Hanmi Financial Corp (HAFC) 2006 Q3 法說會逐字稿

Good afternoon and welcome to the Hanmi Financial Corporation third-quarter 2006 results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this call is being recorded today, October 24, 2006.

This call may contain forward-looking statements which are made under the SEC Safe Harbor rules for forward-looking statements. Forward-looking statements relate to the Company's future operations, prospects and businesses and are identified by words such as may, will, should, could, expects, plans, intends, anticipates, beliefs, estimates, predicts, potential or continue or the negative of such terms. Although we believe that the expectations reflected in the forward-looking statements are reasonable based upon our current judgment, we cannot guarantee future results, levels of activity, performance or achievements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activities, performance or achievements to differ from those expressed or implied by the forward-looking statements. Such statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond the control of Hanmi Financial. Accordingly, actual results may differ materially from those expressed and/or implied or projected by the forward-looking information and statements. Hanmi undertakes no obligation to update any forward-looking statements in the future. For additional information on factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements, please see the Company's filings with the SEC.

I would now like to turn the call over to Dr. Sung Won Sohn, President and Chief Executive Officer of Hanmi. Please go ahead, sir.

Thank you and good afternoon, everyone. We are pleased that you could join us today for our third-quarter 2006 conference call.

Our net income was $17.6 million, up 10.4% from the second quarter, and 17.6% from a year ago. This is an excellent financial performance, indicating that 2006 will be another record year for Hanmi Financial. With this strong momentum, I am confident that 2007 will be a good year as well.

There have been a few special factors, positives and a negative, which affected the results for the quarter and I would like to mention before going into our third-quarter operating results. We earned about $400,000 from prepayment penalties. In the past, Hanmi usually did not have these penalties on loans. Now, we insist on it, especially if a loan is refinanced. While this type of earnings is not predictable from quarter to quarter, we believe it will become another source of earnings in the future.

The tax credit in our state income tax return was higher than expected. We received certain affordable housing investment and enterprise zone tax credits, reducing the effective tax rate to 37.8% for the nine months ending September 30. Our previous accrual rate was 39.2%. On the negative side, we recorded an unexpected loss of $530,000 related to an international trade transaction. This was recorded under the other operating expenses caption. We're taking action to recover the loss.

Now let me discuss the five areas that support our positive outlook for the balance of the year and into 2007. These areas are loans, net interest margin, asset quality, non-interest income, efficiency ratio.

First, on loans. Although not as strong as in the second quarter, growth in the loan portfolio remained healthy. During the quarter, the loan portfolio increased by $61.2 million, or 2.2% from the previous quarter. The growth rate was affected by the $30 million SBA loan sale. Within the loan portfolio, there was a slight shift out of real estate loans into commercial and industrial loans accounting for 61% of the portfolio and grew 4.6% over the second quarter. With uncertainty and a low cap rate, activity in the commercial real estate market has slowed. On interest rates, we have been very cautious about loading the balance sheet with a fixed rate loan. Our policy is to keep the balance sheet asset-sensitive.

Net interest margin. Second quarter net interest margin was 4.73%, compared to 4.76% in the second quarter and 4.8% in the same period last year. Given that competition for core deposits remains strong, we are gratified that margin compression versus the second quarter amounted to a mere 3 basis points.

Asset quality. Asset quality remains excellent. The provision for credit losses in the third quarter was $1.7 million, compared to $900,000 for the second quarter and $3.2 million a year ago. Nonperforming assets were $13.5 million compared to $12.1 million at June 30. At September 30, nonperforming loans were 0.47% of the total loans compared to 0.43% in the second quarter. The allowance for loan losses increased slightly to 0.99% from 0.98% during the second quarter.

Non-interest income. Non-interest income increased by $407,000 to $9.3 million, thanks in part to a gain on sale of loans of $1.4 million compared to $1.3 million during the second quarter. Our SBA loan production is well on track to meet our target of $180 million for the year. We now have seven loan production offices and hope to add a couple more in the near future.

The efficiency ratio. Our efficiency ratio continues to hover around our target range of around 40%. During the quarter, the efficiency ratio fell to 40.14% from 41.59% for the second quarter of 2006.

