Hope Bancorp Inc (HOPE) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Nara Bank Corp second quarter 2003 earnings conference call. My name is

. I'll be your operator today.

Throughout this conference your lines will be on listen-only. If you require assistance from an operator at any time, please key star then zero on your touch-tone phone. Someone will be happy to help you.

At this time I'd like to turn the conference to Mr. Timothy Chang. Sir, you may now begin.

Thank you. Good morning everyone and thank you for joining us to discuss Nara Bancorp financial results for the second quarter of 2003. In just a moment, Benjamin Hong, President and CEO, will provide a summary of our financial performance for the quarter and selected key topics. Then we will open the call to questions.

I would like to caution participants that during the course of the conference call, management may make projections or other forward-looking statements regarding events or the future performance of the company. Such forward-looking statements involve risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the company to be materially different from the featured results.

Performance or achievements expressed are implied by such forward-looking statements, such factors include, among other things, general economics, business conditions, and areas in which the company operates, demographic changes, competition, fluctuation in market interest rates, changes in business strategies, changes in credit quality, and other risks detailed in the document the company files from time to time with the Securities and Exchange Commission.

We wish to caution that such statements are just prediction and that actual events or results may differ materially. We refer you specifically to company's latest Form 10-K and 10-Q, which were filed with the SEC.

Now I'd like to turn over the call to Mr. Benjamin Hong.

Thank you, Tim. Good morning and thank you for your joining us today.

As Tim will go over the numbers later on, I would like to go over the highlights of our second quarter performances and our strategy underlying these performances. I will also try to add some colors to our numbers.

Our strength is in generating quarterly loans. We have strong and uncompromising senior loan initiation officers who meet twice every week to screen and approve credits coming from our nationwide branch and LTO network. We also have very independent and motivated loan officers who try to be more innovative and creative in generating loans.

Our loan growth was 33% increase over the second quarter of 2002. We have grown and we could grow a little bit more than 33% but we chose to take a balanced growth strategy year over actually. We also wanted to maintain a conservative loan mix. Let me elaborate these points more in detail.

Our New York region and the LTOs in Seattle, Chicago, Atlanta, New Jersey, and Virginia have grown to approximately 35% of the bank. California's most competitive market called Korean banks and our current saturation on California is about 65%.

Our loan mix is also very well balanced. We are not real estate heavy. Real estate is 46%, consumer 10% and commercial, including SBA and trade finance, 44%. Real estate loans demand continued to be strong in Southern California. Lacking commercial and other loans, there was a strong temptation to increase real estate loans. We resisted such temptations as best as we could. We also sold more leveraged real estate loans accommodated in the market.

We believe our loan mix is very conservative in the community bank stands as in California. We plan to keep our loan mix this way.

Let me proceed towards deposit taking activities. Our deposit grew 31% of the second quarter of 2002. Competition for deposit was rather heated among Korean banks, pushing CD rates higher than the general market. Especially newly organized and smaller banks were willing to pay for deposit. We experienced less of these competitions in New York. We also expanded on 13 source of deposits.

Thanks to these efforts, we could maintain our course of deposit at 1.56%. This helped us to keep non-interest bearing deposit also to 30% of the total deposit. Our interest margin was 4.57% reflecting our competitiveness in deposit taking activities.

I believe our investments in building nationwide network in the last three years have given Nara Bank a substantial competitive advantage in maintaining lower deposit costs and higher loan yields.

Now, the 9/11 shock in New York area is behind us. Our advantage will be expanded further in the future. We continue to maintain a good, long quarterly in the second quarter. Non-performing loans to gross loan ratio is .4%. This is slight increase from the previous year but is well within the manageable level.

Charge-off for the 810 thousand about same as the second quarter 2002, charge-off ratio to gross loans decreased to .15% from .4%.

Although we are comfortable with the 1.12% of lowest reserve in the previous quarter, we increased the ratio to 1.24% to keep up with the peer group average.

Earlier on, we bought interest rate lock contracts to mitigate the interest rate volatility. We have been successful in minimizing rate compression through this lock per say these. Any interest rate reduction by the Fed, if any, in the future will not affect Nara Bank much.

We followed that position strategy since 1998. All the acquisitions worked out very well. We expect the same in our newest acquisition of Asiana Bank. We anticipate that this deal will be finalized by the end of August this year. It is our strategic plan to continue to acquire banks where we have LTOs now. These are the locations where Korean-American businesses are growing.

We have now hired

, an efficient IT assistant, to manage our geographically diverse wide offices. I think Nara was the first bank in this country, which pioneered this area and this idea among the ethnic banks. We plan to add two new branches in Los Angeles area within this year. We want to maintain our presence as a leading bank in California, too. We're already the largest in New York and Northern California.

Again, we are most diversified geographically and have most conservative loan mix among our competitor banks.

Tim?

Thank you, Mr. Hong.

