Hope Bancorp Inc (HOPE) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Nara Bancorp's fourth quarter 2005 earnings conference call.

My name is Reika, and I will be your coordinator for today.

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

We will be conducting a question and answer session towards the end of this conference. [OPERATOR INSTRUCTIONS].

I would now like to turn the presentation over to your host for today's conference, Mr.Tony Rossi of the Financial Relations Board.

Please proceed, sir.

Thank you, operator, and good morning, everyone.

Thanks for joining us for the Nara Bancorp fourth quarter 2005 earnings call.

Presenting this morning are Mr. Ho Yang, President and Chief Executive Officer of Nara Bancorp;

Mr. Alvin Kang, Chief Financial Officer; and Bonnie Lee, Chief Credit Officer.

Before we begin, I'd like to make a brief statement regarding forward-looking remarks.

The call today may contain forward-looking projections regarding future events and the future financial performance of the Company.

We wish to caution you that such statements are just predictions and actual results may differ materially as a result of risks and uncertainties that pertain to the Company's business.

We refer you to the documents the Company files periodically with the SEC, specifically, the Company's most recent 10-Q and annual report on Form 10-K, as well as the Safe Harbor statement in the press release issued yesterday.

These documents contain important risk factors that could cause actual results to differ materially from forward-looking statements.

Nara Bancorp assumes no obligation to revise any forward-looking projections that may be made on today's call.

With that I'll like to turn the call over to Mr. Ho Yang.

Mr. Yang?

Thank you, Tony.

Good morning, and thank you for joining us today.

I'm going to provide a brief overview of the fourth quarter of 2005, and then I'll turn the call over to Al Kang, our Chief Financial Officer, who will review our financial results.

Following Al's remarks, I'll conclude with a discussion of our outlook for 2006.

We are very pleased with our performance in the fourth quarter 2005, as we were able to stay focused on our core operating strategies and continue to deliver strong earnings growth.

We recorded net income of $7.9 million for the quarter, an increase of 19% over the prior year.

We earned $0.30 per share, an increase of 11% over the prior year.

The lower increase in our earnings per share is attributable to the increased share count we have following the additional capital we raised in September last year.

The key driver of our performance was a 45% increase in net interest income before provision expenses.

This is largely attributable to the significant loan growth we have had over the past year, as well as in expanding net interest margin.

While not being quite at the level we experienced in the third quarter 2005, our loan production, including SB loans that we sell, continue to be strong.

However, we continue to be moving to other -- excuse me -- however, we continue to experience a high rate of prepayment in our commercial real estate portfolio.

In the fourth quarter, we had approximately $67 million in [sheerly] commercial real estate loan payoffs.

Despite the payoffs we still managed to grow the balance of our real estate loans at an annualized rate of 10% in the quarter.

By design, we reduced the level of fed funds in the fourth quarter by allowing some runoffs in our jumbo CDs.

The current rates for jumbo CDs in the Korean American market are highly competitive.

And with the capital we raised in September, we had ample liquidity to fund our loan growth without having to actively participate in the high end of the CD market.

In addition, we also chose not to renew $23 million in brokered and state treasurer deposits.

As a result of this strategy, we were able to effectively manage our deposit costs in the fourth quarter and see a significant expansion in our interest margin.

Moving to other significant items, the two new branches opened late third quarter 2005, one in Gardena, California, and the other in Bayside, New York, have performed very well, putting in total deposits of $66 million collectively.

We believe also these locations represent attractive areas for us, as they have growing Korean American communities that are relatively underserved by the current banks operating in those cities.

Additionally, we received approval to convert our Fullerton branch to full-service facility and we are on track for the opening of our Garden Grove loan production office during the first quarter of this year.

Finally, I would like to provide a brief update on the status of our MOU.

We believe management has made good progress towards meeting all of the requirements of the MOU, and our interactions with the regulators have been very constructive.

While this process has required a great deal of resources and attention from the management team, we firmly believe that it is making Nara a much stronger company.

We cannot speculate at this point when the MOU might be lifted, but we can assure you that the Board and the management team are working diligently to meet all of the requirements as soon as possible.

At this point, I'm going to turn the call over to Al who will review additional financial results for the fourth quarter 2005.

Al?

Thank you, Mr. Yang.

I will start by discussing our net interest margin.

We continue to be in an asset sensitive position, and have benefited from each increase in prevailing interest rates.

Our net interest margin was 5.13 in the fourth quarter, an increase of 18 basis points from 4.95 in the third quarter.

In both the third and fourth quarters, we had unplanned items that positively impacted our net interest margin.

In the third quarter, we benefited from a $353,000 payoff on a non-accrual loan.

In the fourth quarter, we recognized $245,000 in unamortized discounts on purchased loans that were paid off during the quarter.