In summary, results are a testament to the merits of our ongoing program to ensure Hanmi's continuing success.

Some brief comments about real estate in Southern California. Despite dire predictions, we have seen no significant setbacks in housing in Southern California. To be sure, home prices are not rising at a fast clip, as they used to. Experts tell us that the market is back to normal from a frenzied pace. Commercial real estate, which is a lagging economic indicator, is holding up much better. As long as the overall economic conditions remain healthy as they are in Southern California, there should not be a major setback in the foreseeable future.

With that, I now will ask Mike to address our third-quarter financial results in greater detail.

Thank you, Sung, and good afternoon, everyone, thank you for joining us. Let me begin by again saying Hanmi's earnings for the second quarter were $17.6 million, up 10.4% from the second quarter of 2006 and up 17.6% from the third quarter of 2005 when we earned $15 million. Diluted earnings per share were $0.36, up $0.04 from the second quarter of 2006 and up $0.06 from the third quarter of 2005. Our return on average assets was 1.90% compared to 1.79% for the second quarter, and our return on average equity was 15.1% compared to 14.2% in the second quarter of 2006 and 14.4% in the third quarter of 2005.

In the third quarter, we executed well in each of the significant aspects of our business plan -- loan portfolio growth, net interest margin, credit quality, non-interest income and expense control. Our net interest income before provision increased $1.4 million during the quarter from $37.8 million in the second quarter to $39.2 million in the third quarter of 2006. Our net interest margin decreased slightly from 4.76% in the second quarter to 4.73% in the third quarter. The yield on earning assets increased 24 basis points from 7.98% in the second quarter to 8.22% in the third quarter. The yield on the loan portfolio increased 25 basis points from 8.56% in the second quarter to 8.81% in the third quarter, and loans made up 86.1% of average interest-earning assets in the third quarter compared to 85.8% in the second quarter.

On a linked-quarter basis, our total cost of funds increased 30 basis points from 3.32% in the second quarter to 3.62% in the third quarter of 2006. The cost of interest-bearing liabilities increased 36 basis points sequentially from 4.37% to 4.73%. In each case, the increase was less than in the previous quarter, that is, a 30 basis point increase in the total cost of funds in the third quarter compared to an increase of 34 basis points in the second quarter, and a 36 basis point increase in the cost of interest-bearing liabilities compared to an increase of 38 basis points in the second quarter. Quarter end demand deposits were down $21 million from $778 million at June 30, to $757 million at September 30, 2006, but the average balance of DDAs edged up 0.3% from $739 million to $741 million. Average interest-bearing core deposits, including small balance CDs, decreased 4.9% and the related cost of funds increased 25 basis points from 3.25% in the second quarter to 3.50% in the third quarter, while the average balance of CDs over $100,000 increased $136 million over the same period and experienced an increase in the cost of funds of 34 basis points from 4.88% to 5.22%. This also represents a slowing of the increase in the cost of funds as the cost of jumbo CDs rose 44 basis points in the second quarter. We believe we may be reaching the end of the decline in core deposits as money market accounts and CDs under $100,000 grew $10 million and $6 million, respectively, in the month of September.

At September 30, 2006, our deposit portfolio consisted of 25.5% DDAs and 53.1% core deposits compared to 26.9% DDAs and 55.5% core deposits at June 30. Our net loan-to-deposits ratio was 94.9% at September 30 compared to 95.4% at June 30, 2006. Our provision for loan losses was $1.7 million for the third quarter of 2006 compared to $900,000 for the second quarter. The allowance for loan losses was $28.3 million at September 30 compared to $27.3 million at June 30. This represented 0.99% of the gross loan portfolio and 210% of nonaccrual loans at September 30, compared to 0.98% of the portfolio and 225% of nonperforming loans at June 30. Nonperforming assets were $13.5 million at September 30 compared to $12.1 million at June 30. Delinquent loans were $24.1 million at September 30 compared to $23.1 million at June 30 and the total of delinquent and nonperforming loans, which includes nonperformers that are less than 30 days delinquent, was $27.2 million and $25.3 million at September 30 and June 30, respectively. The September 30 allowance level reflects better collateral coverage; in other words, a higher level of collateral relative to loan principal than was the case at June 30, particularly with respect to loans that are recently migrated into nonperforming assets.

