Hope Bancorp Inc (HOPE) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Center Financial Corporation's Fourth Quarter 2004 Conference Call. My name is Anthony and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Ms. Angie Yang, Investor Relations for Center Financial. Please proceed, ma'am.

Thank you, and good morning, everyone. This is Center Financial's Investor Conference Call for the 2004 fourth quarter and full year ended December 31, 2004. Before we begin, please recognize that certain statements in this conference call are not historical facts. They may be deemed, therefore, to be forward-looking statements under the Private Securities Litigation Reform Act of 1995.

Many important factors may cause the company's actual results to differ materially from those discussed in any such forward-looking statement. These risks and uncertainties are described in further detail in the company's filings with the Securities and Exchange Commission.

Center Financial undertakes no obligation to publicly update or revise its forward-looking statements. Today's call will be one hour in duration. Chief Executive Officer, Paul Seon-Hong Kim, will begin with some highlights of the company's performance. Senior Vice President, James Ryu, will then provide some additional financial details for the 2004 fourth quarter and full year.

Paul will then make some final remarks before we begin the question and answer session. Debbie Kong and James Park, Center's Financial Controller and Treasurer, are also here with us today, and will participate as needed in the question and answer session. Now I'd like to turn the call over to Paul Kim. Paul.

Thank you, Angie. Good morning, everyone. Thank you for joining us today for our quarterly conference call. On our last call, we reported strong performance through the first 9 months of 2004. I am pleased to report that our 2004 fourth quarter continues the path of excellent [inaudible] with record quarterly levels of income and earnings.

Compared with the year-ago fourth quarter, that interest income [inaudible] losses through 39% to $10.5 million (ph) and non-interest income has advanced 10% to $5.2 million. Revenues totaled $22.3 million, up 34% from the 2003 fourth quarter.

We continue to realize solid quarterly gains in our core [inaudible] fee income over prior year levels, benefitting from increases in customer count relationships and in our long portfolio. These gains also underscore Center Bank's customer-centric focus and our leadership in the Korean-American market for introducing innovative [inaudible] services and products for our small business customers.

We believe [inaudible] differentiators were essential to retaining and defending services with current customers, as well as attracting new customers, particularly so in an increasingly competitive market. These gains are also proving to be a variable contributor to supporting the strong improvement in net earnings for Center Financial.

Center Financial achieved a 43% increase in net income, totaling $4.4 million or 26 cents for [inaudible] share for the 2004 fourth quarter, which represents another consecutive quarter of the highest net income ever in the history of the company.

The extension of our long portfolio has been a major driver, fueling Center Financial's excellent financial performance. Debt loans at the close of 2004 topped the $1 billion mark, up 41% or $293 million over a year ago.

As of December 31, 2004, commercial real estate loans accounted for 59% of Center Financial's loan portfolio, increasing 58% from prior year levels. Southern California, our core geographic niche, continues to support a very vibrant market for commercial real estate loans, and we will not hesitate to capitalize on this vast opportunity.

I will note, however, that we are carefully monitoring our level of exposure to this market, which relatively, is lower than most of the other Korean-American banking peers. Our SBA operations have also been an important component of loan portfolio and our strong financial performance.

According to the SBA's report for their fiscal year ended September 30, 2004, Center Financial produced $97 million in SB loans, ranking 24th (ph) in the nation in terms of the production. During the fourth quarter of 2004, our SBA [inaudible] originated $18.5 million in SBA loans.

As of December 31, 2004, SBA loans and in our portfolio approximated $49 million and accounted for 5% of our gross loans. The percentages of the other components of our loan portfolio noted in our fourth quarter earnings news release distributed earlier today.

[Inaudible] at year-end 2004 were up 34% over a year ago and also up to the $1 billion mark, totaling $1.17 billion. Despite of the rising interest rate environment, our non-interest bearing [inaudible] continued to account for 30% of total [inaudible]. Total assets increased to $1.34 billion as of December 31, 2004, up 30% from $1.03 billion at year-end 2003.

[Inaudible] collected by our standard network of [inaudible] offices continued to finance the growth in total assets. Now I'd like to ask James to give you Center Financial's financial and operating [inaudible] in more detail. James.

Thank you, Paul. The details of our financial performance were presented in our earnings news release this morning. I would like to, at this point, provide some additional information on certain line items.

First, the net interest margin for fourth quarter of 2004 increased 28 basis points to 4.45% from 4.17% in the corresponding period of 2003. The improved net interest margin reflects the increase in our average loan portfolio size and a favorable impact of a rising interest rate environment, which Center Financial is a highly [inaudible] sensitive institution.

