Hope Bancorp Inc (HOPE) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter Nara Bancorp earnings conference call.

My name is Kelly (ph) and I will be your coordinator for today.

At this time, all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of this conference.

If at any time during the call you require assistance, please press star followed by zero and the coordinator will be happy to assist you.

I would now like to turn the presentation over to your host for today's call, Mr. Timothy Chung.

Please proceed, sir.

Thank you.

Good morning, everyone, and thank you for joining us to discuss Nara Bancorp's financial results for the fourth quarter of 2003.

In just a moment, Benjamin Hong, President and CEO of Nara Bancorp, will provide a summary of our financial performance for the quarter.

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 the events or the future performance of the company.

Such forward-looking statements involve risks, uncertainties and other factors that may cause the actual results to perform or achieve or the companies to be materially different from future results.

Such factors include, among other things, general economic and business conditions in the areas in which the company operates, demographic changes, competition, fluctuation in market interest rates, changes in business strategies, change in credit quality and other risks detailed in the documents of the company that are filed from time to time with the Securities and Exchange Commission.

We wish to caution you that such statements are just predictions and that actual events or results may differ materially.

We refer you specifically to the company's latest Form 10-K and 10-Q, which have been filed with the SEC.

Now, I would like to turn the call over to Benjamin.

Good morning, ladies and gentlemen.

I am back and I hope you're glad to listen to my voice.

As you know, I'm - you know, sort of a temporary situation and to cope with the - this condition of the management, I called in Min Kim, who is the chief operating officer, who will be in charge of the - all the profit (ph) center operation of Nara Bank.

She is sort of number two of our management, so you would have a chance to ask her a question, too, if you wish to.

I have also Christine Nor (ph), who is a controller and who manages our numbers, together with Tim.

So the four of us here and are ready to answer your questions.

I will not - I wouldn't bother you - bore with you here the recitation of the numbers.

You all know the numbers.

Just go over briefly the highlights of our performance.

We'll start with the loans.

The fourth quarter, we had an increase of 9% of increase, but, you know, we had the acquisition of the Korea Exchange Bank Broadway Branch.

Excluding that, so we had an annualized growth of 20%.

For the year, loan growth was very healthy - 37%.

Without the acquisition, we had 28% of the - 28% increase.

The composition of our loan continued to be fairly well balanced.

The real estate at 58%, commercial, 36% and consumer, 6%.

This ratio would continue into next year and depending on the geography, we might have more commercial lending as the economy is expected to pick up.

Provision of loan losses - we increased the loan losses to 1.25% of gross loans.

And it was a slight decline from - decrease from the third quarter because we had acquisition of KEB Broadway Branch.

Charge off was - fourth quarter charge off was $822,000.

And for the year, we had a charge of $1.9 million.

It's - ratio to the gross loans is .23%.

It's a slight increase from year 2002, from .17%, but within a reasonable level.

Non-performing - the end of 2003 was 5.5% - $5.5 million and it's an increase from year 2003 and also 2002.

But out of this 4.9 million, 3.9 million is non-accrual or is fully secured.

So we are not overly concerned about the increase of non-performing assets.

I think we can, during next year, we can solve most of this non-performance.

Turning to deposit, we saw the increase of the $62 million annualized rate of 26%.

For the year, increase of $244 million.

Excluding our acquisitions, deposit increased 20%, $166 million.

Based on these - the balance sheet, the increases, we had a fairly healthy income for the quarter as well as for the year.

The - for the quarter, we had an increase of 27% to $4 million.

EPS - annualized EPS is - the quarter EPS is .33% - .33 compared to .28 in 2002.

The slight decrease in the fourth quarter in the interest - the interest to income is due to the interest swap (ph) income.

A decrease from the - compared to the last quarter.

We - year to date, on a year-to-date basis, increase in interest income is about 30% to about $45 million.

This compares very favorably to last year -- $35.1 million.

Noninterest income - you see here, you know, a quarter-to-quarter basis only 2% increase.

It came from service charge and gain on sale of SBA and investment securities.

I would rather look at the year-to-date figure.

