Largest Korean-American Bank Seeks to Become Regional Player After Deals

Alvin Kang, president and chief executive of BBCN, is just getting started.

Kang has spent the year blending two Los Angeles merger partners into the country's largest Korean-American bank and striking another deal. Now, "we want to create a sustainable structure that's scalable … from a community bank to a regional bank," he says.

"We have the people, and we understand what we need to do" to graduate to the middle tier. "It's a matter of execution."

Though many bank acquirers often make bold claims, the $5.3 billion-asset BBCN Bancorp (BBCN) has established credibility in the eyes of several industry watchers.

Its executives are "very well positioned to achieve their transformational changes, and I like" its regional aspirations, said Julianna Balicka, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc.

BBCN kicked off the year with the hefty task of merging the $3 billion-asset Nara Bancorp and the $2.3 billion-asset Center Financial into a new brand. Meanwhile, it agreed to buy a small bank in Seattle, paid off the Troubled Asset Relief Program and beat peers across multiple financial metrics.

Its loans have nearly surpassed deposits — though both categories have grown. BBCN is "one of few banks with a loan-to-deposit ratio over 100%," said Aaron James Deer, an analyst with Sandler O'Neill. "Obviously, having loans is a much better alternative than securities when banks are faced with more deposits than they necessarily want."

Part of the loan growth came from its merger, but BBCN has also expanded its Small Business Administration unit into one of the largest SBA lenders in the country. The company also held on to more of its SBA loans in the third quarter than in the past, Deer said.

The heightening of its profile prompted some Korean-Americans to give it a second look, too. "We had business customers who had gone to mainstream banks because of their larger size and more capacity," Kang said. "Now, they're coming back to us because they'd rather do business with a Korean-American bank."

BBCN has been able to keep its cost of deposits stable while increasing interest income from loans. As a result, net income rose 87%, to $18.4 million, in the third quarter compared with a year earlier. BBCN Bank's net interest margin has also grown to 5.1%, surpassing the national average of 3.4%, according to the Federal Deposit Insurance Corp.'s quarterly banking performance report.

"We got to see the full benefits of the integration [this year] … and it's led to very strong performance at the bank," Deer said.

In June, BBCN redeemed $122 million in Tarp funds from its two predecessor companies while promising it had plenty of capital left to grow.

By October, BBCN followed through on that promise by agreeing to buy Pacific National Bancorp in Seattle for $8.2 million. The deal would add only $200 million in assets but would expand BBCN's market share in the Pacific Northwest; BBCN plans to use it to expand into trade finance and SBA lending in Seattle, Kang says.

This "acquisition gives us the base to really improve our presence in the Korean-American market," Kang said. "There really isn't that much competition" in that niche, "so we like that and we want to be the dominant player in all our markets."

Kang promised a "laser focus" on customer and product services and "strategic" expansion. He is targeting major metro areas with large Asian-American populations, such as Dallas, Atlanta and Washington, D.C. BBCN already has operations in New York, New Jersey, Seattle and Chicago in addition to its home state.

The company is also building out a cash management business — something analysts said they wanted to see to help BBCN bring in more non-interest-bearing revenue, Kang said.

"It's never an easy transition, but I certainly think they have the talent to pull it off," Deer said.

BBCN's executives learned to be enterprising in overcoming adversity. They had to wait nearly a year just to get regulatory approvals on the merger of Nara and Center. Both companies were under informal agreements, but each used the unexpected delay in 2011 to clean up credit quality, and Nara raised capital to help ease concerns.

"Despite all of the problems we had with credit losses, with governance issues … we never lost confidence that we would come out of it," Kang said. "And that's really just a testament to our staff and all the planning we did up front."

That planning included establishment of several integration task forces and numerous subcommittees. Participants were drawn from the board down to employee ranks, and a merger hot line was created so workers could ask questions or make comments anonymously.

"There was a constant flow of information, both up and down, so everyone was on the same page on the integration," Kang said.

But the real confirmation to the merger's success, Kang said, was when "an observer" complimented him on the unity among the 500 employees at BBCN's holiday party this month.

"It looked like people there were celebrating BBCN as opposed to two different groups … and I can compare that to other Christmas parties with merger situations that were not the same," said Balicka, who was also there.

Kang, who joined the celebration by singing with an ensemble on stage, said it was nice to hear such comments. "Every corporation has its own personality," he said, "so it really amounts to the people forgetting where they came from and beginning to talk as 'I'm a member of BBCN Bank.' "