Hope Bancorp Inc (HOPE) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q2 2005 Center Financial Corporation Earnings Conference Call.

My name is Candice and I'll be your coordinator for today.

[Operator's Instructions].

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

Please proceed Ma'am.

Thank you, Candice.

Thank you and good morning everyone.

This is Center Financial's Investor Conference Call for the Second Quarter ended June 30 2005.

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 in, discussed in or implied by any such forward-looking statements.

These risks and uncertainties are described in further detail in the Company's filings with the SEC.

Center Financial undertakes no obligation to publicly update or revise its forward-looking statements.

As previously announced, the Company's financial statements for the years ended December 31 2004, 2003 and 2002, and certain quarters during those years are being restated to ensure compliance with hedge accounting principles generally accepted in the United States.

Accordingly, these previously filed financial statements should not be relied upon.

The Company's quarterly Form 10-Q for the period ended June 30, 2005 was filed yesterday.

This report includes restated financial information, which eliminates hedge accounting for the interest rates swaps during the period that the Company used the short cut method to test effectiveness.

However, an independent public accountant has not completed a review of financial statements in accordance with SEC rules.

Therefore, all restated financial information for prior periods is preliminary and may change in connection with the review by the Company's independent accountant.

The restated financial information is also incorporated in the Company's Q2 2005 news release issued yesterday and will be used for today's discussion.

This call will be 1-hour in duration.

CEO Paul Seon-Hong Kim will begin with some result highlights of the Company's performance in the 2005 second quarter.

CFO Patrick Hartman, will then provide some additional insight to the financial result.

Paul will then make some final remarks before we open up the call for the question and answer session.

Now, I'd like to turn the call over to Paul Seon-Hong Kim.

Paul?

Thank you Angie.

Good morning everyone.

And as usual, thank you all for joining us today for our quarterly conference call.

I'd also like to thank you for your patience and understanding.

We are working diligently to complete the review and to file the restated financial statements as soon as we possibly can.

I'll assure you that all of us here at Center Financial are committed to this.

Our CFO Patrick Hartman has been leading this effort on our behalf.

Since joining Center Financial in March 2005, he's proven himself to be a worthy colleague, a top duty (ph) leader and the most valuable asset to the Company.

I'm sincerely grateful for his unrelenting dedication during this demanding period.

As we have stated in our news releases and the SEC filings, while the restatements are expected to result in changes for the reported income and expenses for certain periods, we expect that there will be no material impact on either our statements of financial conditions or cash flows.

In other words, this does not affect where we are today.

With that, let's turn our attention now to the second quarter financial results reported yesterday.

A very strong second quarter performance added to the great start we had in the first 3 months of 2005.

Patrick will review the results with you in just a moment.

But I would like to point out to you that again, we achieved well balanced levels of growth in loans and deposits and improved our operating results.

We are pleased that our performance, which benefits in a rising interest rate environment translated to another quarter of growth earnings for Center Financial.

The expansion of our loan portfolio continues to be strong and steady, increasing 28% year over year and 8% in a linked quarter basis.

The year over year growth is slightly off, for higher levels achieved in prior periods, although growth still very strong relative to the industry average.

This is expected as we are working out of a larger base and operating in a more competitive market than in the past.

In the second quarter of 2005, we experienced the strongest growth in commercial real estate loans, commercial business loans and customer loans.

The commercial real estate market in Southern California continues to be vibrant.

Commercial real estate loans grew by 7% on a linked quarter basis and by 41% over the year ago period.

As of June 30 2005, these loans were accounted for 60% of Center Financial's loan portfolio, down from 61% previous quarter.

Reflecting our focus on increasing our commercial loans bases, commercial loans posted strong gains in the current Q2, up 10% sequentially from Q1 2005 and up 35% over the 2004 second quarter.

Center Financial's SBA department also continued to show strength and made growing contributions for the record rate of earnings in Q2 2005.

We originated approximately $24 million in new SBA loans.

And sold $16 million through wholesale market for a gain of $592,000.

Of the $16 million, approximately $10 million was guaranteed and the $6 million was un-guaranteed.

