Hanmi Financial Corp (HAFC) 2007 Q3 法說會逐字稿

Good afternoon. Welcome to the Hanmi Financial Corporation's 2007 third quarter 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 conference call is being recorded today, November 6, 2007.

This call may contain forward-looking statements which are made under the SEC's Safe Harbor rules for forward-looking statements. Forward-looking statements relate to the Company's future operations, prospects and business, and are identified by words such as may, will, should, could, expect, plans, intends, anticipates, believes, estimates, predicts, potential, or continue or the negatives 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 activity, 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 in 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 will now turn the call over to Dr. Sung Won Sohn, Hanmi's President and Chief Executive Officer. Please go ahead, sir.

Thank you, Operator. Good afternoon, everyone. Thank you for joining us today for a discussion on our 2007 third quarter financial results. As we noted in today's release, our core business remains solid. The loan portfolio grew by $164 million over the prior quarter. Deposits grew by $74 million. And at quarter end, total assets were a record $4.01 billion.

In terms of our various financial metrics, however, our operating results were less than satisfactory. Earnings for the third quarter were $11.1 million, down $4.2 million or 28% from the second quarter of 2007. Diluted earnings per share were $0.23, down $0.08 per share from the second quarter when we earned $0.31 per share.

These operating results reflect three factors in particular. One, an increase in the provision for credit losses from $3 million in the second quarter to $8.5 million in the third quarter. Two, continuing strong competition which caused our net interest margin to decline 25 basis points from 4.51% in the second quarter to 4.26% in the third quarter; a smaller than usual gain on sale of loans.

Let me first turn to credit quality, the area of the most concern. The largest single contributor to the increased provision for credit losses can be traced to our group of six related business acquisition loans amounting to $3.6 million. Some of the events relating to these loans became the subject of a litigation that we initiated and we hope that some of the $3.6 million may be recovered following a final resolution. To be conservative, we have charged off the entire $3.6 million even though we believe there is value in the assets.

43% of the $8.4 million provision in the third quarter can be explained by the $3.6 million charge-off mentioned earlier. The remainder is attributable to the deterioration of loan classifications. Overall, the allowance for loan losses on the balance sheet increased $2.3 million to $34.5 million or 1.07% of gross loans compared to 1.05% at June 30. This represents 77% of our non-performing loan at September 30 compared to 142% of non-performing loans at June 30. Non-performing assets increased $21.3 million from $23.7 million or 0.61% of total assets at June 30 to $45 million or 1.12% of total assets at September 30.

Included in the amount is a $17 million construction loan for low income housing that is fully collateralized and participated in by the local government. The downgrade of this loan relates to project cost overruns and construction delays. Despite these effects, we anticipate the project being completed and our loan being repaid without a loss to the bank. Already a new developer introduced by the Community Development Agency or CRA in Los Angeles has applied for new tax-exempt bonds to provide additional money to complete the project, which should be resolved by the end of the year.

In addition, new equity investors are in the wings to buy the tax credit. CRA Los Angeles has already injected significant sums into the project and is behind Hanmi since Los Angeles is in need of affordable housing. Today we have never lost any money on low income housing projects and we don't expect to lose any on this one either.

The NPL ratio includes $6 million of loans backed by government guarantees, including $4.2 million of SBA guarantees. Delinquent loans increased $23 million from $32 million or 1.05% of the portfolio at June 30 to $55 million or 1.71% of the portfolio at September 30. Again, a major portion of the increase is due to the $17 million construction loan on the low income housing project mentioned earlier.

Our construction loan portfolio is made up primarily of low income multi-family housing projects which are 31% of the portfolio and commercial real estate projects which are 44%. As of September 30, $21.8 million of our construction loans were delinquent, including the $17 million low income housing loan provision mentioned just now.