We had about $2 million increase in 2003 compared to 2002.

And a chunk of this $2 million came from service charge of $1 million and gain from SBA of $1 million.

And other investment securities income added up to the non-interest income.

Non-interest expense - quarter to quarter, we had the increase of about $2 million and salary and benefits took about 50% of that.

And others - occupancy and so forth.

We had, in last quarter, we had a one-time expense - a relocation of New York Branch, acquisition of Silicon Valley, the Asiana Bank.

Year - no, year to year in 2003 compared to 2002, non-interest expense increased 16%.

It's about $5 million over 2002.

And $3 million out of $5 million are the salaries and benefits.

And others are occupancy and so forth.

We're still, you know, the expansion and adjustments in the New York area, which took the - you know, it's very unusual the amount of non-interest expense for the year, which would not be recurring in the future.

I would like to go over briefly performance - the ratios.

Quarter to quarter, the ROE - 18.8% from 19.49, ROA - 1.3 from 1.4.

Interest margin from 4.7 - to 4.7 from 4.65.

The margin has increased in the quarter.

Interesting that the efficiency ratio is slight - about the same - 57.8 to 50.57.

And cost of deposit - 1.21 from 1.66.

The quarter - last quarter, we saw the course of deposit has come down substantially.

This is a trend that we see, would show into the new year, 2004.

Year-to-year comparison ROE - increase from 18 to 19, ROA - 1.4 to - from 1.4 to 1.3, interest margin from 4.8 to 4.5, efficiency ratio from 60 to 56 and cost of deposit from 1.6 to 1.4.

Definitely, a positive trend is cost of deposit and the margin would gradually recover.

I know this is a - this is a low - the point, I think as we have upturn starting last quarter.

Finally, the cost of deposit has been fully adjusted to the market.

I would like to look at the - 2004.

Basically, based on the, you know, the margin trend and some of the plans we have, we project our earnings per share between 1.4 to 1.5.

This is an achievable goal that we have in our mind.

And the - it's about the 17-21% - the increase.

We will continue to improve our efficient ratio - 52 - between 50 - about 52 to 54.

And we would be a little bit more aggressive in opening a branch this year in Bollin Heights (ph) and the other - Sacramento and Garden Grove and so forth in southern California.

We would increase our loan loss ratio between 1.35 and 1.4.

Just looking at the Nara Bank in general, on the big picture, 2004, we will continue to seek the opportunity to acquire banks in the New York area and also in other area where we have representative - loan production offices.

But our generic core growth, we are very optimistic - both in New York and in northern California.

Northern California is finally coming back to life.

Silicon Valley is now fairly stabilized.

We see some activities there.

New York, of course, is now fully operational.

They are the largest - we have the largest Korean bank in the presence (ph).

And I think we have this fairly strong base to take advantage of our - of course, we're the largest in northern California, too.

So, we have this advantage in two locations.

With more concentration in southern California, I think the year 2004 looks very good.

Now, that concludes my remarks this morning and I would invite your questions.

Ladies and gentlemen, if you would like to ask a question, please press star, one on your touch-tone telephone.

If your question has been answered or you wish to withdraw your question, please press star, two.

Questions will be taken in the order received.

Please press star, one to begin.

And your first question comes from Mike McMann of Sandler, O'Neil and Partners.

Good morning, Ben.

And it is nice to hear your voice again.

I knew you wouldn't go far.

Well, thank you, Mike.

I thought you wouldn't like to listen to my voice again.

Congratulations on a good year and a good quarter.

A couple of questions.

With the sale or announced sale or agreement by Omni to purchase Pacific Union, I assume that you're increasing your marketing activities towards those Pacific Union customers.

But if you could give us some color on what you're doing and success to date, et cetera, that would be helpful.

Yes.

I think this merger, as you know, is very aggressive on the part of Omni Bank.

They're paying a hefty price, especially in view of the size of the bank, the premium they are paying.

It's a fairly aggressive move.

This is very close community and, you know, Omni has to, you know, they've used the overhead.

I hear that about 40-45% overhead reduction is planned.