Non-interest income increased 4.6% sequentially from $8.9 million in the second quarter to $9.3 million in the third quarter with increases in most categories of non-interest income. We recognized $1.4 million of gain on sale of loans in the third quarter compared to $1.3 million in the second quarter. Loan principle sold was $29.9 million in the third quarter compared to $27.9 million in the second quarter.

The efficiency ratio was 40.1% in the third quarter compared to 41.6% in the second quarter. Noninterest expenses increased 0.3% from $19.4 million in the second quarter to $19.5 million in the third quarter. Salaries and benefits were down $300,000 as a result of a smaller vacation accrual. Increases at commissions to employees were offset by greater absorption of direct loan origination costs. Decreases in data processing expense, advertising and promotion expense and professional fees reflect our strong emphasis on expense control in the third quarter. We experienced an increase in other operating expenses primarily because of a $355,000 mark-to-market on our SBA loan servicing asset, as well as the $530,000 operating loss Dr. Sung discussed earlier.

In the third quarter of 2006, we filed our California state income tax return, which included enterprise-owned tax credits that were larger than the amounts included in our 2005 provision for income taxes. This true-up reduced our year-to-date effective rate of income taxes by 0.9% and contributed to the reduction in our year-to-date effective rate from 39.2% for the first six months of the year to 37.8% for the nine months ended September 30. The net loan portfolio grew $61 million, or 2.2% sequentially, from $2.76 billion at June 30 to $2.82 billion at September 30, 2006. The quarterly average gross loan balance increased 3.7% sequentially to $2.83 billion.

During the third quarter, we continued to emphasize growth in our commercial and industrial loan portfolio which at September 30 was up 4.6% from the prior quarter end while commercial real estate loans decreased 1.5% during the quarter. We continued to see strong demand for fixed-rate loans and the total loan portfolio mix at September 30 was 23.3% fixed rate and 76.7% prime based, compared to 22.9% fixed and 77.1% prime based at June 30, 2006. In order to maintain an asset-sensitive posture, we obtained $90 million in two-year advances from the Federal Home Loan Bank, increasing the balance of FHLB borrowings from $113 million to $168 million after quarterly payoffs. At September 30, our fixed-rate gap was $202 million, or 5.9% compared to 5.7% at June 30.

Overall in the third quarter, we continued to execute on our business plan and had some success in growing the loan portfolio and fee income, maintaining margins and credit quality and controlling expenses. Our operating environment remains competitive, but we're hopeful we can continue to grow the bank while maintaining attractive levels of profitability.

And with that, we would be happy to respond to your questions.

(Operator Instructions). Brett Rabatin, FTN Midwest.

A couple of questions. First off, I'm not sure if I quite understood the language for the expenses, the $355,000 of mark-to-market on the SBA and the $530,000 with the trade finance item. Basically your other expenses are flat linked-quarter. Am I to understand that you reduced your data processing expense enough that your other expense line item would have been down by the 800 -- or 900,000 or so? Can you give us any thoughts on the core expense run rate in 3Q and kind of the linked-quarter comparisons from 2Q there?

In most cases, we were able to control non-interest expenses very well and most of the categories show slight declines. In the case of the other operating expenses caption, which is the last one within the category there, that increased from $2.3 million in the second quarter to $2.9 million in the third quarter, so that was largely attributable to those two items that we discussed. Our salaries and benefits were down about $300,000 sequentially. We saw about a $100,000 decline in professional fees. And other than those, we were basically flat to slightly lower in the remaining expense caption. So we've been trying to hold the line on expenses across the board here, and I think they've been pretty effective in the third quarter.

Yes, that's pretty clear. Is a total expense run rate of $18.5 million -- is that a good run rate going forward to build off of? Can you guys continue to manage your expenses that tightly?

Well, I think the bank is into more of a growth mode than it has been in periods past. So we intend to be opening new loan production offices. We have the new wealth management initiative that will probably cost us some money before it starts to turn a profit. So it's likely there will be some growth in expenses. I wouldn't expect it to stay as flat at 18.5.

And new branches, too.