The company's net income for the second quarter increased 20% to $3.4 million compared with $2.8 million of 2002-second quarter.

The increase in earnings for the quarter is due to an increase in net interest income and growth in non-interest income offset by a lower net interest margin.

The net interest margin for the second quarter was, as we mentioned, 4.57 compared with 4.74 the second quarter of 2002, the decrease in the margin is primarily due to a decrease in market interest rates.

For the quarter, return on average assets was 1.31 and return on average equity was 19.26 compared with 1.51% and 18.40 respectively for the second quarter of 2002. Total assets increased 88 million to 1.1 billion at quarter end compared to 979 million at December 31, 2002.

Our gross loans increased 80 million, or 11% to 810 million from 730 million at December 31, 2002.

The highest growth in the loan portfolio came from the commercial and loan growth non-residential real estate loans, which increased 90 million or 16% to 645 million at June 30, 2003 from 555 million at December 31, 2002.

Our SBA department continues to out-perform in the first quarter by originating over $20 million in loans. Total non-performing assets increased 832 thousand to three million at June 30, 2003 compared to 2,002 million at December 31, 2002.

Of the total non-performing assets, one million relates to one loan that will be fully paid and 425 thousand relates to restructure loans that are fully performing currently.

We provided $1.1 million in provision for loan office during the quarter, bringing the loan off allowance to growth loans ratio to 1.24% from 1.16% at December 31, 2002.

Deposits increased $205 million or 31% to $863 million compared with June 30, 2002. This increase is a result of the continued marketing efforts the branches and the seasoning of the new branches that were opened during the past two years.

Based on the scheduled opening of two branches in the Southern California marketplace during the second half of this year, we continue to expect strong core deposit growth.

Effective tax rate for the second quarter of 2003 was 40% compared with 35% for the quarter ended June 30, 2002.

During the second quarter of 2002, a one-time reduction in tax rates were recognized from the tax benefit that resulted from a telephone estate tax law changes and a credit related to the acquisition of Career First Bank of New York.

Now Benjamin Hong will comment on the outlook for the remainder of the year.

We are increasing slightly our estimated diluted earnings per share for this year to the range of $1.18 to $1.21 from the previous guidance range of 15, $1.16 to $1.20.

The Korean-American community continues to expand in all areas of marketplace. We are on track to generate normal growth in the range of 15 to 20% in our deposits, approximately 16% in 2003.

Our non-interest income is expected to grow 10 to 12% due to an increase in fees from international department in the past three accounts.

We continue to monitor and control our non-interest expenses closely with an anticipated growth in the range of 12% from 2002. The increases will come mainly from the bank's expansion and the natural increase of employee related expenses. We also expect our efficiency ratio to continue to improve as the relative, the new branches in Northern California and New York region for the gain of economy of scale.

Of course these estimates do not include potential M&As. We will continue to pursue in the future.

We believe that we are one of the strongest franchises among our peers, net provide the consistent quality earnings and a strong balance sheet growth and asset quality. We have the infrastructure and quality management in key areas to continue our success in providing shareholder value and unmatched services to our customers.

Gentlemen and ladies, gentlemen this concludes our formal discussion. Thank you for participating in this call and we will now open to questions.

OK. Thank you, sir. Ladies and gentlemen on the phones, if you wish to ask a question at this time, please key star then one on your touch-tone phones. All questions will be taken in the order in which they are received. Once again, if you'd like to ask a question, simply key star, then one on your touch-tone phone.

Sir, your first question comes from

of

.

Yes, good morning and congratulations on the good quarter.

Question about your loan growth sale. You've done very well, again. How far do you feel like you have penetrated your Korean-American market? And secondly how are you incentivizing your loan officers to encourage both quantity and quality of your loan production?

The penetration in a Korean market is still lots of room to grow. But, you know, it is not the monopoly for Korean-American banks. They have options to go to mainstream banks as well. But in terms of, the part of the pie, I think the avenue that Korean banks share is still a maximum 60%. In New York area much less than 50, I would say about 40%.

So there are a lot of room to grow but this is not the monopoly market for us. We have still compete on the same basis with local banks.

Incentive, I think we have best incentive for loan officers. We don't have the cologne type of sales commission for loan officers. It is more merit basis and it's on an annual basis. We have a profit sharing plan and that is - throughout the system we have a certain, the formula which we have internally to identify those officers that more contribution and they get paid more. It's old-fashioned way of giving incentive.

But let me tell you I think we are the only bank who has a fairly genuine profit sharing plan for the lending officers and also other staff function officers.

All right. Thank you.

OK. Thank you, sir. Your next question is from

of

.

Hi. Good morning. Great quarter.

Just a couple of questions, a few number of questions related - do you have average loans for the quarter, Tim, for the second quarter?

Yes, we do. Average loan for the second quarter was - do you have a second question, maybe while we look for that you could ask the second question.

I also wanted to see what the breakout was of securities gains this quarter versus gain on the sale of SBA loans.