Recently there has been considerable concern regarding recent vintages of subprime residential mortgages. Our total exposure to single-family residential loan is minimal. During the third quarter, commercial and industrial loans were up $134.9 million and real estate loans were up $36.6 million, while consumer loans were down $7.1 million. Fixed-rate loans were made up 45% of production in the third quarter and at September 30, the portfolio consisted of 38% fixed-rate and 62% prime-based loans.

Continuing strong competition is the second factor I mentioned. And it too is reflected in the third quarter financial results. Net interest margin decreased from 4.51% to 4.26% as a low income construction loan went from delinquent to non-accrual status. $526,000 in interest income was reversed, reducing the net interest margin by 6 basis points. In addition, the yield on the loan portfolio declined 24 basis points to 8.44% in the third quarter compared to 8.68% in the second quarter. The continuing demand for fixed-rate loans, which carried low interest rate, [extend] prime based loans in the third quarter reduced the margin.

Our investment yield increased by 12 basis points to 4.52% from 4.40% due to the reinvesting to higher yielding agency bonds. Overall, our yield on earning assets declined 16 basis points from 8.17% in the second quarter to 8.01% in the third quarter, reflecting pressure on loan yields.

On a linked quarter basis, the cost of interest-bearing liabilities increased to 1 basis point sequentially to 4.93% and the cost of interest-bearing deposits increased 2 basis points to 4.78%. Our average jumbo CD rate was 5.31% for the quarter, down 3 basis points compared to the second quarter.

DDA balances decreased $30 million from $720.2 million at June 30 to $690.5 million at September 30. While the average balance of DDA decreased $20 million to $699.8 million. Overall, core deposits at September 30 were up 0.4% compared to June 30, while we saw quarter-over-quarter growth of 1.1% in average balances. However, our deposit growth has not kept pace with the net increase in the loan portfolio. And growing deposits, particularly core deposits, remains one of our primary areas of focus in the future.

Non-interest income, exclusive of gains on sales of loans, increased 0.8% sequentially from $8.9 million in the second quarter to $9 million in the third quarter of 2007. We had solid increases in other service charges and fees which consist largely of late fees on loans and a $226,000 gain on the sale of OREO offset by declines in insurance commissions and trade finance fees.

Our SBA department had a slower third quarter with originations of $26 million in SBA-guaranteed loans compared to $42.4 million in the second quarter. Another factor that adds a significant bearing on the third quarter operating results was a smaller than usual gain on the sale of loans. This is mainly because the premium bids by the secondary markets were considerably lower than anticipated, and the management decided to defer the sale of SBA loans. Our sales of SBA loans in the third quarter totaled $16.9 million or a gain of $523,000 compared to a gain of $1.7 million in the second quarter when we sold $35.6 million. The gross premium on SBA loans decreased 172 basis points and net gain after adjusting the origination costs decreased 103 basis points, reflecting current secondary market conditions.

The efficiency ratio was 44.9% in the third quarter compared to 43.6% in the second quarter of 2007. Our salaries and employee benefits expense increased 5.9% compared to the second quarter because of the new Rancho Cucamonga branch, which opened on August 16, and lower incentive compensation accruals in the second quarter. There were relatively large decreases in most other non-interest expense categories. Data processing fee decreased $125,000 by implementing in-house, online storage starting July 2007. Other operating expenses also decreased due to the decreased deposit operation losses and quarterly write-offs of the loan servicing assets compared to the second quarter.

In short, solid loan growth and expanding branch network were overshadowed by higher loan loss provisions and continued margin compression. As pointed out earlier, a major portion of our problems during the quarter is related to the acquisition loans and litigation I mentioned and low income housing loans supported by the government, mentioned also earlier.

We have or are taking a number of steps to mitigate recent deterioration in asset quality. We have recently increased the number of senior credit officers. Within their assigned areas, each officer will be able to spend more time reviewing underwriting and monitoring. Underwriting is being centralized regionally in order to improve efficiency and quality. At each of the five districts, experienced loan officers review and monitor the loans in the district. Recognizing the risks associated with C&I loans, we now have an experienced credit person with decades of experience. His job is to assist in originating, structuring, monitoring and work out, if necessary, of large C&I loans as well as training.

