this quarter were broad-based with no particular concentration in any one industry. And as Kevin mentioned, that we are seeing a growing contribution from our consumer lending businesses, which contributed $25 million in loan production in the first quarter.

We saw a shift in demand toward variable rate loans in the first quarter with 62% of our total origination being variable rate and only 38% being fixed rate. Despite this shift toward variable rate loans, the average rate on new loan originations increased to 4.29% from 4.24% in the preceding quarter. This was primarily due to a 28 basis point increase in the average rate of new variable rate loans. Although the year started a bit slower than recent years, we are seeing more opportunities develop and a loan pipeline going into the second quarter building up nicely. As a result, we continue to believe that our organic loan growth will once again approach the low double-digits for the full year.

With that, let me now turn the call over to Doug to go over our financial results in more detail. Doug?

Douglas Goddard

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 was essentially flat with the preceding fourth quarter. Although we had an increase in average loans of $167 million, a modest decline in our net interest margin offset this benefit.

Compared with the prior quarter, the impact of purchase accounting benefits was more than $900,000 lower at $4 million, which accounted for the vast majority of the decline in our reported net interest margin. Excluding this impact, our core net interest margin increased by 1 basis point from the prior quarter to 3.60%, driven by 2 basis point increase in our weighted average yield on loans and 3 basis point increase in yield on our investment portfolio. These increases more than offset an increase in our deposit costs, which continue to creep up due to competitive pricing in our markets. Our total cost of deposits was 63 basis points in the first quarter, up from 60 basis points in the prior quarter.

Our non-interest income declined by $2.2 million or 20% from the preceding fourth quarter, the primary driver of the decline was a lower income from the gain on sale of SBA loans. We sold just $23.8 million in SBA loans during the first quarter, compared with $41.9 million in the preceding fourth quarter and $32.5 million in the prior year first quarter. While production is sellable 7(a) loans of $37.6 million was similar to the preceding quarters’ production of $39.4 million, we ended the first quarter with variable inventories of 7(a) loans held for sale. Much of the production in the fourth quarter was front ended and was actually sold during the quarter. Due to the timing of new SBA production, the overall volume of sales that we were able to complete in the first quarter was comparatively low, which of course impacted the amount of our gain on sale income.

The other less controllable factor that has a direct impact on the gain on sale income recognized in the given quarter is the premium available in the market. The premium for the first quarter increased modestly to 8.94% from 8.74% in the preceding quarter, this is down by more than 200 basis points when compared to 10.96% in the year ago first quarter.

In terms of SBA gains on sales for the balance of 2016, we are projecting SBA originations for the full year will parallel the overall growth in our loan portfolio of high single to low double-digits. The gains recognized will be depended on the actual amount sold in a given quarter and the going premiums available in the market. Just keep in mind that this is a seasonal business with the first quarter tending to be the slowest and volumes being more heavily weighted in the second half of the year.

Turning to non-interest expense, there were minor differences between the quarters, but most items were in the normal range of variation. The most significant difference in the preceding quarter was in our net OREO related income expense line, where we went from $154,000 in income in the fourth quarter to $1.4 million in expense in the first quarter.

As we have mentioned in the past, this tends to be a valuable line item and somewhat difficult to project. But even with the large swing we saw from quarter-to-quarter, the amount of OREO related expense we recorded in the first quarter was still within the typical range that we’ve seen over the past few years.

Moving on to asset quality, at March 31, our non-accrual loans were $43.5 million, up from $40.8 million at the end of the prior quarter. We had total inflow of $4.4 million in the non-accruals during the first quarter, which was comprised of a number of smaller loans with no particular commonality from a geographic or industry perspective. There were unique issues causing each credit to be downgraded to non-accrual. At March 31, approximately 68% of our non-accrual loans were current on their payments.

As a percentage of total loans, total non-performing loans consisting of both non-accruals and TDRs increased to 1.51% from 1.43% at the end of the prior quarter, so with 85% of non-performing loans current on their payments. Total classified loans of $204 million was essentially unchanged from the end of the prior quarter. We had $821,000 in gross charge-offs during the first quarter and $769,000 in recoveries, resulting in net charge-offs of $52,000 for the quarter, are well below 1 basis points of total loans.