That would bring many - lots of the turmoil of the personnel and so forth.

So see that as, you know, phenomenal changes would take place in the market and provide opportunities for other banks - not only Nara, but other Korean banks.

We - I think we are ready to take the - advantage of the situation as much as we can.

I wish them a good luck, though, but, you know, this is a business and I think it will give us a lot of opportunities.

OK.

If I could ask one more for now.

You had a significant linked quarter expansion in the net interest margin and I'm unclear, at this point, as to why exactly that happened.

Was it mainly deposit repricing?

Yes, that's - I can answer that, but I would ask Christine Nor to answer this.

Christine?

Yes.

Basically, during fourth quarter of 2003, if you compare that to a quarter of 2002, we have a significant decrease in the cost of interest bearing liability.

If you look at the total cost of interest bearing liability, during 2002 - within fourth quarter of 2002, we had 2.58% compared to 1.91% (inaudible) 2003.

There is a significant decrease in the cost of deposit.

So (inaudible) increase in the margin take (ph) from the repricing of interest bearing liability.

OK.

I was thinking more from the third quarter to the fourth quarter.

Yes, that also.

During the third quarter compared to fourth quarter, I believe, we had about 20 basis decrease in the interest bearing liability.

So is (inaudible) no change in interest rates - market interest rates - is your margin likely to remain stable?

Not at 4.73%, but I assume we could maintain about 4.5%, which is our year-to-date margin.

Why would it go down 20 dips?

Was there something unusual?

Were there any interest recoveries or something unusual in the fourth quarter?

Fourth quarter we did have some of the fee income that came in as a credit of where we sold the loans, the real estate loans that were sold during the fourth quarter, where we recognize some of the fee income that might not be recurring for 2004.

In fact, it is kind of hard to anticipate.

And that fee income was reflected in the net interest margin?

Yes.

Fee income is added to the interest income.

OK.

But ...

So the cap region (ph) of the margin.

But going forward, just to finalize this, is you think a 450 margin would be within the ballpark, assuming no change in the Fed interest rate?

Yes.

And that's because you've largely repriced all of your deposits and loan yields should remain stable.

Yes.

OK.

Thank you very much.

Thank you, Mike.

Your next question comes from Manuel Ramirez of KBW.

Please proceed, sir.

Yes.

Hi.

Good morning.

Good morning.

Just a couple of questions for you.

One of them is kind of technical.

On the mark to market on your interest rates flops, the swings have been pretty volatile.

I was just curious if you can talk about why that's going through the P&L.

I'm just thinking about this simplistically.

On the cash flow hedge, I wouldn't expect that mark to market to flow through. (inaudible) this for the P&L as much as it seems to have over the last several quarters.

And that seemed to be a big swing factor to fee income for the quarter.

And then, I'll have a follow-up question.

Yes.

I think the swap - you know, we had a fairly substantial benefit to the swap operation.

As the rate goes up, probably our swap profit would disappear, but, as you know, we have the largest portion of our loan priced on a variable rate basis.

That would generate the interest to income.

So there is a balancing factor, but, as you know, the interest rate environment has - is changing and I think will continue to change towards the end of the year as the anticipation of the interest rate is upward trend.

But, you know, we have our loan portfolio, which is well, you know, well balanced out.

We the start (ph) of the swap operation.

Tim, do you want to add anything?

No.

I think you're talking about the ineffectiveness of the cash flow hedge?

Yes.

Yes.

Essentially, because our underlining asset for the swap itself is on a time base and also our Nara prime is slightly higher than the normal Wall Street prime, which is 50 basis.

Because of that difference, we had to create what is called a synthetic model.

So definitely the change of synthetic which actually mirrors the market versus our actual Nara prime.

There is - that difference is the ineffectiveness of our swap.

And there could be some swing on that.

So essentially, what we gave up in the last quarter was just a portion of what we actually gained at the swap period.

So, on a net side, we're actually on a positive.

As you know, on the interest side, we're - we had a fairly, you know, good income from that as well.

OK.

That's very helpful.

And just - I may have missed this.