In conclusion, the third quarter results reflect the pressures of a very competitive marketplace in which we operate. However, we believe our efforts demonstrate the commitment of our management and the Board to improve the performance for the benefit of our stockholders.

With that, I'll be happy to respond to your questions.

(OPERATOR INSTRUCTIONS). Brett Rabatin, FTN Midwest.

First off, just one housekeeping issue, Dr. Sung. I wanted to ask you about the 24 basis points of loan portfolio yield reduction linked quarter. Can you attribute -- how much of that can you attribute to the increase of non-performers or any reversal of previous interest?

A significant portion of that is because of the competitive pressure in the marketplace. Also, as I pointed out, because we decided to reverse the large construction loan interest earned so that reduced net interest margin by 6 basis points. But I would say a lion's share of that decrease is due to the competitive pressure that we continue to face in the marketplace.

Okay. And then if I heard you correctly, you sold $16.9 million of SBA loans this quarter and production was $26 million?

Yes. In the third quarter, we originated $26 million of SBA guaranteed loans. And that compares to $42.4 million in the second quarter. And we sold $16.9 million in the third quarter as opposed to $35.6 million in the second quarter. Again, as I mentioned, premiums were very low so the management decided to defer sale of some of the SBA loans that we could have [and] gained but we chose not to.

I wanted to just ask you on the origination of SBA loans, obviously you had a linked quarter decrease. I don't recall any seasonality factors in 3Q. Was there any other factors that played in to the lower production levels in 3Q?

Seasonally, we should see fairly strong, while the strongest production really in the summertime. So this was an aberration because of the economy. And obviously in the third quarter, we have lots of problems in the financial markets including the subprime. So, I think a significant portion of the slowdown, which is contrary to the seasonal pattern one would expect, is due to the economy. And the number of sales in the marketplace has decreased while competition remained fairly intense.

Having said that, in the fourth quarter, we are expecting somewhat higher production than we experienced in the third quarter. So overall, we believe our somewhat slow production in the third quarter was an aberration which hopefully, should not continue.

Okay. And then wanted to address credit. I know you have this one low income housing construction project that is somewhat skewing the numbers given the size of it. But it looks like, given the continued increase in delinquent loans, at least it looks like it could be another quarter or two of higher provisioning to address at least the higher number of delinquent loans as presumably they migrate through the risk categories. Can you give any color on just the provisioning? And it looks like you've obviously addressed a few loans in 3Q, but it looks like the pipeline of problems is still there.

The NPL and delinquents went up. And again, as I mentioned, $17 million of that is due to that low income housing construction loan which we do not expect to lose any money -- we have never lost money on low income construction loans. And if you look at the delinquency, it did go up. But again, the same story -- a very significant portion of that $17 million was explained by the fact that low income housing loan that [but] didn't go very well. And so if you subtract the $17 million low income housing loan, as you can see, the increase in NPL as well as the delinquency is not as bad as it sounds.

And in the first quarter, the delinquency was 37 and the second quarter was 32 and the third quarter was only 37, excluding 17. So, it went from 37 down to 32 up to 37. So I'm not sure if that's a -- what you call a significant deterioration, if you exclude that $17 million low income housing, which we are confident that we will not lose a dime.

I guess my point, Dr. Sohn, is it looks to me like the delinquent loans -- you took a big provision in 3Q but it looks to me like the level of potential non-performers is still there. And you've charged off obviously the business acquisition loans. But the provision in 3Q appears to me, does not take into account any further deterioration in the loan portfolio. But you obviously still have some past dues. So, to me, there's a disconnect. And I'm just looking for any additional color on it.