We recorded a provision for loan losses of $500,000 in the first quarter, down from $4.9 million in the preceding fourth quarter, during which we booked a record level of new loans. Relative to the fourth quarter, the lower provision required this quarter reflects the lower level of growth in the loan portfolio, the more balanced growth within the CRE portfolio and the lower level of net charge-offs. The provision recorded in the first quarter brought our allowance to total loans to 1.21% at March 31, while our coverage ratio of non-performing loans was 80%.

With that, let me turn the call back to Kevin.

Kevin Kim

Thank you, Doug. Considering BBCN’s consistent financial performance, our ongoing progress in becoming a more diversified financial institution and the pending combination with the second strongest commercial lender in our space, we remain quite optimistic about the prospects of our organization and believe we are very well positioned to further enhance the value that we provide to our customers, communities, employees and shareholders.

Now, before we open up the call for Q&A, let me just provide a few comments on the progress we are making with the merger. As you should all know by now, we filed our registration statement on Form S-4 in early March with year-end audited financials, which includes a preliminary joint proxy statement/prospectus of BBCN and Wilshire. We would hope to have the definitive joint proxy statement/prospectus filed in the coming weeks, followed by shareholder votes likely in June.

Giving the current timeline, we would expect to complete the merger vehicles with Wilshire sometime in the third quarter of the year. And we are working diligently together in planning for the merger completion and integration of our two organizations, so that we can realize the synergies of this combination as soon as practicable. We still have a lot of work ahead of us, but considering the dedication and commitment of the collective boards of directors and management teams of BBCN and Wilshire, I am confident that we are up for the task.

I would just like to say thank you to all of our shoulders who have shown such strong support for BBCN, as well as for the pending transformational merger with Wilshire. I would also like to thank all of our employees for their hard work and dedication. M&A transactions, especially ones that are positioned as mergers of equals, tend to be extremely challenging for the employee base, without their full participation in the merger planning activities, in addition to their continued focus on the day-to-day responsibilities, we would not be as well positioned as we are today. We very much look forward to keeping everyone apprised of our progress.

With that, let’s open up the call to answer any questions you may have. Operator, please open up the call.

Question-and-Answer Session

Operator

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.

Aaron Deer

Hey, good morning everyone.

Kevin Kim

Good morning.

Kyu Kim

Good morning

Aaron Deer

It looked like a pretty solid quarter. I just have a few questions. First for Doug, you mentioned the swing in the OREO costs in the quarter. I'm curious, with the $1.4 million OREO charge, how big was the property that was sold there and when was that last appraised and what was the mark on that at the time of the last appraisal?

Douglas Goddard

That isn’t one large transaction, that’s a mix of OREO related expenses and including things like property taxes and there is some seasonality to that. There wasn’t anything, I don’t think there was a item related to one property more than a couple of hundred thousand dollars in the quarter.

Aaron Deer

Okay. Very good. And then Kyu, on the C&I growth in the quarter, it's encouraging to see you guys continue to make progress on that. Was that all self-originated or are there any participations that are contributing to that growth?

Kevin Kim

The majority of that is the self-originated.

Aaron Deer

Okay. Any sort of percentage in terms of the split of self-originated versus participation?

Kevin Kim

Hold on for a second, majority of that is the self originated. We gave one participation, national syndicated participation.

Aaron Deer

Okay. And then on the residential mortgage platform, now that, that's built out across the franchise, in terms of the products that are being offered through that, is that all QM? Are you guys doing any one-off product offerings on your residential offering?

Jason Kim

Yes Aaron, the majority of our residential mortgage loans have been a five year hybrids both conforming and non-conforming and the break up between the purchase and re-finance transaction has been about 50-50. So in addition to that, I just wanted to give you a little bit of color, we’re pretty pleased the fact that our branch has been very active, cross-selling this offering, and we completed our regional role out last year and we are seeing a very active referrals within our BBCN retail network.