As the majority of the rate hikes occurring during the latter part of 2004, the impact on our net interest margin is less apparent for the full year. Our return on average asset for fourth quarter increased to 1.38% from 1.26% in the year-ago, and from 1.33% in the immediately preceding third quarter. This improvement reflects the gain in non-interest income and an increase in total average assets.

Return on average equity for 2004 fourth quarter rose 280 basis points to 19.33% from the year-ago fourth quarter, and from 19.19% in the immediately preceding third quarter, reflecting higher interest incomes due, in part, to rate hikes and increases in average earning assets.

With a higher interest rate environment, our average yield on interest earning assets improved to 6.04% in fourth quarter, in comparison with 5.51% in the same period a year ago. With regard to expenses, total non-interest expense in the fourth quarter rose 14% to $10 million from $8.7 million in the same prior period.

This was due to higher operational costs associated with Center Bank's expanding franchise, as Paul outlined earlier, an increased professional fee due to the additional compliance with requirements associated with new rules and regulations.

Non-interest expense for the fourth quarter of 2004 also includes an impairment loss of securities available for sale of $394,000, resulting from decline in the market value of our Fannie Mae and Freddie Mac preferred stock. We are currently viewing potential options to mitigate or eliminate our exposure to additional impairment loss in the future.

Benefitting from economy scales, our total non-interest expense, as a percentage of total revenues, were lower, at 45% in 2004 fourth quarter, compared with 52% in the corresponding year-ago period.

Center Financial's efficiency ratio for fourth quarter was 56.27%, a notable improvement from 63.46% in the same period a year ago. Excluding the securities impairment charges, the efficiency ratio would have been 54.05% for fourth quarter of 2004. As we mentioned on our last conference call, with our strategic objectives to expand our geographic network of full service branch and loan products and offices, we are looking to maintain our efficiency ratio in the lower 50 percentile range.

Average loan size as of December 31, 2004, are as follows - commercial real estate loans averaged approximately $1.2 million. Commercial loans were approximately $200,000 on average. SBA loans held in our portfolio average about $106,000. Consumer loans, which are primarily automobile loans, averaged around $72,000.

I am delighted that our adherence to strict underwriting guidelines resulted in enhancement of Center Financial's outstanding asset quality. With non-performing assets improving to 0.26% of total assets at December 31, 2004. Now I'd like to turn the call back to Paul for some closing remarks.

Thank you, James. With the graduation of Center Financial's second full year as a [inaudible] company, we hope that all of you are as gratified as we are with our performance in 2004, which extended our steady and excellent track record of growth to the past 6 years, since 1998.

While the growth experienced to date has been almost exclusively through organic growth, we think in 2004 expanded our expansion project with our full acquisition and established a full service branch in Chicago.

Most recently, we opened our 15 full service branch offices in San Fernando Valley in Los Angeles [inaudible]. [Inaudible] is our 14th in Los Angeles [inaudible]. I am happy to report that the performance in the first month of operations has already exceeded our initial expectations in terms of [inaudible] gathering and loan production. The Valley (ph) branch is a testament to the flourishing Korean-American community here in southern California.

More importantly, we believe it exemplifies the ongoing [inaudible] and the newly developing concentrations of small businesses is published to cater to the particular needs of the thriving Korean-American niche market.

We are also continuing to make progress during the year, broadening our geographic reach with 4 new loan production offices, opened in Atlanta, Honolulu, Houston and Dallas (ph), representing targeted areas with large, thriving concentrations of business-oriented Korean-American and other ethnic communities.

Today we have 9 loan production offices and the broadest geographic reach across the nation of our direct peers. We look forward to the continued contributions in 2005from each of our 24 process (ph) centers. Our financial performance is benefitting from a strengthened branch and LPO network, and we will continue to pursue a similar pattern of [inaudible] extension, both through [inaudible] and acquisitions by reaching out to small businesses and merchant communities that are in need of value and product in services.

We continue to be a leader in utilizing proven technologies in new applications that add value to products and services designed through the banking industry, like Center Bank's free [inaudible] checking, ACH service and [inaudible] services. These types of variated products and services provide us with a leading edge as we actively work to develop solid relationships with our customers.

They also better position us to pursue higher levels of account-based fee business and accounts for greater [inaudible] account relationship-based and money service-based fee income in addition to our core conventional sources of fees from trade finance and SBA operations.

As we embark on a new year, we are confident that this type of continued investment in expansion and a new product, Center Bank will continue to renew its recalled achievements is strong and consists of financial [inaudible] while maintaining excellence and quality quarter after quarter. Now I will pass this back to James to direct the question and answer session. James.

Thank you, Paul. Now, before I turn the call back to the operator, I would like to present some suggestions for the question and answer session. As this call is 1 hour, I would invite that you present 2 questions at a separate time.