I can't you a definitive answer as to what's been happening in the fourth quarter. But if you look at, for example, delinquencies in NPL in the third quarter, we have two construction loans, the $17 million loan that I've just mentioned, plus there is an additional $2 million loan that we have accounted for. And then we have a couple of, what we call TLTD term loans division, it's basically C&I loans to the garment industry. And that's about $1.36 million. And then we have one commercial property loan which is very well secured by property; again, that should be just fine.

And then so this explains what we did in the third quarter. Now, in terms of do we have a significant amount of NPLs and delinquent loans in the pipeline which will generate more provisions in the fourth quarter? Well, I guess I would not come to that conclusion at the moment. I mean, it's too early to tell. But I'm not sure if I would come to that conclusion. I wouldn't.

James Abbott, FBR.

My questions are kind of similar to what Brett's are. Maybe I'll approach it a little different way. If I just provision or reserve for the loan growth that you had for the quarter, that's about $1.8 million if you provision at the same rate as your overall portfolio. And you exceeded -- provisions exceeded net charge-offs by $2.3 million. And if $1.8 million of it was allocated to loan growth, then that leaves a very small amount to cover even the increase in non-performing assets or delinquencies of both, even if you exclude the construction loan of $17 million, we assume that there's no losses there, you still had a $4 million increase in non-performing assets.

And it doesn't seem like that's sufficient to cover that, I guess, and that's kind of what I'm getting is -- and maybe that's what Brett's getting at as well is -- it strikes me that the reserve ratio should have gone to 120 or 125 under this scenario. Can you take us through why not higher?

And the other thing is that strikes me is going back maybe a couple of years ago or 18 months ago as I recall, Hanmi raised the reserve ratio based on higher oil prices. And I thought I might see that this quarter a little bit because that should portend a weaker economy in the future. Maybe take me through some of that. There seems to be a pretty big disconnect there.

First of all, our provision is based on, as you know, a formula that we use, a so-called reserve track method. And fortunately or unfortunately, we cannot really change it from quarter to quarter. So we have to go by what we have. And first of all, let me explain how we came to $8.5 million provision for loan losses.

The biggest portion of that was $6.2 million of charge-offs. And out of the $6.2 million, $3.6 million was that acquisition loan that I talked about, which is in litigation that I cannot comment on further. And the other $1.14 million was related to the change in risk rating or classification. The other $1.15 million was related to impaired loans. So we have a separate category, as you know, called the impaired category. And that was the $1.15 million.

The loan portfolio grew by $164 million. And that increased the reserves only by $158,000; a very insignificant amount. And then we also have a so-called the qualitative adjustments. In this qualitative adjustments, basically that the amount of reserves remained fairly stable. So based on this reserve track method or the migration method, we came down to $8.5 million.

Now we again feel that charging off of $3.6 million, the entire amount, in this acquisition loan is being conservative. We wanted to be conservative. As I mentioned, we do expect to get certainly some of the money back. But right now the proper thing we felt was to charge off the entire amount. And also we looked at the many other categories and then we tried to be as conservative as we can.

If you look at the NPL to the loan ratio, in the third quarter it was only 0.74%. And then obviously in the third quarter it went to 1.39%. However, if you look at the [ALLL] coverage ratio, it actually went up from 1.05% in the second quarter to 1.07% in the third quarter.

Again, going back to your question of the reserves that we set aside, is this enough to account for some future problems? I'm sure we will. Like any other bank, there will be some problem loans in the future. At the moment, we feel that this is adequate and this is what we feel the formula called for. And so that's what we believe.

Okay. Let me ask a little follow-up question, I guess. As I was listening to you, you mentioned that there was $158,000 set aside for $165 million worth of loan growth? Did I catch that number right?

That's correct, yes.

So that works out to roughly 10 basis points.

Yes, in our so-called the clean loan category -- and the clean loan category we have set aside reserves based on basis points and then when you apply the calculation in the reserve track method, which is based on history, we didn't set it arbitrarily, that's what it comes to.