Excluding the unplanned items in both periods, our net interest margin increased to 5.07% in the fourth quarter, from 4.87% in the third quarter, a 20-basis point increase.

We expect to see continued expansion in our net interest margin with further increases in interest rates.

However, with the increasing likelihood that we may be nearing the end to the interest rate hikes, we have taken steps to mitigate the impact of lower rates in the future.

These steps include, among other things, adding more fixed rate loans to our portfolio, maintaining the interest rate swaps covering $100 million of our variable rate exposure, and keeping our deposit maturities short.

The average yield on our loan portfolio increased 38 basis points during the quarter, to 8.49%.

Adjusted for the recognition of unamortized discount on purchased loans paid off during the quarter, the yield was 8.43%.

Our -- due to our concerted effort to manage our deposit cost, our average costs of deposits increased only 26 basis points during the quarter to 2.74% despite significant competitive pressures.

This equates to a primary spread, which is the loan yield minus the deposit cost, of 5.75% or 5.69 on an adjusted basis.

Our non-interest income was 5.9 million in the fourth quarter, an increase of 7% over fourth quarter 2004.

The growth was -- was driven primarily by our gain on sales of SBA loans which increased 54% over the prior year to 2.3 million.

We expect our gain on sales of SBA loans to remain in this range for the foreseeable future.

The increase in SBA gains was partially offset by a 10% decline in service charges on deposit accounts, resulting from our decision to discontinue banking services to check cashing businesses, to reduce our compliance risk regarding the Bank Secrecy Act.

We believe we've seen the last of the decline relating to exiting this business, and our deposit service charges should remain in the 1.5 to $1.6 million range over the next several quarters.

Our efficiency ratio was 48.63% in the fourth quarter of 2005, compared to 45.09% in the fourth quarter of 2004, and 45.41% in the third quarter of 2005.

Our efficiency ratio in the fourth quarter of 2005 was negatively impacted by the following items -- first, higher personnel, facilities and -- and advertising expenses incurred to support the opening of our two new branches; second, higher bonus accruals due -- due to the Company's strong financial performance; and third, we continue to incur significant legal and consulting expenses related to our MOU compliance efforts.

For the full year 2005, we incurred approximately 1.8 million in expenses related to the MOU and our financial restatement, with $400,000 occurring in the fourth quarter.

We would expect our level of advertising expense to decrease in the 2006 first quarter, following the initial promotional efforts for the new branches and also the holiday promotions that occurred in the December quarter.

Moving to the balance sheet, our gross loans were $1.43 billion at December 31, 2005, an increase of 18% over the end of 2004.

Our overall loan portfolio increased in an annualized rate of 5.2% during the fourth quarter, primarily driven by growth in our commercial real estate portfolio, despite the significant payoffs that Mr. Yang mentioned.

Our total deposits were $1.5 billion at December 31, 2005, an increase of 22% over year end 2004.

However, due to our strategy to reduce our fed funds level and control our deposit cost, we allowed some runoff of high rate jumbo CDs and our total deposits decreased by $17 million during the fourth quarter.

Our core deposits remain relatively flat from Q3 to Q4, although we did see approximately $49 million of runoff in the money market accounts, which were offset by gains in the other core deposit categories.

Going forward, our deposit gathering efforts will be focused on short-term CDs and core deposits.

As to credit quality, our non-performing assets were 6.3 million, or 36 basis points, of total assets at December 31, 2005.

This compares to 4.7 million, or 26 basis points, of total assets at September 30, 2005.

The increase was attribute to three commercial loans totaling $1.4 million.

One loan has been paid off, another loan has been -- and another loan has been brought current in January this year.

And the third loan is adequately secured by a real estate collateral.

At December 31, 2005, our allowance for loan losses was 1.22% of gross loans receivable, compared to 1.20% at September 30, 2005.

Net chargeoffs were $307,000 in the fourth quarter, representing an 8 basis point -- representing 8 basis points of average loans on an annualized basis.

This ratio is a decline from 11 basis points in the fourth quarter of 2004, and 19 basis points in the third quarter of 2005.

Overall, we are pleased with the quality of our loan portfolio, and we don't see any trends to indicate that non-performing assets will deviate significantly from the current level.

We also continue to aggressively pursue collections on past-due loans and recoveries on loans charged-off.

Now, I'll turn the call back over to Mr. Yang.

Thanks, Al.

Now I would like to provide our guidance for 2006.

For the full year, we expect earnings per share to range from $1.20 to $1.25.

This is based on the assumption of loan and deposit growth in the middle teens, as well as continuing expansion in our net interest margin, at least in the first half of the year.

In addition, with the financial restatement behind us and much progress already made on complying with the MOU, we believe our expenses will be at least 40% less than the $1.8 million we incurred in 2005 related to these items.

This expense reduction should be another driver of our bottom line growth.