A year earlier, we posted a gain instead (ph) of loss of $890,000.

At the close of the current second quarter we had $53 million for SBA loans in our loan portfolio equal to 5% of growth rate.

Now going to deposits.

We experienced a strong uptick in total deposit in Q2, up 11% from the 2005 first quarter and an increase of 24% from Q2 '04.

The most significant increase in deposits, since December 31, 2004 was an $81 million increase in current deposits of over $100,000 category.

We will usually see this in a rising interest environment.

But as most of you know, the deposit market here in Southern California has been extremely conflictive (ph).

During the second quarter we introduced a new flexible rate product to compete with fierce competition and attract a set zero deposit.

This contributed to the increase in term deposits.

We are also pleased that our non-interest bearing demand deposit continued to grow, up by 12% since year-end 2004.

Up with the strength in term deposits experienced in Q2 non-interest bearing deposits, as a percentage of total deposit slightly declined to 29% as of June 30 from 30% at year-end 2004.

Our expanded deposit base continued to finance the growth in total assets, which increased to $1.5 billion at June 30, 2005, up 26% from a year ago.

Now, I would like to ask Patrick to review Center Financial's financial and operating results in more detail.

Patrick?

Thank you Paul.

Before I begin my review I would like to start with just a few comments about the restatement.

While I imagine it's never pleasant to be involved into a restatement, I'll tell you that ours is not necessarily a difficult one.

The purpose of the restatement is to eliminate hedge accounting for interest rates swaps during the period that the Company used the short cut method to test effectiveness.

Hedge accounting allows the Company to report changes in the fair value of the swap contracts to other comprehensive income component of shareholder equity.

Eliminating hedge accounting requires changes in the fair market value of the interest rates swaps to be recorded in the current earnings.

Our Form 10-Q for the period ended 6-30-05, filed yesterday with the SEC and includes the effect of the restatement on the earnings for the effective periods.

As with any restatement however, there are countless procedures and approvals needed to complete the review before we can file the amended documents.

So, I also thank you for your understanding and patience, as we work through this.

Now to get back to Center Financial's Q2 '05 performance.

Paul's already reviewed with you the solid gains in loans and deposits in the second quarter.

Coupled with the increases in prime rate totaling 200 basis points since July of '04, these gains produced another record quarter of net interest income and net income.

Between our Form 10-Q and earnings new release filed yesterday for Q2 '05, I believe you all have the financial details in your hand, but for the benefit of anyone who just joined the call, here's a brief recap of the second quarter '05.

Net interest income before provision for loan losses is up 64% from a year ago totaling $15.6 million.

And non-interest income grew 3% to $5 million.

These gains resulted in a threefold increase in net income totaling $6.1 million equal to $0.37 per diluted share, and representing another consecutive quarter with highest quarterly net income in the history of the company.

Now to highlight some of the performance metrics.

As in the immediately preceding quarter Q2 '05 results overwhelmingly showed strong performance in the Company's performance ratios.

Our net interest margin for the quarter was 4.92%, up a 119 basis points from a year ago.

On a sequential basis our NIM improved 40 basis points over Q1 '05.

The improvement exemplifies the highly rate sensitive nature of the Company's loan portfolios at about 90% prime rate based.

Accordingly, our asset sensitive loan portfolio benefited further from the movements in market rates.

We're proud to have achieved these strong gains in spite of the considerable growth in higher cost time deposits.

Reflecting high net interest income and average earning assets, our return on average assets for the second quarter improved to 1.8% compared with 1.6% in the linked first quarter.

Return on average equity for Q2 '05 rose to 24.9%, up from 23.4% in the first quarter of '05.

The yield on earning assets for Q2 '05 improved 173 basis points to 6.87% from a year ago and 48 basis points from the linked first quarter reflecting the increases in market rates.

Also reflecting these rate increases, but somewhat at a delayed pace the average cost of interest bearing liabilities increased to 2.76% in the current second quarter compared to 2% a year earlier and 2.46% in Q1 '05.