Okay. Well, is that the reserve that is allocated to past grade loans, is 10 basis points?

That's correct, yes. Again, I'd like to emphasize that that's not based on our arbitrary determination but that's based on history.

Okay. I guess I'll just state for the record that makes me particularly nervous. I would -- especially since history is not likely to repeat itself given the fact that we have a housing environment that is declining, housing prices nationwide plus California -- is there anything -- I mean, have you gone back to the Board and asked -- or the auditors and said, look, this is substantially insufficient. This -- a 10 basis point reserve on past grade loans is substantially insufficient given the macroeconomic conditions.

We are continuing to look at enhancements to our reserve track method so that it is not something that is cast in stone forever. As a matter of fact, we are in the process of looking at it, yes.

Okay. Let me shift gears a little bit. On the margin, the Company probably didn't feel a lot of the impact from the Fed cuts that we've had so far. Do you have a sense as to where the margin would settle here, assuming the Fed doesn't cut any further? Do you have an insight into the fourth quarter and net interest margin at all?

We have made some calculations and for every 25 basis point decrease or the cut in the federal funds rate, our net income goes down by -- before tax, revenue goes down by $1.24 million. So, so far we've had 75 basis points, so you can kind of calculate that.

Okay. And then maybe a question on -- and then, actually, I should probably give up, secede the floor to someone else.

Last question is on the loan growth rate, given the profitability and given the macroeconomic risks out there, you're probably adding loans somewhere near the 8% coupon level or maybe 7.5%. Could you give us some insight on that? And then I'd also like to hear the thought process as to whether it is wise to add loans at that incremental yield when the cost of funds on an incremental basis is at 5%.

The loan growth has been healthy. We do not sacrifice credit quality in growing loans. The type of growth in loans that we are seeing we believe is quite consistent with the economy of the region. If you look at southern California where we are operating primarily, the economy has really performed reasonably well despite all the negative news that you hear about residential mortgages and then everything else.

So, the local economy has been very healthy. Also, commercial real estate, and that's really our bread and butter. Commercial real estate is doing quite well. The vacancy rate is going down and the rents are going up. And there aren't any properties to be bought in some cases if someone wanted to because of the low cap rate, for example.

The other positive thing that we are seeing is money from Korea. Korea is encouraging, the country of Korea is encouraging its citizens to invest overseas. And southern California is the largest concentration of Koreans outside of Korea. So we are and then we will continue to see flow of our money and people in this direction. So that's another reason for the growth. So, the kind of growth that we are seeing right now I think is justifiable, manageable growth. I think that this is reasonable growth and I don't have any problem with that.

In terms of the yields, clearly we do not determine what the yield on loans is in the marketplace. We have to go by what is in the marketplace. However, we do make choices. And we look at not just the loan yields but we look at the ROAs, return on assets. And as a theoretical matter we are willing to take very low rates if we can make it up elsewhere. So we emphasize cross-selling. We look at deposits. We look at sales of insurance and wealth management, other services. So we are really looking at ROAs -- return on assets, not so much just the interest rate on the loan.

(OPERATOR INSTRUCTIONS). Christopher Nolan, Oppenheimer and Company.

The timing of the share repurchases. Am I correct where it looks like it was probably some time in late July that you were doing those share repurchases?

Yes.

When did the credit quality start to really deteriorate in the portfolio? I could only presume it was sometime after that, September-ish?

Well, I'm not sure if I can give you an exact date or the timing. And then how that's related to share repurchases.

Well, I guess one of my questions would be at this point I don't think -- I can only presume the share repurchases are going to stop. I'm just trying to get a sense as to management's priorities at the time. Was the -- did you see the credit quality deteriorating throughout the portfolio? Or did it sort of crop up all at one time? Particularly given, you know, this -- oh, please go ahead.

I think the credit quality did deteriorate in the first quarter and then again now in the third quarter. But I don't necessarily think we could say this is a trend. So that I do not want to come to the conclusion that we have a trend. I don't think we do.