In 2006, we'll continue to employ the strategies that served us well in 2005. [This being] growth with an emphasis on profitability.

With solid execution on our business plan, we believe we generate improvement in both return on equity and return on assets in the coming year.

While the Korean American market has become increasingly competitive, we believe the economic conditions within our core market remain very attractive and are conducive for growing the value of our franchise.

We also continue to increase our efforts to position Nara Bancorp as a multicultural bank that can service the ethnic communities beyond the Korean American market.

We believe these communities represent a valuable source of incremental loans and deposits, and we believe we are making good progress in diversifying our customer base.

In closing, I would like to thank all of our employees for their hard work and effort.

Despite a very challenging year in 2005, the entire Company remained focused on operating the business and produced another record year of earnings.

We are confident that we can continue this trend and create additional value for our shareholders in the coming years.

Now we would be happy to take any questions you might have.

[OPERATOR INSTRUCTIONS].

Brett Rabatin, FTN Midwest.

Hi, guys, good morning.

Good morning.

A couple of questions for you.

Starting off, I was curious on the loan growth guidance and what happened in the fourth quarter.

You mentioned the 67 million of loan payoffs, and if you exclude those payoffs, loan growth would have been about 24% linked quarter annualized instead of 5%.

Is that the primary reason and -- in the mid-teen or the expecting federal loan growth in '06 as you believe those payoffs are basically done in terms of the commercial real estate portfolio?

Well, yes.

I'll -- Bonnie Lee, our Chief Credit Officer can add a little more color, but we think the -- the payoffs will probably abate a little bit in 2006, and, Bonnie, do you want to add some color --

Fourth quarter, we experienced higher payoffs.

It's very normal, actually, for the -- a lot of real estate purchases that are trying to close at the end of the year.

But as far as the production was concerned, although we had a slight decline in production, it wasn't anything out of the ordinary.

Okay.

And then secondly, and I recall from the previous quarter, the cost of CDs in Q3 was up about 50 basis points to 3.58.

I was curious if you had the cost of CDs in aggregate for the fourth quarter, and it -- it sounds like you -- you intend to be disciplined in '06, but I'm curious to hear how the -- you're going to fund growth, given that the market is so competitive.

The fourth quarter CD was 3.95.

So it was up from 3.58.

Okay.

And our jumbo CDs went from 3.73 to 4%.

So the -- the rates still keep continuing in our marketplace, and we've been able to manage that growth.

We think that on a go-forward basis, really it's going to be demand driven; that is, we're going to take a look at our loan growth, and that will be a determinant of -- of how much we participate in the CD market.

Okay.

And then last question on the -- the BOLI adjustment and the split dollar agreement, could you walk us through that in terms of -- you had an adjustment there of 1.4 million.

What exactly -- I'm assuming that came -- that was in the other expenses line item and obviously that wouldn't be something that we'd see going forward.

Yes, that's a nonrecurring adjustment.

It actually occurred in 2004.

There were amendments to the policies of the bank owned life insurance that allowed us to reduce the -- the expense related to bank owned life insurance.

So it's -- it was a prior year event, but obviously that created the variance.

Well, let me make sure I understand this correctly.

The -- what was the impact in the fourth quarter of this year?

Well, there was no impact in -- in this year's fourth quarter, but when you compare fourth quarter of the previous year with the current fourth quarter --

Oh, okay.

That a credit adjustment in 2004 of 1.4, so it reduced the fourth quarter in 2004.

Okay.

I -- I understand.

Thank you.

I think that's it for me.

Congratulations on the quarter, guys.

Thank you.

Mike McMahon, Sandler O'Neill.

Good morning, gentlemen.

Morning.

A couple questions.

Was -- were the prepays -- was that 67 -- 6, 7 million in the quarter.

Yes.

67.

Okay.

And just for information purposes what -- what were they, or approximately, what were they in the third quarter so we can just kind of get a feel for that -- that run rate.

Third quarter, the level was around 40 -- slightly less than 50 million, actually.

Okay.

And, Bonnie, you mentioned if I heard you correctly that there's a normal phenomenon of people wanting to get real estate deals done at year end, so if that's -- so we could expect that prepays would probably slow in the first quarter?

Yes.

Okay.

And with a -- an increase in the prepays, did that -- were there prepayment penalties, Al, that ran through the margin that also helped the margin expand that may not be there in the first quarter?

Yes.

You would have prepayment penalties.

I don't -- I don't have a number to quantify that, but there are prepayment penalties associated with loan payoffs --

Okay.

-- that run through that margin computation.

And what were the -- what was the -- the volume of SBA loan originations?

For what period?

Fourth quarter.

Fourth quarter was about 47 million.

[Bueno.] And you -- you indicated -- and I appreciate this, we all do -- that you expect a level of gain on sale to be around where it was in the fourth quarter.