And as time permits, we will address your follow-up questions. Please direct your question to me and I will answer them myself, ask Paul, Debbie or James to respond as appropriate.

Operator, if you will please explain this [inaudible] element for the Q&A session?

(OPERATOR INSTRUCTIONS).

Brett Rabatin, FTN Midwest Research.

Hi, good morning. How are you guys? I have quite a few questions, but I'll ask my two and get back in line. First, I was curious on the margin. A piece of the margin expansion was obviously a result of movement of securities in the loans on a relative basis, given the strong loan growth and the strong loan and deposit growth in the quarter. Can you comment, was there any other recapture of previous interest that affected the yield during the fourth quarter? And if not, is - can you give any thoughts on additional margin expansion from the 4 Q levels, is question 1?

Okay. Brett, you want to present us with the second question or should we answer your first one?

You can answer the first one, but the second one was, I wanted to talk about the tax rate in the fourth quarter. It was slightly lower than the previous quarters. If there was anything unusual there, and if you could give us a thought process on a run rate for the tax rate going forward.

Okay. I will reserve the tax rate question to our Controller and Treasurer. But going back to the interest margin enhancement during our fourth quarter, that is attributed through, largely, the Federal Reserve's trust fund rate increase. And I previously have optimistically stated that maybe we'll see about 10% enhancement or net interest margins of every 25 basis points. But it looks like, from looking back, perhaps 7 to 8 percent basis increase. And as I mentioned previously, since most of the rate increases came after June of last year, we see some strong impact in the latter part of our operation, especially during the fourth quarter. So, we look forward to enhancement in this regard and, going forward, a little bit more, as a lot of analysts and experts expect that, during 2005, the sub (ph) rate may increase 100 basis points plus. We see continuing enhancement to our net interest margin.

Okay. And just to follow along with that, is the loan portfolio, I know, is very variable. Is it still running approximately 85% variable rate following the loan growth in the fourth quarter?

That's correct, Brett.

Okay. And then, in regards to the other side of the equation, the cost of funds, it looks like your cost of funds decreased or increased slightly less than some of the banks I've seen in your space and in your geography region. Should we anticipate a higher level going forward as you have more pressure on CD funding or is the level, from a running perspective, going forward, be more applicable?

I will answer part of it. I think Paul -

Marked competition or you know, the page where the future directions, so we are a little bit lower compared to the peers in offering the customer the target rate. But in the future, still, the competition will dictate it. So, we'll see.

Okay, fair enough. And then to the tax rate issue?

Tax rate, Debbie?

[Inaudible - microphone inaccessible].

Debbie, I'm just looking at the stated tax rate of about 34.5% in the fourth quarter, and typically you've been running 38 to 39. So, just curious if there was any true up or anything unusual in the fourth quarter and if the tax rate would return to the 38 or so percent level going forward.

Actually we were reserving our taxes based on the last quarter's end have been [inaudible]. As we are reaching the year-end, we true up all the tax figures and then we come up to our own final tax rate before we rip off our year-end [inaudible].

So, there was an increase and temporary differences occurred due to [inaudible] that we have realized this time as of year-end. And there is a little bit of an increase in eased tax credit. And nothing particular actually happened compared to last year. But there was an increase in temporary difference. So, it gave our benefits to our tax rate.

Okay. Is 37, 38 percent a good run rate going forward?

Yes, approximately that would be the range.

Okay. Thank you.

Kathleen Steinbrecher; Piper Jaffray.

Good morning. Good quarter. My first question is on the interest rate swap. Any expectations into 2005 on what the cost associated with that would be? And also, on the loan loss provision, if you could talk about the credit quality as far as what your target is into 2005 for allowance to loan to get an idea of, as loans continue to grow, where you're looking for provisioning to be?

So, the first part, Kathy, [inaudible] Debbie. Can you briefly talk about [inaudible]?

I can. Good morning. Basically, with regards to the interest rate swaps, going forward basis, we don't expect any losses. We're expecting losses in the areas where it has impact on our equity, but not the losses that will hit our income statement.

Okay. And Kathy, regarding the future loan reserve, we will maintain the 1.1% [inaudible] and we expect that loan growth pattern would be similar to last year. Does this answer your question, Kathy?

Yes. Thank you very much.

Don Worthington, Hoefer & Arnett.

Hi. Good morning, everyone. A couple things. One, you mentioned evaluating on an ongoing basis the concentration of commercial real estate, and I was just curious as to whether you have any specific plans or initiatives to diversify the loan portfolio away from that sector at all or whether you're comfortable kind of continuing on at around 60%, I guess it is, of total loans?

Don, this is a very challenging question for me. And number 1, as I stated earlier, we believe that there are still good opportunities in this area, and we don't want to disregard this opportunity. So, [inaudible] we are continuously search for good quality and top progress in commercial real estate deal.