The second point is that share repurchases and credit quality, they are just totally unrelated. And earlier this year, the Board authorized share repurchases of $50 million. And since then we have spent about $39 million and we have $11 million left to go. And so to me this is a capital management plan. Our bank is well capitalized, capitalized. And so you have to really ask yourselves the question, what do you want to do with your excess capital? And we want to a number of things and one of the things that we decided to do was to buy back stock. And even after spending $11 million left out of $50 million, our bank will be well overcapitalized.

Is the intent in the fourth quarter to continue repurchasing shares?

That's correct. At least for the $11 million that we have left.

Okay. And it's -- what percentage of the loan portfolio is now fixed?

Fixed -- in the third quarter it was 45%. And if you look at the portfolio, it was 38%. Now, clearly still customers, they prefer a fixed-rate loan at the moment. So that is one of the reasons for the margin compression.

Okay. And I guess, finally, back to the questions that Brett and James were sort of talking about in terms of the reserve. According to my calculations, it looks like the allowance for reserves is about 44 basis points -- excuse me, 77% of the total non-performing assets -- the allowance is about 77% of the total non-performing assets. Do the regulators put any priority on enabling or ensuring that your allowance will be at least 100% of your NPAs or some multiple of NPAs? I'm just trying to get a perspective, what do the regulators view?

I haven't spoken to the regulators. So I could not tell you. But as you know, these numbers do go up and down, jump around from quarter-to-quarter. If you look at our trend, the trend is still moving in the right direction, meaning that higher coverage. So that NPL, again, let's not forget the fact that it includes a $17 million construction loan that I talked about. And again, to us, repeating myself, we do not plan to lose a dime on that loan.

Okay. So I could basically infer from that then it doesn't look like there would be a major change in the reserve coverage ratio from current levels, at least in the near-term?

In the foreseeable future, we plan to use the reserve track method that I've talked about, and we've been using it for years and years and years. And so again, as I indicated, we are always looking for enhancements. And we are in the process of doing that. And as a result of our efforts, we may decide to change the methodology slightly. So we will have to wait and see. But so far, that's the methodology that we have and we are using.

Don Worthington, Howe Barnes Hoefer.

I got on about five minutes late, so I apologize if you went over this. But I just wondered if you had an update on the CFO and the Chief Credit Officer positions in terms of the search. You mentioned the fellow that you said was a senior credit person, but is that the replacement for Kurt? Or are you still looking for that?

No. The CCO is a very different position. We had senior credit officers and they assist CCO and then Deputy CCO. We have added another senior credit officer in addition to that senior -- the person who was also assisting in C&I loans. And so this is very separate from the CCO position.

Well, CCO, we are still in the process of looking for an able person to fill that position. And we really don't have anything more to say at this point. In terms of CFO, we are pretty close to finding a person. So when that time comes, we will make an announcement but we have made more progress on that front.

Okay. Thank you. And then in terms of any future branch plans or LPO openings?

We plan to open a branch in Beverly Hills either late this year or early next year. And after that we are looking at a couple of other areas or three areas in southern California. So our hope is that we can open maybe three to four branches a year and that could be in southern California and/or outside of southern California.

In terms of the loan production offices, yes, we are looking at opportunities on an ongoing basis and there are a couple of areas that we are considering right now. So both in terms of a branch expansion and LPO opportunities, we are constantly looking at opportunities to add to our existing footprint.

(OPERATOR INSTRUCTIONS). Brett Rabatin, FTN Midwest.

I just wanted to follow-up on a couple of things. First is Jane Kim no longer with -- is she no longer in Credit?

She is our Deputy Chief Credit Officer. She's still here. And she has been very helpful.

Okay. Thanks for that clarification. And Dr. Sohn, I guess, what the talk is in the local community is that there has been a renewed fervor of, I guess you'd call it movement amongst the banks and personnel and so to some extent the seat hopping has continued. Besides the CFO and CCO positions, can you talk about other executive management or senior management positions that you're looking to fill presently?