Aaron Deer

Okay. So a combination of conforming/non-conforming – all fully documented borrowers?

Jason Kim

AQ asset qualifies, which yields more higher yield, so that’s helping our portfolio given the consumer residential portfolio.

Aaron Deer

Okay. Good stuff and good luck for the continued progress on the merger. Thanks for taking my questions.

Kyu Kim

Thank you

Operator

The next question is from Matthew Clark of Piper Jaffray. Please go ahead.

Matthew Clark

Good morning.

Kyu Kim

Morning.

Matthew Clark

Just wanted to clarify your organic loan growth guidance. It sounded like in your prepared remarks you used the term approach low double-digits and then the commentary on SBA for originations would be up in the high single-digits to low double-digits consistent with the loan growth. Just want to clarify and make sure that we're on the same page in terms of your organic loan growth guidance. Is that also high single-digits to low double-digits?

Kevin Kim

Yes, that’s correct. I mean we’ve been talking really for a couple of years, we’ve have been saying high single-digit, at least half of that time, we dipped over the 10% and we are giving guidance consistent with that history.

Matthew Clark

Okay. And then can you just remind us of the – I can easily pull it, but if you have it just the originations, SBA originations for last year?

Jason Kim

Yeah. Matthew, just to give you a 2015 figure, let me just kind of give you some of the stats from the past three years. For the past three years, our projection has been a high single-digit growth, which we have achieved. For 2015, we had originated $272 million in total SBA origination. In 2016, our projection is high single-digit growth to low double-digit growth for 2016.

Matthew Clark

Got it.

Kyu Kim

So you were looking for the specific quarter or full year?

Matthew Clark

No, full year, that’s all I needed. Thank you. Okay. Then just on the core margin, saw a nice little uptick here this quarter. Is it fair though to assume we'll see some modest pressure going forward, given what you're putting on the books relative to the core portfolio, and maybe some more inching up of deposit costs?

Douglas Goddard

Yes, but that really has been a moderating trend. I’d look every – not just what you see every quarter, but every month, at the average rate we book loans versus our current coupon, which is lower than the yield you see because of fee income and that spread has been just a handful of basis point for the last quarter or two. So that compression slow quite a bit. But yes, we’re still probably off a couple of basis points a quarter.

Matthew Clark

Okay. And then just last one from me, on the reserve coverage on loans, down to 1.21 here. I assume we're getting close to a trough, excluding the Wilshire deal, which will obviously distort that number?

Douglas Goddard

That’s always the hard one for me to answer because we do not manage to that number, we do a bottom up with very detailed analysis, but the end result of that analysis has been very close to that level for several quarters in a row.

Matthew Clark

Okay. That’s it for me. Thank you.

Operator

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

Julianna Balicka

Good morning.

Kevin Kim

Good morning.

Douglas Goddard

Good morning

Julianna Balicka

Nice to see a very nice quarter, especially for the first quarter -- sets up well for the rest of the year. I was hoping you might be able to provide us, I have a couple follow-up questions on the quarter and I was hoping you might provide us an update on the merger. In terms of on the merger, the SEC comments should have come back by now. I was wondering whether you've gotten any comments from regulators or any other interested parties at this point in time, and what the SEC comments were focused on, so we can get a sense of the important issues as we look forward to the merger close.

Jason Kim

I’ll comment on the SEC side, I won’t get very specific, but I don’t anticipate any issues there and I expect to be filling the final version of the S-4 very shortly. And the regulatory I am not sure much we can say, as far as we can tell from our perspective things are moving along on schedule.

Julianna Balicka

Okay. And then we saw earlier in the quarter – recently, I know you had made an agreement with CRA activist groups. Could you talk to us a little bit more about, how the CRA side of the merger is proceeding because if that can get resolved amicably and quickly, then that means that your timing can be much faster?