New branches -- we have two new branches in the works to be opening very shortly. So there will be some growth in non-interest expenses. But I think this quarter demonstrates how focused we are on controlling those expenses going forward.

Okay. And secondly, a housekeeping item. On the tax rate, can you give us any -- you had the true-up or whatever you want to call it in the third quarter. Can you give us any thoughts on 4Q? I'm assuming it will be 38%, 39%?

Yes, we disclosed 0.9% as the effect of the true-up. So if you add that to the 37.8%, that puts you in the high 38s.

Okay. And then on SBA, I heard you say you sold about $30 million. What was the production this quarter -- I missed that number?

Production is around $50 million to $55 million in that range.

Okay. Then prepayment penalties, the $300,000 equates to about 4 basis points of margin in 3Q. Do you expect those to continue in the next couple of quarters or --?

It's a very volatile number, Brett, it's very hard to predict. So I took a look back over six quarters or so and I saw a range from $75,000 on the low end to this 400-and-some, which is the highest that we have seen.

It is unpredictable, as Mike points out. However, we have changed our modus operandi. In the past, we simply did not have prepayment penalties on loans, even on refinancing. Starting from about a year ago, we decided to insist on prepayment penalties, especially on refinancing. But in the future, there will be more prepayment penalties going into income, but the quarter-to-quarter pattern I think will be highly volatile.

Lastly, if we could go back to the SBA operation -- or that charge you had on the trade finance, I didn't quite understand what happened there. If you could give any color on -- it sounds like you had an operational loss, is that correct?

Yes, I would characterize it as an operational loss.

And we're taking action. It could become a legal action, so we really would rather not get into details. But it's related to documents against payments in international transactions.

Okay, I see. Nice revenue growth, thank you, guys.

James Abbott, FBR.

Congratulations on a very solid margin in a very ugly quarter. Could you give us some color on the loan pipeline or what your -- maybe how the loan growth progressed during the quarter, maybe some outlook into the fourth quarter here? It seems like it has been trending down from 7% to 4.5% to 2.5%, and I'm wondering if it's going to 1% or if it's going to bounce back up a little bit?

I hope it bounces back up. Actually, in the third quarter, our loan production was pretty substantial. It actually went up from the second quarter. In the second quarter, it was $373 million of gross production, and in the third quarter, $377 million of gross production. However, we have had a lot of payoffs and then refinancings, people wanting to go to a fixed-rate loan. Since we have been probably more cautious about loading our balance sheet with fixed-rate loans than many of our competitors, that is one of the reasons why the net growth rate had to slow. But now that the interest rates have plateaued hopefully and in some cases actually declining, I feel pretty good about our pipeline. But, clearly, given the slowdown in real estate transactions across the board through the United States and in Southern California, my expectation is it's really not that great. But I'm certainly hoping that the rate of increase will pick up in the fourth quarter.

And could you elaborate a little bit on how the incentive programs are going? I know that you've put several different initiatives in place, the six different divisions and those types of things. It sounds like it's not affecting production too much. Is it affecting it as you would have anticipated, or --?

I think, again, the gross production has been fairly healthy and strong, and it's simply that we're not willing to entertain too many fixed-rate loans. Had we been able to entertain those fixed-rate loans, our net production would have been much higher. And so that's in part by design, and we want to keep our balance sheet asset-sensitive. We do not want it to be liability-sensitive. However, going forward, since because we feel that interest rates have plateaued and could even decline, we might be willing to put on fixed-rate loans at decent rates. So to answer your question, I think our incentive compensation system and then this so-called district leader concept, that they are working pretty well, and that has resulted in, as I said, $377 million in gross production of loans, as well as the healthy excellent increase in net income.

And to that extent, has there been any turnover since we last spoke, any new hires as well to talk about?

I don't believe so. There have not been any major turnovers that I'm aware of. No, there are not.

Okay. And last question is on the expense line item. Was there any reversal of incentive compensation or bonus accrual, depending on what you call it, in the third quarter that would -- or slowdown in accruals? I know you said the vacation accrual was down.

The vacation accrual was down pretty substantially, but in terms of bonus accrual, no, there has been no slowdown at all.

Can you tell us a little bit about the factors behind the vacation accrual being down?

I think it's just usage.

So, less usage?