The Company's efficiency ratio improved to 45.9% for Q2 '05 versus 73.3% of the year ago quarter as we stated.

The Company's efficiency ratio benefited from increases in the market rates, higher contributions, from new branch offices and cost containment efforts.

Moving to loan sizes.

As of June 30th '05, average loan sizes remained relatively at our target levels.

Commercial real estate loans approximately $1.3 million, C&I loans of approximately $218,000, SBA loans held in our portfolio averaged about $112,000 and consumer loans which are primarily autos, averaged roughly $19,000.

Especially as interest rates have continued to move upward, we're adhering to our strict underwriting guidelines.

We maintain excellent asset quality with non-performing assets to total assets improving to 0.2% at June 30th '05 from 0.25% at March 31st '05, and 0.26% at the end of '04.

Net charge offs as a percent of average loans equals 0.03% compared with net recoveries of 0.02% in the prior year second quarter and net charge offs of 0.1% in the linked first quarter.

Now, I would like to turn the call back to Paul for some closing remarks.

Thank you Patrick.

During the second quarter we expanded our presence in the Seattle, Washington area with the opening of a new full service branch office.

Now, with well established LPO and a full service branch we believe, we are well situated to serve the financial needs and became an even more active member of the large and growing Korean-American business community in the Greater Seattle area.

The significance of this branch is a major milestone in the history of Center Bank as it represents the Company's first expansion in a geographical area outside of Southern California from initial loan production office operations.

We also relocated our Chicago branch office to the Koreatown business district providing Korean-American and neighboring ethnic communities with easy, convenient access to Center Bank's full offerings of financial products and services.

Both Seattle and Chicago support densely populated classes of Korean-American business area much like Los Angeles, but on a smaller scale.

As we continue to make progress developing deep relationships with local customers, we believe these cities are sufficiently large enough in scale to support a multi-branch network expansion in the future.

Looking forward, we're anxiously anticipating the opening of our newest addition to the Center Bank Franchise in Irvine (ph), California.

We believe the demographic composition of this location is somewhat similar to that of our downtown branch with concentrated populations of Korean American as well as Persian American businessmen.

With the success of our downtown branch working closely with both of these ethnic communities, we believe the prospect for the Irvine branch is bright and strong.

We have forged new and stronger relationships with our existing and potential investors.

And we believe we have begun to gain recognition from the mainstream financial publications while we would (ph), having to deal with the current statement, as we've said before it has not changed our accomplishments to date and where we stand today.

We've remained confident of our leadership position in the market as one of the largest and the most successful community banks serving primary the Korean American community.

We will not waver from our focus on delivering strong and consistent financial performance, while maintaining excellent asset quality quarter after quarter.

Now, I'll pass this back to Angie, who will provide some directions for the question and answer session.

Angie?

Thank you, Paul.

Before we turn the call to the operator, I would like to present some guidelines for the Q&A.

As this is a 1-hour call we invite you to present a couple of questions at a time, and as time permits we will try to address any follow-up questions.

Please direct your questions to Paul and he will respond or ask Patrick to respond.

Operator, if you would please explain the technical elements for the Q & A session?

[Operator Instructions].

Our first question comes from Scott Carmel of Moors & Cabot.

Please proceed.

Good morning, everyone.

Good morning.

Question on the margin.

Over the past year as the Fed's gone up about 200 basis points, we've sent this translate almost basis point for basis point through the loan yield.

Going forward if the Fed continues to increase short term rates, how much, taking into consideration any caps on the loans, how much could we expect to see this continue to flow through the loan yield?

Patrick.

Scott, this Patrick Hartman.

It will continue to all go through there are no caps.

Okay.

Great.

And would you expect any other of the customers to -- as rates, the absolute level gets higher, would you expect any of you customers to ask for concessions on the pricing?

Well, they can ask.

Not because of the rising interest rates environment, it's not because of the competition among our competing banks.

So, that is always a possibility, yes.

Okay.

Great.

Understood.

And then they second question would be, on the current litigation, can you give us a sense of how much that cost you in the quarter?