At the same time, we also like to extend our efforts in commercial lines, commercial relationship payments (ph) because the commercial relationship brings us additional positive relationship, mostly in terms of the non-interest [inaudible] relationship. And in the long run, this kind of relationship is more desirable.

But certainly, regarding the real estate loan areas, we will not neglect that area. At this time our portfolio, about 50% of it is coming from commercial real estate area, which is quite a heavy concentration. But still, as I told you, among the peers, we are low end in concentration. And we will pick and choose in this area, not only in the Los Angeles areas, but also our new branches in Chicago and proposed branches that were in the first half of this year in Seattle and other interesting areas, low LPOs. We will seek this commercial property loan opportunity.

Okay, very good. The second question then is, on the professional fees, James, I think you mentioned most of it was related to compliance issues, were there any legal costs in there attributed to kind of that ongoing legal issue that you have?

Yes. To the amount, Debbie, can you address a little bit about the legal costs associated on the professional side of it?

Don, I mentioned largely to compliance related because that was an added on portion of our professional fees, but Debbie is looking at the legal fees associated with the ongoing case.

Okay.

Mostly the legal fees that were related to ongoing legal cases is around, an increase around, close to $500,000 last year.

Okay, great. Thank you very much.

Brett Rabatin.

I just have one housekeeping question. I was wondering if you had available the average interest-bearing funds for the quarter. And if not, if you could just call me after the call with that. And additionally, I wanted to talk about SBA. I thought I heard the comment that there was 18.5 million of production in the fourth quarter. I was curious, how much was sold during 4Q? And if a discussion about the run rate of sales of SBA was going forward could be addressed?

I think Paul can answer that for you.

Regarding the sales of the SBA loans within the last quarter, it is about $16 million. And we will continue to produce the SBA loans and to continuously sell part of them to the secondary market. And your first question regarding the averages?

Yes, the average interest-bearing funds for the quarter. You've got average deposits in your press release and you don't have much borrowings, but the average deposits include the DDA (ph), and I was just curious what your interest-bearing -

Interest-bearing liability, it's 755,070.

Okay, great. Thanks.

Kathy Steinbrecher.

Hi. I have a couple of follow-up questions. You mentioned briefly about the future liability on Fannie and Freddie preferred, that you were going to try and mitigate that. Can you expand on that a little bit? And then, my second question would be, on the option expensing costs.

This is James Park. What James Ryu had said previously, one of the options is to perhaps maybe sell them in the market at this point. And doing so, I believe, at this point, when we have mark to market last quarter, it's giving us a favorable number at this point. So, that's one option that we're looking into. And right now there's kind of an open discussion as far as how to limit losses going forward. So, that will be one of the options that we're looking into.

Kathy, and the second question, as I understood, it had to do with stock options and the expensing aspect of it, right? Kathy?

Can you hear me?

Yes. The second question has to do with stock options and expensing aspect, potential of that in our perspective, correct?

Correct.

Okay. I think, Debbie, you have some professional opinion in that.

At this time, [inaudible - background noise], but that's something that we have to consider this year.

Kathy, can you hear us?

Kathleen Steinbrecher. Yes. I have a couple other questions. Should I ask them now or just call back and see if anyone else had questions?

Go ahead, Kathy.

Housekeeping. Just to confirm that your net charge-off in the quarter was 237?

Correct.

And can you just talk about deposit growth or the number of loan officers that you now have at the Chicago branch office?

Okay. So, specifically related to the Chicago office, currently we do have 2 persons overseeing lending elements that would entail underwriting, as well as customer referral activities. Those individuals are being guided by the regional office manager in Chicago.

Okay. So, there would be 3 then including the office manager?

Yes.

And all 3 would be making loans?

Yes. They are in the way of referring loans, underwriting, but central decision is being made here at Los Angeles headquarters.

Okay. And any deposits there?

Deposits, we're looking to grow the deposit portfolio a little bit more and we are looking to relocate at this point. So, right now the office is located in downtown Chicago, where it may not really be our market niche. So, we are looking to relocate and looking to increase our deposit portfolio notably.

So, we are in the process of relocating the branch in a more desirable area, which is located in so-called Korea-town area. So, the answer, the completion of the relocation during the first part of this year, Chicago office has a very good [inaudible] goals to achieve. So, we will see.

Okay, great. Thank you very much.

There are no further questions in the queue. I'll turn it back to you for closing remarks.

Okay. We would like to thank all of you for your participation with us and our conference call this morning. On behalf of the entire Center Financial team, we appreciate your strong interest and look forward to your continuing support. Thank you once again.

Thank you very much, and we will talk to you again next quarter.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Everyone have a wonderful day.