I apologize.

But what are your loan growth expectations for 2004 on a period and a period end basis?

If I hear you - did ask about the loan growth?

Yes, for '04.

Loan growth was about 25.

Is that 25% organic?

Yes.

Organic.

Yes.

OK.

Thank you very much.

Your next question comes from Joe Gludo of Cohen Ruthers.

Please proceed, sir.

Yes, hi.

You mentioned in your talk some of the one-time nonrecurring expenses that you had in the fourth quarter.

I was just wondering if you could give us an idea of, you know, the general magnitude of those.

Christine ...

The one-time charge - the biggest item is the occupancy, where we had a dual (ph) (inaudible) location.

And the Silicon Valley and the Oakland from the Asiana (ph) Bank.

Those - we had to buy out the leads on the Silicon Valley area.

So those were the extra expenses that we incurred during the fourth quarter, which was exactly, I don't know exactly the number figure.

But we had the Silicon Valley and also Oakland - these expenses that went out during the fourth quarter, which we'll not be incurring this year.

It was all paid out.

OK.

Just one other question.

You know, in the two acquisitions, Asiana (ph) and the branch from Korea Exchange Bank, how are customer attention efforts?

You know, are you seeing any significant runoff in ...

No, we retail almost - over 95% of the customers.

OK.

That's it.

Thank you.

Thank you.

Your next question comes from Dan Worthington (ph) of Hofer (ph) and Arnett (ph) .

Please proceed, sir.

Good morning.

Good morning.

A couple questions.

One, on the increase in charge-offs and MPLs (ph), how much of that was related to acquisition?

And then, I've got another question after that.

Min Kim is here, who is in charge of the operation.

Min, would you address that issue?

Yes, Don.

It was - about 20% of the charge-off was related to the acquisition of the KEB and Asiana Bank.

OK.

From our net charge-off.

OK.

Thank you.

And then, the other is if you could just provide an outlook in terms of business opportunities in the Far East, relative to your representative office in Korea.

Yes, you know, we'd rather talk about the Korea, not the Far East.

The Far East too big.

Yes.

OK.

You know, Korea is going into a lot of political turmoil and, from our side, it's a lot of problem brewing up in Korea.

I think, in a sense, we are beneficiary of the Korean - the political instability.

A lot of people coming from Korea with money, (inaudible) and so forth.

So, Korean Bank, in general have benefited from these trend from Korea.

And this will continue for awhile.

It's a lot of the demands for the ownership of American business by Koreans.

That's the easiest way for Koreans to take the legal residency in the United States.

Since 9-11, it's very, very strict for the foreigners to come and live here.

And the one - the open avenue for them is ownership of the business.

So, business and real estate.

So, you know, it's - a lot of activities coming from Korea.

OK.

Thank you very much.

You have a follow-up question from Mike McMann of Sandler, O'Neil and Partners.

What were the SBA originations in the quarter and the sales?

Yes.

Min is very close to the SBA.

Hi, Mike (ph).

Hi, Min.

During the fourth quarter, we originated about $35 million and we sold about $29 million.

OK.

And ...

It was 35% of the production.

OK.

And any concerns on the SBA funding issue and, I guess, on a worst case basis, if there's some political issues before that get fixed, you simply hold onto those loans.

Is that right?

You'll continue to originate, but hold onto them and sell them in the future as need be?

Yes.

We will continue to make - originate the SBA and then we are going to - whether sell it or hold it depends on our liquidated position and the profitability.

But the SBA cut down guaranteed portion to 750,000 will not affect much as their banks.

The reason is that we have not focused on a piggyback large transaction.

So actually, we are projecting to increase our dollar production value from $95 million loan origination last year to about $120-130 million.

The reason is that we are adding two additional loan production offices this year and also we are planning to add a couple of marketing officers to focus on the SBA marketing.

So we are very optimistic in SBA loan production.

And do you think that you'll sell 90% of those loans or some ...

Yes.

Most likely we will sell.

A large percentage?

Yes.

OK.

Tim, on the swap issue.

That an unrealized loss, is it not?