A lot of usage in the third quarter, very little in the second.

Okay.

James, I guess just adding another point about the fixed-rate loans, and again, I'd reemphasize the point that we've been very cautious about adding fixed-rate loans to our balance sheet. Had we been willing to make more fixed-rate loans, we could have probably ballooned our loan portfolio. But during the third quarter, only 26.4% of our total loan production of the $327 million came from fixed-rate loans. The remainder has been basically variable or something related to that. So you can see, we're trying very hard to keep our balance sheet asset-sensitive and we've been reluctant to add on a lot of fixed-rate loans. So it's not because we haven't had any loan demand. There's plenty of loan demand out there, especially in the fixed-rate categories if you're willing to book it at very low rates, and we simply have not been willing to do that.

Is there any way to get rate-neutral at this point since we're -- obviously you can add fixed-rate loans; that's one way. What about swaps, things like that? People certainly are a little bit potentially nervous anyway. If the Fed were to cut, what would happen to Hanmi's margin, et cetera?

One of the ways that we quote a fixed-rate loan is to look at the swap rate in the marketplace. But the problem is that the fixed-rate loans -- the fixed-rate loan rate implied by the swap rate is too high. And there are banks which are willing to offer fixed-rate loans right now -- five-year, seven-year, 10 years -- at 6.5%, 6.75%, and we simply are not willing to go that low. And so we do look at the swap rate, but we have not really engaged in any swaps ourselves.

And at this point, you're not considering that, I take it?

No, we do not, at the moment.

Hugh Miller, Sidoti.

I was wondering a quick question. Would you be able to let us know -- I know you mentioned the third quarter production for variable versus fixed-rate, but would you happen to have the loan exposure for variable versus fixed-rate at the end of the third quarter?

Yes. In our portfolio, 23.3% of it is in fixed-rate, and then so in the third quarter, we increased it to 26.4%. But, again, the portfolio composition says 23.3%.

Would you be able to add some color on the deferred loan origination costs that helped with the salary expense during the quarter, and whether or not you would anticipate an uptick going forward in the fourth quarter?

That's really dependent on the level of loan production, so it really dovetails with the forecast of putting new loans on. That's the absorption that's required by FASB Statement No. 91 where you are to capitalize your direct loan origination costs, so it really is very much a matter of how many loans we put on the books.

But if the loan originations I guess in the third quarter were slightly less than in the second quarter, I was just looking for why that would have impacted the salary to that extent to cause a dramatic decline on a sequential basis?

Really, the thing that caused the decline was the decline in the vacation accrual, which was upwards of $300,000. If you look at the loan origination costs, we had an increase in the level of commissions paid, which was largely offset by the absorption of those costs into the deferred loan costs. So those two items were largely offsetting and the vacation accrual went down as well. So you put the three together, you wind up with the decline that we saw quarter-over-quarter.

Sure. And I think you had mentioned in the second quarter that on a sequential basis, salaries had gone up because of some competitive pricing within the Korean-American market there for employees, which if I remember correctly, it caused you to increase some of the options expense, et cetera. Can you add some color in that aspect?

The competition for employees has remained intense. We have more branches and more banks in the Korean community, so that really has not changed. However, we're not only trying to pay our employees well, but also, we have started a program to really make our employees feel proud of working at Hanmi. And so we have started what is called the [three well] program for employees. So what we're saying is that salary expenses have been going up, and hopefully, that will slow down in the future as we don't expect any more banks opening up in 2007. But at the same time, we're trying to give the -- make employees feel better about working at Hanmi, and then hopefully, that will slow down the rate of increase in employee expenses.

And just to clarify with respect to your question about the options expense, Hugh, going into the second quarter, it had been some time before the bank had granted substantial amounts of employee stock options. So it's a relatively small amount of comp expense attributable to stock options recognized in the first quarter. At the beginning of the second quarter, there were some stock option grants, and that drove the expense up somewhere in the neighborhood of $400,000, if I recall. And that's a continuing expense, which declined somewhat from quarter-to-quarter, down a little bit quarter-over-quarter. But, really, it was the grants that the Company made at the beginning of the second quarter that drove the increase in stock compensation expense.

Thank you very much for the insight.