Well, in Koreatown, as you know, we have that musical chairs going on. And so I'm sure that will continue on. But in our case recently we filled a position of SAD's Special Asset Department. And in this economic environment we feel that that's a very important position. Fortunately, this gentleman has, again, decades of experience in commercial banking. He fills many positions in various parts of the bank including Hanmi Bank. And he also has that experience in SAD in the past during his earlier years.

So we are very pleased to have the position filled. And other than that, again, we talked about CFO and CCO and hopefully we hope to fill the CFO position fairly soon and CCO pretty soon. But again, in the meantime Jane is here.

Okay. And then Dr. Sohn, just given the competitive landscape in Koreatown, I know Hanmi is the Bank and the Group is probably more mainstream than others, can you give us an update on how much of the loan portfolio is mainstream -- not to Korean or other ethnicities? And if the direction of the Company going forward takes a more mainstream bent? Or if you have a particular focus on direction for the next couple of years?

I wouldn't mainstream, but we've tried to stay in ethnic markets. About almost 50% of our new loans are going to non-Koreans but still to the ethnic markets. And as we expand into areas outside of southern California, my expectation is that we will rely probably -- continue to rely on not only Koreans but also non-Koreans as well.

For example, one of the reasons why we are opening the office branch in Beverly Hills is because of our Middle Eastern and Iranian customers. And they've been very good to us. And we want to better take care of them. Many of them, they do business banking with us right now. So we also want to cross-sell consumer products as well and give them the kind of convenience that they need. So that's really our strategy -- staying in the ethnic market in southern California and elsewhere. And obviously we begin with the Korean population, but we want to go beyond the Korean population and serve other ethnic groups.

Okay. That's good color. And just one last thing. I'm curious to, given your economic background, to hear everyone in the market is obviously aware of the softness in single-family housing and construction on the residential side. I guess I think about six months from now and what might happen if the economy continued to be soft; obviously it's a difficult call to make based on where the unemployment rate goes. But I am curious to hear your thoughts on commercial real estate. You noted in the press release that that was one area of your portfolio that was still continuing to perform well. I'm just curious to hear your thoughts on commercial real estate. And if you're changing any things on loan underwriting there? And just generally your thoughts on that loan segment.

In credit, in general, we are being much more vigorous and watching asset quality, given the summer softening and general economic conditions, I think it is really called for. So, not only for commercial, but also all the loans that we write. We are making sure that we cross T's and then dot all the I's.

As far as southern California is concerned as I indicated, commercial real estate has held up very well. And the vacancy rate is still going down. The rents are going up. And if you want to find a block of office space on Wilshire Boulevard, for instance, here in L.A., it's hard to do because it's all -- you know, full.

Having said that, if the economy does really seriously deteriorate, it goes into a recession, for example, I don't expect that, but if it did, at some point I suppose the commercial real estate could be affected as well. But I don't see a recession at the moment. And in the foreseeable future, the near future, commercial real estate I think will perform reasonably well.

However, it is also dependent upon geography. In some parts of southern California, for example, warehouses are not doing as well as office buildings downtown. So depending on the type of buildings and type of -- the area that you're in, it does make some difference. But overall, on balance I would say, commercial real estate, which is really our bread and butter, two-thirds of our portfolio, is holding up quite well.

Are you putting any odds on a recession, just if you had to gauge what you think the chance of a recession is?

Well, Chairman Greenspan said the probability of a recession is less than 50%. Probably that's about as good as I can say.

I just thought I'd put you on the spot and see if you had a number for me. All right. Thank you.

(OPERATOR INSTRUCTIONS). James Abbott, FBR.

Just a quick question on your reserve methodology. I wanted to see if I could understand that a little bit more. When you look back to see historical delinquency trends and so forth and delinquency charge-offs, how far is the look-back period? Is it an average of one or two or three years? Can you tell us something about that?