OK. For the first question average loan was $804 million.

OK.

Oh, that's net loan, sorry. That's not the growth.

And security gains the second quarter was approximately $9 thousand compared to last year we had a gain of, let's see just a second, we had about $200 thousand dollars in last quarter net. I mean last year of second quarter.

OK. So most of the gains this quarter were the sale of SBA loans?

Yes.

OK. And then just going back to the average loan seller, it's $804 million. You said net, is that versus 563 last quarter, last year?

Last year, 500, yes, that is correct, 565, 560, yes.

OK. Just going on to the net interest margin. It expanded pretty significantly this quarter and I was kind of a surprised given the decline in interest rates that we saw during second quarter. Was a lot of it due to the interest rate swap contracts that Ben talked about earlier?

Well, we made, we that free practice.

OK.

One swap and second we control the cost and three I think our loan yields was a little higher than our competitors.

OK. And just going forward, it seems that you're pretty comfortable that the margin is sustainable at this level for the rest of the year even with the recent Fed rate cut?

No. Can I elaborate on that margin a little bit for last quarter?

OK.

There were basically two factors. One, Mr. Hong already mentioned was a re-pricing of the liabilities. That accounted for about 18 basis points. And another seven basis points was due to the loan fee that related to construction loan that we had to take in all at once. We couldn't amortize because of the length of the loan.

How many basis points is that?

That was about seven basis.

OK.

Going forward, because of this recent rate cut, we expect our margins to be squeezed by another 15 to 16 basis points.

In the third quarter?

Yes, so about 432 or so.

OK. And then should we assume that it rebounds in the fourth quarter?

Fourth quarter, I expect it to continue in that range, 432.

OK. Are there more opportunities to re-price on your deposit side with your CDs or is that pretty, pretty much done?

Yes. Approximately 98% of our CDs what we price within 12 months with the average rate about 2.3%, more than 50% actually about 77% will re-price within six months. And that's average about, right around 2.25 or 2.28, around that.

And what's the average yield now?

Currently it's running about 2.38.

I'm sorry, the CDs are averaging about 2.38 now in terms of the new CDs or both?

Currently, no. Currently it's about two percent, less than two percent on non-Jumbo and Jumbo's around two percent.

OK. Thanks very much.

Sure.

Thank you, ma'am. Your next question is from

of

.

Good morning. Thanks for the great quarter. I just have a question following up on the credit quality. I got the first loan; what was the second loan in terms of credit quality that you mentioned specifically?

The second part was related to restructure loans. Basically restructure loans we are to categorize as non-performing, although 100% of our restructure loans are performing and paying their interest.

And what was the amount on that loan?

424 thousand in aggregate.

OK. Thanks.

That's just one loan.

OK.

OK. Thank you. Your next question is from Scott Hood of First Wilshire Securities.

Hi, good quarter.

All of my questions were answered, but I was wondering if you could just expand a bit on problem loans, charge-offs, or non-performing sort of geographically or by industry if you've seen any changes in the last year? I mean particularly how many are from New York and how many are local?

OK. In terms of charge-offs, mostly from California, specific Southern California. New York, we're not seeing any heavy charge-offs there, if any. New York actually there's only one loan that we charged off in the last quarter.

Yes.

So we're seeing actually a fairly strong payment in New York, relative to California, that is.

OK. And then just sort of any changes you can, that you've seen over the last year in industries, any problem industries or any industry in particular?

Real estate, as you know, is very strong. Commercial has been strong but retail business is in Southern California is a little weaker than in the past.

What are your plans for branch expansion for the balance of the year?

We have - we are planning to open a branch and another one in Southern California. So two branches and, as you know, we are getting one in Atlanta back and in Northern California.

Right.

There probably will be two or three more next year.

OK. Where would you put those?

You know, a couple in California and maybe a small one in Northern California. And small branches in New York area.

OK. OK. Thank you.

Thank you,

.

OK. Thank you. Once again, ladies and gentlemen, star-one for any questions.

Sir, I have

of

.

Yes, quick question on your interest rate hedging. The $280 thousand of gains you recorded in non-interest income, did that relate to a - did you close one of your swaps or is that something a mark to market and what would be the impact on any future gains or losses in a rising rate environment?

Yes. On that $280 thousand related to absolutely ineffective portion of the cash flow hedge. So it's basically mark to market. We did not reverse out any of our interest swaps.

Going forward, if the rates do go up we would probably have to recognize that there was a less unrealized gain on the valuation points.

To give you some color on that, 25 basis points increase equates to approximately about, a little less than a million dollars in interest gain or loss on that front.

OK. Thanks.

Sure.

Thank you, sir, thank you, ladies and gentlemen. I have no further questions for you at this time, sir.

Thank you.

OK. Thank you very much.

OK. Thank you, sir. And thank you again, ladies and gentlemen. This brings your conference call to a close. Please feel free to disconnect your lines at any -