Kevin Kim

Yes. Julianna, this is Kevin. We have been very proactive in dealing with the community based organizations. And as you saw in our press release, we were able to come to an agreement with a major organizations – with a few major organizations, and we certainly hope that there will be no oppositional protest by those groups because we already have reached an agreement and absent of such opposition, we expect our approval from the regulators will be in the timeframe that we originally expected when we signed the merger agreement.

Julianna Balicka

Very good. Then skipping ahead to the post-merger, could you talk a little bit about Mark Lee's proposed new role in terms of developing corporate banking. Any thoughts about that vertical size, or in general how you're thinking about the direction of the company and the business model once you're over $10 billion in assets and therefore maybe shifting more towards middle market banking?

Kevin Kim

Well, as you may be aware our – we have made most of the first merger title decisions and we are very far along the process of setting the only vision structure of the combined company. But until the merger is completed all of our respective officers with continue in their existing roles which I believe takes priority at this point.

About Mark Lee taking the head of our corporate banking unit, that corporate banking unit is something that we believe will take a very, very important role for the organization when the organization is about $12 billion, $13 billion in assets and we have full confidence and trust in Mark’s capabilities commitment to the new role and we feel very optimistic about the future of that new unit that we will be starting as a new combined bank.

Julianna Balicka

Okay. Then I have a question on the quarter and I'll step back now. Thank you for the color on the merger. Kyu, in your remarks, you talked about that your production in C&I was broad-based and did not see headwinds from the macroeconomic uncertainty. Also you had mentioned there was a shift in your borrower demand to variable rate loans, which, given the environment, which has suggested that there should have been more of a fixed rate preference, so could you talk about how your C&I managed to withstand the first quarter so well and also why do you think your borrowers are preferring variable rate loans this particular quarter into a presumably rising rate environment or can you give us a little more color around those two remarks?

Kyu Kim

As you know, C&I loans it takes long time to build the relationships, so the largest C&I loans that we booked this quarter, it started probably minimum six months ago. So that's the reason that we didn't really have any headwinds that we felt for the C&I loan production and we've been constantly pushing for C&I loans. Our field managers say they do focus on getting C&I loan relationship, so we’ve been doing that. At some quarter we do better than others, but this quarter we were successful in booking large C&I loans that we've been working on for quite some time.

Angie Yang

And second question related to customer preference for variable.

Kyu Kim

Oh, okay. When you have many C&I loans, of course that you have more variable loans. And also for CRE loans, because we don't want to compete with the pricing and we offered more variable rate to customers and it was more intended after that from our part.

Julianna Balicka

Got it, that makes sense. Thank you very much for taking my questions.

Kyu Kim

Thank you.

Operator

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

Tim Coffey

Thank you. Good morning everybody.

Kevin Kim

Good morning.

Kyu Kim

Good morning.

Tim Coffey

To follow on the last question, is there an internal focus on generating C&I loans in light of regulatory concerns about commercial real estate and/or the acquisition of Wilshire’s CRE heavy portfolio?

Douglas Goddard

Let me try to answer that question. It’s always a good thing to diversify your portfolio as much as possible, and historically, BBCN has been very CRE concentrated. Not necessarily CRE concentrated from the regulatory perspective, but we do want to diversify our earning income – our earning asset basis, therefore the focus always has been enhancing our C&I capability. So it’s not necessary to bring it to the regulatory side.

Tim Coffey

Okay. One of – if you continue to generate more commercial loans and more of the resi products, what impact would that have on your provision expense going forward, assuming everything else is equal?

Kyu Kim

I don’t think we heard part of what impact does that have on your...

Tim Coffey

Your provision expense going forward, all else equal?

Douglas Goddard

Our provision expense, it could go either way. If you just go industry wide, you expect provision on the single family to probably be lower on average than CRE and C&I is probably a little higher on average. I'm not sure the mix would be much different.

Tim Coffey

Okay.

Kevin Kim

At the end of the day, you're booking the past-grade loans, so the impact to the overall provision is manageable.