We look at 28 quarters and then we take the 10 worse quarters. So you see, the system does have a built-in conservativism because not only do we look at 28 quarters but we take the worst 10 quarters out of that.

Meaning you look at the worst 10 quarters?

Well, the methodology requires to use the 10 worse quarters to come up with the reserve ratio.

Okay. So it will take maybe as long as 2.5 years then for some of the -- I mean, what you're experiencing today is flowing through the number a little bit, but it's going to take quite a long time before that reserve ratio really rises substantially. It's kind of a slower process, is what (multiple speakers) --

Yes, it will take some time but James, again, I'd like to point out that if you look at our portfolio, again, our bread and butter, two-thirds of that is really commercial real estate. And as you can see, some of the problems on loans that we're talking about, I just mentioned this too -- NPL list that we have for the third quarter again, we talked about that $17 million construction loan. That's real estate. And we don't expect to lose a dime. And then there's another real estate, as I said, it is very well secured. It's less than $1 million and very well secured. And we expect to come out quite well.

So if we were in residential mortgages or -- our primary business is in C&I loans, then I guess I would worry more. But given the outlook for commercial real estate, which I am pretty sanguine about and the fact that we are heavily into commercial real estate, I'm not sure the reserve track methodology is that bad. In fact, I think it's a reasonable method that we use.

Okay. And then sort of a related question on commercial and industrial loans, you mentioned you were improving some of your maintenance abilities. And I assume that meant collecting and reviewing the financial statements of your customers? Maybe that's not what you meant but that's how I interpreted that.

Yes.

Can you tell us how often you collect the financials on your commercial business customers? And what you're doing to change that?

We have the C&I loans. And first of all, recognizing that in these uncertain economic times, the C&I loans have more risk than, let's say, a commercial real estate loan. And so we hired a very senior person with decades of experience and we plan to build that area. The purpose of that area is to not only help in originating, structuring but also very importantly, monitoring existing loans.

And when we talk about monitoring, how often do we get financial statements? Well, we like to get them as often as possible. But it is not a cookie cutter approach. It depends on the type of loans. In some cases it require annually. Sometimes semi-annually. Sometimes quarterly. And so clearly, we want to make sure that covenants are adhered to and we get the financial statements that we're supposed to get.

As a matter of fact, we are right now in the process of doing what we call baseline analysis. We are looking at every single loan, including C&I loans -- beginning with the C&I loans -- and make sure that we have the financial statements and all the covenants are being adhered to. So we are putting extra, extra, extra effort in monitoring. And we believe -- that's very important.

Okay. Do you have an estimate on the cost of building out that -- I guess we won't call him a workout committee, but the monitoring base?

Well, we don't have any workout group other than SAD, Special Asset Department. So we have a senior person with, as I pointed out, decades of experience to make sure that we do a good job of monitoring. And in the future, again, I can't tell you the timeline or the who, but our intention is to boost, beef up that area so we do a good job of monitoring and make sure that we do what we are supposed to.

You don't have a targeted budget on those expenses?

No, we do not right now. Except that this very experienced person has been hired and he has been on the job for four months.

Okay. Thanks again, Dr. Sohn.

Thank you very much, sir. I'd like to turn the call back over to Dr. Sohn for any closing remarks you may have.

Thank you for joining us today. We are addressing the issue of a credit quality. Nothing is more important to us than this. And we are taking steps to ensure that long standing procedures governing the underwriting and monitoring of loans are rigorously followed throughout the bank.

With these initiatives already well underway, we hope to achieve measurable improvements in operating performance. So we look forward to talking with you early next year when we will report fourth quarter and year-end results. Thank you and good bye.

Thank you very much, sir, and thank you, ladies and gentlemen for your participation in today's conference call. This concludes your presentation for today. You may now disconnect. Have a good day.