Christopher Nolan, Oppenheimer.

Could you characterize -- are you seeing an increase in prepayment activity for commercial loans, as well as commercial real estate loans at all?

Yes. In the third quarter, we have seen a fair amount of prepayments, and that's one of the reasons why our net production did not go up commensurate with our gross loan production of $377 million. And because of the prepayments, that's one of the reasons why we were able to collect $400,000 in prepayment penalties. So still, many of the customers are going to fixed-rate. We try to tell them that interest rates have probably peaked, but that doesn't seem to matter. They still want fixed-rate loans. So in the marketplace, what loan demand there is, is substantially related to fixed-rate loans. But, despite that, we have been really working hard and have done a good job of producing variable-rate loans. And again, almost three-quarters of all the loans that we did produce in third quarter 2006 were variable-rate.

So you would characterize it as increased level of prepayments in the third quarter, or just pretty much static with the earlier part of the year?

I think a very slight increase. I wouldn't say a dramatic or major increase, no.

Great. And in previous quarters, you mentioned that you used an outside consultancy to determine the provisioning level. Was that the case in this quarter as well?

In the past, we used outside economic consulting firms to get their projections for the unemployment rate, and we continued to use them, and so that does affect so-called the qualitative aspect of our provisions for loan losses. This time around, I don't think that really has had any significant or major impact. Having said that, our asset quality remains excellent, but we're not concerned about that at the moment.

Great. So was the outside view of employment in Southern California basically declining -- or excuse me -- increasing unemployment rate because your provision went up? Because in the second quarter, your provision went down, and the reason was they had a more favorable outlook in terms of the employment outlook then.

The reason for the increased provision for the third quarter was really not so much related to the economic outlook. I think that remained fairly stable. There are basically three components, as you know, in the -- accounting for the loan loss reserve. So one is -- that required a portion, and that includes credit size, classified and then impaired loans, and that did go up slightly, but really not that much. But that also meant that we had the better side, more reserves for that.

The second portion of the provision is related to charge-offs, and we have had, again, a very slight increase in charge-offs, but nothing to really talk about much. And then at the end of the second quarter, we had $41 million in excess reserves. So when you combine all of these things, we came to the conclusion that our provision for reserves for the third quarter should be $1.682 million. And that, again, raised the reserves, the percent of gross loans, to 0.99%, which is somewhat -- a bit higher than it was in the second quarter.

And I guess, finally, in your comments about the commercial real estate is holding up well, can you give a little bit more granularity in terms of what section -- I mean, are there any particular areas of commercial real estate where you're seeing much more aggressive cap rates than typical, or activity is slowing down particularly?

The vacancy rates are fairly low, in some cases going down. That is pretty much across the board. I cannot really say this particular sector of commercial real estate is beginning to show wear and tear and suffering. That is not the case. For example, in Los Angeles where we are, the offices are very hard to find. And we haven't had any construction of office buildings for quite some years. So the space is fairly tight. As I have indicated in the past, the commercial real estate activity is really a lagging economic indicator so that the economy softens first, and then that leads to problems in commercial real estate. We have really not seen anything meaningful softening economic activities in California. For example, our tax rates are -- tax revenues are higher than anticipated in Sacramento in part because the economy is doing much better than anticipated. And so that means, I don't think we're going to be seeing commercial real estate problems, if any in the foreseeable future. So I don't think there's much of a problem there or concern at the moment.

Great, thank you very much.

(Operator Instructions). Don Worthington, Howe Barnes & Hoefer.

Hey, Don. We've got to learn your new company name.

That's right. It's a little bit longer. A couple of questions. One, on the SBA loan sales, what kind of premiums are you getting on those secondary market sales?

It depends on the loans, but we sold the guaranteed portion of the SBA loans, and many of them were new productions. They tend to command a fairly high premium. And so the premium tends to be 8%, 9%, in that range, so it is pretty high. And that was actually one of the reasons why we wanted to sell, because as loans season, they age, their premiums tend to go down.

Okay. And then you talk a little bit about your expansion plans. What I heard was a couple of branches and a couple more LPOs. Is that correct? Is that over maybe the next 12 months?