So that - the ineffective portion is a realized loss.

It's a realized loss?

Yes.

Because that's - yes.

That's quite different from the unrealized because this is a swap that's ineffective, meaning it doesn't mirror the market rate.

OK.

And then, just finally, it would be helpful if someone could circle back with us on the amount of nonrecurring fourth quarter expense.

When you say circle back, do you mean do you want some breakdown on that?

Yes.

Just a rough dollar amount - 500,000, 200,000, whatever the number is, if it's material.

Yes.

I think it's less than 200,000.

Thank you.

Once again, ladies and gentlemen, if you wish to ask a question, please press star, one on your touch-tone telephone.

And your next question comes from John Talaka (ph) of Global Emerging Growth.

Please proceed, sir.

Hi.

How are you doing?

Nice to hear from you again.

Just two questions.

One is what's your outlook on the real estate market?

How do you see it in your areas because you have loans tied to that, naturally.

And then the second - is the management issue resolved or do you plan to get a new CEO?

Just give us some guidance in terms of management outlook as well.

Yes.

First, the real estate.

We still see that the real estate is strong.

As I said and particularly the Korean immigrants coming from Korea are still very active in the real estate market.

That's a very unique situation.

In the Korea Town, the commercial district and the places where Koreans wants to live, school system and so forth, it's very strong.

So I think at least 2004, the market would be very strong.

Very good.

And also, just give us a rough idea.

I assume these loans are made with a down payment, right?

Yes.

You're not doing these no dock loans or, you know, these no interest, no dock.

No, no.

OK.

Fine.

Yes.

Any more question about the real estate?

No, I think that's a general guidance.

That's fine.

Thank you.

And then the management issue?

Yes.

The management issue, you know, we made a mistake.

So board is very cautious in selecting the - my successor.

So we want to take some, you know, very cautious approach.

It may take, you know, the six months, one year, I don't know.

We are in the process of searching and a qualified candidate.

Of course, in the meantime, you know, we have - we have a fairly good management structure - internal management structure, which can go on without the immediate replacement of CEO.

Well, I agree.

Sometimes it's better to cut your losses.

Certainly, in my area, we make our share of losses, so that's a wise decision.

But can you just give us, maybe, general guidance?

Was there a disagreement over long-term strategic goals?

Is that maybe what the mistake was or just give us some guidance as to what it may have been.

You know, the Korean-American banking is very short in history, so we don't have the many people being able to - being trained in the Korean banking.

So outside naturally come in and tend to find it very difficult to get adjusted to the very unique banking practices we have developed.

And that is related very much to the customer relationship - culture and customer relationship.

The Korean-Americans are quite different from Koreans in Korea.

They are very Americanized, but not 100% American.

So it's - the culture hybrids we are dealing with.

It's not easy.

Yes.

And that's the one that most people find it difficult.

Also, the - our people, my staff are also Korean-American.

And they are hybrid, too.

So it's cultural, the differences, if there's somebody coming up out of Korea and try to get adjusted to the new environment.

I think that's a good point.

Just maybe just a final question.

In your last annual report, you did open the door for going into other ethnic areas.

Yes.

You know, obviously, EastWest Bancorp is maybe more Chinese in the past.

Oil and vinegar don't mix and all those statements.

Does it appear that perhaps this could be a lucrative market.

You may enter the Chinese market somehow or is that still too much down the road?

Well, the Chinese market is a very tough nut to crack.

As you know, they are over (ph) bank and it's a lot of competition.

But we see more opportunities in non-Chinese, other ethnic communities.

We have an Indian officer in Silicon Valley.

We have - we have the Middle Eastern officer in our downtown branch, a Hispanic officer in New York, Jackson Heights.

We have - we have a non-Korean officer targeting the other ethnic minorities.

It is our plan this year - we organize a non-Korean business center in the head office this year to service those - the ethnic communities which would need similar banking on the requirement as Korean's do.

It's the first generation new immigrants all have the same problem and they, you know, have a problem getting a financial - the support from the bank when they start the business.