Tim Coffey

Okay. And then the increase in loan deposits, the average cost of deposits this quarter, would there be an expectation for that to rise in the next quarter?

Douglas Goddard

I would say yes, but not very much. I think we are talking 1 or 2 basis points might be the range.

Tim Coffey

What is driving that?

Douglas Goddard

What’s driving that? I mean, mix tends to be very much short-term fluctuation. We do have some very large customers. We have with some seasonality to their deposits, so we have a little bit of unfavorable mix change in the current quarter. But the rest of it's purely competition in our markets and us wanting to maintain market share in some places, where we’re competing with some people with some aggressive rates and we would rather keep the customers.

Tim Coffey

Okay. Thank you very much. Those are my questions.

Kyu Kim

Thank you.

Operator

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

Gary Tenner

Thanks. Good morning. I think all my questions have really been answered, so I'll just – in terms of merger related expenses for the next couple of quarters, can you give us a sense of where you think they'll shake out?

Douglas Goddard

That’s a little bit tough. The current quarter had two major things going on which is really the registration process and the merger application process. We have some tail from that in the current quarter and is slowly ramping up some of the more integration related projects. I would expect that level to be down from the first quarter, but it’s going to be still several $100,000 a quarter until the deals.

Gary Tenner

Okay. And just I guess in terms of the deal and size of the bank, any early indications in terms of what the requirements might be, in terms of adds to compliance or BSA, as well as just more generally, the financial department of the bank?

Douglas Goddard

Well, we are spending a lot of time on that on an ongoing basis, so there's not any one big revolution there, but I think we are making good and steady progress in terms of understanding the details of everything we need to do and nothing that we are discovering and learning and starting to build is inconsistent with the kinds of cost projections we gave initially yet, but yeah, I think we're getting down the learning curve on that.

Gary Tenner

And if the deal closes in July or in the third quarter, would the first DFAS be 2018 or 2017?

Douglas Goddard

We’d be filing in 2018 for the 2017 year. So the actual filing date is July 2018.

Gary Tenner

All right, great. Thank you.

Operator

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

Don Worthington

Good morning everyone.

Kevin Kim

Good morning

Douglas Goddard

Good morning.

Don Worthington

Just curious whether the increase in CDs during the quarter included any specific deposit campaign?

Kyu Kim

Not in first quarter.

Douglas Goddard

No, not particularly. It does include our reacting to the promotions of other banks.

Kyu Kim

Right.

Don Worthington

Okay, but no specials or anything like that. Okay. And then, just some color on – you mentioned in terms of the lending that it was diversified by type. Are you also getting kind of proportional loan growth in your markets outside of California?

Kyu Kim

It’s mostly Southern California and New York/New Jersey for the C&I loan.

Don Worthington

Okay. Thank you.

Operator

The next question is a follow-up from Julianna Balicka of KBW. Please go ahead.

Julianna Balicka

Hi. Thank you. I have just one quick follow-up. To follow-up on the merger expenses question, in terms of your operating expenses which are not directly tied to the merger such as registration costs, have you started to incur any infrastructure building costs related to just simply being a much larger bank, any new system upgrades, more compliance people, or is that still kind of pending in your expense run rate?

Douglas Goddard

One would be no – both answers to that. I would say no in terms of any significant new expenditures, we're obviously trying to be careful about that. But the answer is, yes answer, I feel like we've been doing that for the last year and a half. We’ve been anticipating this need and with the level of our investment in risk management in BSA and in cyber-security, in any number of areas has been an anticipation of crossing over some thresholds fairly soon. But we are not – we haven’t signed up for any big ticket items in the last few months between then and the merger.

Julianna Balicka

And do you plan on signing up for any big ticket items, like especially in BSA or you're pretty much good to go on that?

Douglas Goddard

Once again I would say that there is no individual big ticket. The level of investment we think we need to make I think is still consistent with the projections we gave at the time we announced the merger.

Julianna Balicka

Got it. Okay. Thank you.

Operator

There are no additional 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.

Kevin Kim

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

Kyu Kim

Thank you.

Operator

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

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