That's correct. In terms of branches, there are actually three that we're looking at. We got approval from the regulators. One is in a place called Buena Park, and we hope to open that branch sometime early next year. There's another branch in Roland Heights in Orange County which was closed, but we have received permission to reopen that, and so that's the second one. The third one is in San Francisco. It was a very small deposit-gathering operation, and so we decided to convert that into a full branch. And we just got bids for remodeling and construction, so that, again, we hope to open that full-service branch early next year.

In terms of our loan production offices, we have right now seven LPOs, and either later this year or early next year, we hope to add a couple more so that by then, we should have nine LPOs.

Okay great, thank you.

(Operator Instructions). James Abbott, FBR.

Sorry for the follow-up question, but can you, Mike, maybe just give us the prepayment penalties from the prior quarter, just so we can have an apples-to-apples comparison? And then also, what your outlook is on the margin for the fourth quarter here -- are we starting off -- it's a fairly stable level in the month of September, or is it -- should we expect -- I know you said it gradually declined is what I think the comment was earlier in the call, but I just didn't know if it steps down?

In terms of production levels you mean, James?

No, I'm sorry, in terms of margin -- whether there would be a stable or slightly declining margin, or whether we would see a similar margin, excluding prepayment penalties in the fourth quarter?

I don't expect any substantial changes in margin. The pressure on margin is a continuing thing, and so it is not moving around in any substantial way. I don't have a quarter-by-quarter summary of prepayment penalties in front of me. It seems to me -- I would be happy to get back with you on that, James, and anybody who's interested in knowing that information.

Okay. And we have seen some companies that had a lot of variable-rate loans, and the Fed is done, or appears to be done, moving interest rates higher, and those companies have gotten their margins absolutely crushed. You didn't go through that same scenario. Is that simply because of the rate on CDs is already up there? And now that -- assuming the Fed doesn't raise interest rates, is that a valid scenario, that margins do hold?

We're hopeful that we can control the cost of our CDs. Just a couple of things to back that up. If you look at the month of September compared to August, the cost of funds was up 2 basis points, and March really the same situation from July to August. So we feel like the cost of funds is flattening out pretty well for us. But it's still a competitive marketplace. But, looking at the CD portfolio, we feel like the vast majority of it is priced either at or pretty close to market at this point. If you look at the number of accounts that are under 5%, it's somewhere in the neighborhood of $200 million. So there's not a whole lot left there to reprice to current rates. So we're cautiously optimistic on that front. At the same time, the pricing situation is competitive on the loan front, and hopefully we'll hang in there, but you know, (indiscernible) increase.

James, also our asset sensitivity I believe was 5.9%. And you know, that is about as evenly matched as you can have it without going into liability sensitivity. So, again, our policy is that we want to be asset-sensitive and not go into a liability-sensitive area. And so the number is only 5.9%. So I think our balance sheet is actually pretty evenly balanced. And, remember, a year ago when we were talking about it, I don't have numbers in front of me, but it was something like 15%, 16%, 17%. Now it is way down to below 6%. So even if the rates do go down, I don't think that's going to hurt our margins that much, if at all.

Okay, thanks very much. And any color on loan yield or loan pricing, rather, on commercial business loans? Has there been much compression in that pricing, or is it holding relatively stable?

Mike can give you the numbers, but I think it is holding up pretty well. Again, we've been trying hard to maintain our margins, and again, that's one of the reasons why we've had a lot of prepayments in our portfolio. But Mike?

Yes, I would say it has been hanging in there pretty well, James, from the second quarter to the third quarter. So, again, we're cautiously optimistic that we can do okay, so far as maintaining the margin (indiscernible).

Okay, thanks again, and sorry to nit-pick so much.

At this time, there are no more questions in queue. I would now like to turn the call over to Dr. Sung Won Sohn for closing remarks.

Thank you. In closing, I would repeat my earlier suggestion that solid results of the third quarter reinforce our belief that we are on the right track in terms of positioning the bank for record results in 2006, as well as further growth next year. Our cautious optimism is founded not only on our asset set expanding on this footprint while enhancing operating efficiencies, but also on what is expected to be a favorable business environment in 2007. Again, I thank you for joining us today and we look forward to speaking with you again early next year. Thank you.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect. Good day.