We have the know-how to evaluate the risk of these entrepreneurs - immigrant entrepreneurs.

So we can duplicate our established landing practice to those minority groups and we are very, very intense to develop that type of business.

Thank you very much.

Good answers.

Your next question comes from Brett Raditon (ph) of SGN Midwest Research.

Please proceed, sir.

Hi.

Good morning.

I had two questions.

First, one is to circle back on the loan growth expectations for '04.

I primarily wanted to just delve into - '03 was a great growth year for the main growth commercial real estate perspective and obviously, the current real estate market is still very strong.

I wanted to hear your thoughts on composition of (inaudible) growth going forward.

As I said, our growth would be fairly balanced between real estate and commercial and SBA.

SBA, of course, is - has a lot of real estate elements.

I don't see much of the changes in the mix of the portfolio in 2004.

Market is still, in large segments, untapped market, not only in California, but in New York and northern California.

And plus, as I said, we can add some more non-Korean elements to this, so our growth - the 25% - we're very confident about that.

OK.

Also, the people coming from Korea to want to buy our investment business, too.

So, this trend will continue next couple years.

OK.

OK.

So you - let's just say we're at the end of '04, you don't expect the composition of your own portfolio to materially change?

No, no.

OK.

And then, wanted to circle back around on the expenses on what the other guys were trying to get at in relation to the "nonrecurring."

When you look at the occupancy and other, I mean, personnel link (ph) quarter is up approximately 100,000 and then other expenses are up about 600,000.

So, I guess we're trying to just get a good run rate for what personnel expenses might be going forward and then if other might go down a little bit in the first quarter as well.

Benjamin Hong.

I don't see much increase in personnel.

I think we want to - we are very mindful of the efficiency ratios.

So personnel is a chunk of the expenses.

Our plan doesn't include much increase in the personnel expenses.

Occupancy - we don't anticipate any.

You know, New York, we had to - we had to move because our location we inherited from Korea First Bank (ph) was poor.

And we finally found the space that we liked and we moved it.

So it's kind of - the relocation expenses, we opened the new branches - the (inaudible) branch and (inaudible).

All these occupancy expenses happened in 2003. 2004 - one time, noninterest expense.

I don't think much is coming.

Christine (ph) ...

We don't anticipate any unusual expenses coming up in 2004.

However, as we open new branches, as we plan to open two, three, four more branches, most of the increase will come from there.

As far as our potential for 2004 in each existing branch, we do not plan to increase personnel or occupancy expense over 5% - five to 10 - it'll be between 5-10% increase on the existing.

However, we may anticipate some of the increases from the new branches that we plan to open during 2004.

OK.

Well, then would it be fair to assume, just looking at 2003 and the 16% or so growth rate you had this year and what you accomplished in '03, that 2004 might have in the vicinity of 19, 20% expense growth just from the branch openings?

Actually, overall overhead expenses in 2004, we anticipate to increase about 13%.

Thirteen percent.

Thirteen percent.

Yes.

OK.

And then, just one last question.

There was discussion regarding an increase in the relative loan loss reserve levels.

And so, I was curious to know if those - or if that metric included an assumption that net charge-offs would probably be lower in 2004 or if we might see a little higher provisioning level in '04.

Well, you know, loan loss reserve is really in odds.

And we sort of look at our own anticipation of the charge-off.

But also, we compare ours to the industry average and our intention is to bring it up to the - bring it up to, as much as possible, the industrial average.

I think we, at this level, we are very comfortable of our loan loss provision.

But we want to increase it slightly because that's what we are told by you guys.

Actually, Brett, the charge-off rate for 2004 - we don't expect it any higher than 25 basis points.

OK.

So if you had a modest increase in the provisioning level and you did have the 25% or so ...

Actually 23 basis.

Twenty-three - then, yes.

That would get you to a growth level with the loan (ph).

OK.

Thank you.

Thank you.

As a reminder, ladies and gentlemen, if you wish to ask a question, please press star, one on your touch-tone telephone.

There are no further questions at this time.

Well, thank you, ladies and gentlemen.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program.

You may now disconnect.

Have a good day.