I know professional fees are up quite a bit.

And then going forward, how much you expect on somewhat of a quarterly run rate, how much do you expect that to cost you?

Well we cannot predict that in numbers.

But as we previously stated that our insurance company started cover a part of the attorney's fees, number one.

And at this moment, this quarter or last quarter, we did not spend much money on that.

And in the future, depending on the situation.

But you know that, at least the insurance company covers part of the attorney's fees.

Okay.

And then in the increase in professional fees in the quarter would that be mostly from the hiring of an outside consultant or the restatement of -- or what led to that 300,000 or so increase in professional fees?

I think it had to do with changing our accounting firm.

We're incurring some cost there with the overlap.

Okay.

Should we expect that to stay flat or come down a bit off 2Q levels?

I would say flat to down.

Okay.

All right thanks guys.

[Operator Instructions].

Our next question comes from James Abbott of FBR.

Please proceed.

Good morning.

Good morning James.

Congratulations on the quarter.

Thank you.

I wanted to ask a question on the outlook for margins and also on the pipeline for loans?

First on the loan or on the margin rather looking at the yield -- I think we've got a pretty good sense as to what's happening there.

What can you tell us about the funding costs and the outlook for that?

Where new CD rates are being issued today?

The duration of CDs that customers are generally taking, what's their preference?

And sort of give us a sense as to how that's going?

And then how much control do you have over money market account rates and things like that?

Where would you expect those to develop if we see a Fed fund of say 4% over the course of next year?

You have the multiplication solved?

So, okay thank you.

Patrick, can you tell us what the margin improvement (ph) is?

Sure.

We have had quite a bit demand for the CDs out here and a lot of competition in our marketplace.

We have created a variable rate CD that's tied to prime, primarily just to protect our market share.

It has however, brought in some new money during the quarter.

We expect that competition to slow down a little bit.

I think it's better now than it was last quarter.

Although it is still there and we continue to offer that product although a little bit less aggressively, because we don't seem to have any outward migration of our CDs.

As far as money markets go, they will follow the market.

But right now there is not a lot of pressure on that particular portfolio rate-wise.

The competition seems to be in CDs.

So those things have -- certainly have an adverse effect on our margin.

Although the effect is lagging the effect on the loans.

So, we continue to benefit on the way up.

Okay.

Now we made -- as we spoke to you, we made a big increase in CD which is adding cost to us.

But again, as we predict to you, we're maintaining approximately 30% of total deposit pie from our demand deposit, non interest bearing demand deposits.

And we had the stickiness in raising the deposit rate.

So, we have shown a steady improvement in margins.

As you see that compared to the third month ago, our margin has been improving more than 110 basis.

While the prime rate increased 200 basis, right?

Actually more than that.

Yes, that is a kind of indication that we are benefiting from this interest rate environment, although there are tremendous pressure on the CD side.

There is pressure on the pipeline (ph) right?

You're right.

Let me just wrap up real quick on the CDs.

What's the general duration that customers are using right now or ...

Okay, this particular product feature is 1-year duration.

So if the customer wants the duration settled in 1-year, then we are ...

...We're not just offering that prime based CD.

But most of the CDs are being raised in the 3 to 6 months range.

Right.

Okay.

And the rate on those is roughly equal to a comparable treasury of that?

Yes, that's a good estimate.

Okay.

So we can sort of make our own assumptions as to where we think the 3 to 6 month treasury is a year from now and sort of make up something there?

And then -- I appreciate that.

On the money market account, I think the average rate for the quarter was about a 180 basis points.

Could you give us a sense as to where the new money or the new rate is for new money coming in?

And ...

...It is at the same place.

Yes.

So 180.

So new rates -- so we shouldn't expect to see an increase in the third quarter or real material increase anyway in the third or fourth quarter on money market account?

We hope to not.

I mean that's a tough rate increase because it affects the whole portfolio that day.

Okay.

I think it was up about maybe 15 basis points linked quarter.

So that was the shift that took place maybe at the beginning of the quarter?

Probably.

Okay.

Sorry and then the last question like I did mention, was the pipeline.

And how things look on that side?

Well, pipeline, we still see that we have the healthy volume in pipeline, particularly in the real estate, commercial real estate loans.

Okay.

So ...

...Would you say it is greater or -?

Not necessarily greater.

Probably this has slightly slowed down, but still good volume of the (inaudible) are on the pipeline.

So but we're very careful.

We're cautious in screening all those proposals.

Okay.

All right.

I appreciate that information.

Thank you.

Thank you.

[Operator Instructions].

Our next question comes from Greg Laben (ph) Saranac Capital.

Please proceed.

Can you give an upgrade on your efficiency ratio goal?

Efficiency ratio, Patrick.

Yes.

Thank you.

I expect that to continue to improve.

We don't actually -- we don't actually set a goal for it.

We have been targeting 45 to 50%.

I'm beginning to have fantasies about 40 to 45.

So, we're going to continue to manage our costs containment efforts and look for efficiencies and process improvements in the Company.

And I think that it's kind of target rich environment.

So, we should continue to find ways to do things better, faster, cheaper.

By the way, we are not necessarily targeting to show more fancy numbers in efficiency.

We are rather continue -- continuing our effort in period (ph) expansion, branch expansion matters.

We will on one hand improve the process very much, but on the other hand we will continuously spending for future investment.

So ...

...

That's a numerator, Paul's a denominator.

Okay.

Is there any moderation in expansionary effort?

Moderation ?

What I'm doing is comparing it to your transcript for the first quarter that notes that the efficiency ratio improved to 47%.

But you highlighted that 50% is the goal and you pointed out some expansion in Southern California.

So, things have improved and you have another quarter under your belt.

So, it looks like it coming in part from the cost.

But I wanted to see if there's any change in future expansion plans?

We still believe that there are certain good opportunities to expand in Southern California as well as other places.

So, as far as the expansion climate (ph) is concerned, we will focus on the interesting project within our, the resources.

Okay.

The term (ph) looked good thanks.

Thank you.

We have a follow-up from Scott Carmel of Moors Cabot.

Please proceed.

Hey, just a quick follow-up on the margin.

I know you talked about the introduction of the floating rate time based CD in the quarter.

What's your typical pricing on that?

I assume that it's prime minus, but minus what?

I think the base rates are 3.75 per year.

And then it re-prices with prime each quarter end.

Each quarter end?

Yes.

Okay.

Thank you.

1 year duration.

Yes, 1 year duration.

Okay.

Thanks a lot.

We have a follow-up from James Abbott of FBR.

Please proceed.

Yes.

I was just wondering if you can give us an update on the efforts that you're making on the -- I believe you're under a regulatory MOU for Bank Secrecy Act.

And I believe that you're working pretty diligently in that area directing a lot of focus to that.

Can you give us some update as to what new policies are, new procedures?

What, give us if you can, something that will give us some comfort as to how -- what you have done to address that issue?

We -- basically we have expanded our size of the teams dealing with the BSA issues.

And also, we improved some -- they are thickened (ph), so that we have a better way to capture all this information and analyze that.

We offered the additional deduction (ph) for every party including the press people.

And what else -- Patrick, do you -?

That pretty well it sums it up that we have done a lot of internal training.

We've strengthened the team that's working directly on BSA.

The technology, we changed our teller system to help us better aggregate the customers transactions.

And basically tried to improve the quality of the reporting that we're documenting for the regulators.

All of this is in preparation of another review by the regulators sometime in the future.

This (inaudible) is complex; it's a very costly agenda.

And we're spending our -- the money and time to fully comply with this law.

And we believe that we can -- overcome this pretty soon.

Okay.

Thank you very much for the update.

Thank you.

[Operator Instructions].

Ladies and gentlemen, this concludes the question and answer portion of today's conference.

I will turn it back to Mr. Kim for closing remarks.

Yes.

Thank you.

We would like to thank all of you for participating in our call this morning.

On behalf of the entire Center Financial team, we appreciate your strong interest and look forward to your ongoing support.

Thank you once again.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.