Can we assume that you're going to sell a similar percentage of your originations going forward at whatever margin assumption we -- we choose to use?

Yes, we've been pretty consistent in selling 75% and retaining 25.

Okay.

And a final question, if I heard correct, the level of professional fees, 1.8 million related to the MOU and the restatement, you expect to -- to be lower by about 40% in '06, and I assume we should back -- back-end that reduction?

Yes.

All right.

Thank you very much.

Thank you.

Don Worthington, Hoefer Arnett.

Good morning.

Morning.

Couple things.

One, in terms of the break-down of your loan portfolio, you -- you include a line that's commercial -- or that's real estate.

Is that primarily commercial or do you have any residential in there?

That's all commercial.

It's all commercial.

Okay.

Maybe a more subjective question, read the announcement recently of Mr. Hong going into [Sahon] as CEO.

Would you expect any staff issues or perhaps customer relationship issues with him bringing over people or relationships to Sahon?

Well, I wouldn't have any comment at this point, but among Korean-American community banks there -- there has always been kind of movement among these banks, so we'll see.

But at this point we have no comment.

Okay.

Fair enough.

Thank you.

James [Cabott], FBR.

Good morning.

Morning.

A quick question on the commercial business loans.

I noticed that those decline on a link quarter basis.

Any color on what was happening there, or is that just a normal fluctuation of that type of business?

Can you repeat the question?

Reduction in commercial --

[Sheerly] reductions.

Commercial business loans.

I understand --

Commercial business or commercial real estate?

Commercial real estate, I guess.

Commercial business.

Commercial business.

I think it ended the quarter 483 million?

Commercial business loan there's actually really not that much of a fluctuation.

Okay.

And is the pipeline fairly strong there?

What -- what's your outlook as far as commercial business loan growth in 2006?

In 2006, we -- there are a few factors that we expect to drive our loan growth.

First one is that -- obviously, that we don't -- we don't think that the commercial real estate loan payoffs will offset as much of the new loans that we originated as they did in 2006.

And second, with our new branches and loan production offices, we have increased our exposure to faster growing areas in the New York and Orange County, California.

And finally, we will be developing some new loan products and targeting some niche markets that we think can have a positive impact on overall loan growth.

For competitive reasons, we don't want to be too specific about our new strategies, but collectively we think this will be another good year for the loan growth.

I think also, just from a macro viewpoint, commercial real estate versus commercial business, given that the commercial -- the real estate market may also be peaking, we think that our customer base will probably be looking for placement or investments in different areas, which would probably lead to more business loans, as opposed to real estate loans, so we're looking to see maybe more activity on the commercial business loan side.

Okay.

That's helpful.

Also, another question on new hires that took place during the quarter.

Was there a significant number of inflow or was it net outflow, how -- how would you characterize -- did you lose anybody that you really wanted to keep?

And vice versa, did you gain anyone that you are really excited about?

Well, we have added several people people, a chief compliance officer, and also chief internal auditor, and we're very happy with those additions.

We also -- some of the growth in our employee count was really the -- the branches, but overall, we're pretty happy with the -- the additions that we've made.

Do you characterize your employee base as fairly stable in addition --

Yes, [among senior officer was -- officer management pushed] new hire [inaudible] to almost 0 in turnovers, so very stable.

Okay.

All right.

Super, and then the last question for me is on the expense growth related to your assumptions as far as EPS goes.

Could you -- you've given us some good insight so far, but do you have a -- roughly a magnitude of what that growth rate will be?

You -- looking at the fourth quarter of 2005 as -- as our starting point.

Which I guess was about $13.5 million.

Do you expect that to be up $1 million per quarter by the end of '06, or 2 million or 5 million?

Well, I think that fourth quarter had some unusual items in there, but I think on an overall basis we're looking to improve our efficiency ratio, so we -- there's a lot of one-time items both in 2004 and 2005 that effects those numbers.

Okay.

What I'm trying to do is separate the efficiency ratio comment from the margin expansion because a lot of margin expansion could make your efficiency ratio look extraordinary, but the expenses would not have -- expenses could have gone up significantly as well.

Well, I think on -- on non-interest expense, we -- it depends in part on our ability to expand our branches, and that in turn will really depend upon the situation with our MOU.

But absent that kind of growth, we think we'll be able to control our expenses.

Okay.

So we should -- if we see the MOU clear, which might be some time in the next six monks, perhaps, then we would expect expenses to accelerate towards the back half of the year.

If that were to happen.

If it were to not happen, then we would expect more flat or more stable expenses.

I think that would be a fair assessment.

Okay.

And on the expense to assets, it's -- it historically runs somewhere close to 2.8%.

Is that a good run rate going forward as well or --

Yes, I think that's a good run rate, and again, the fourth quarter was a little bit of an aberration.

Right.

That's why I didn't look at that.

Okay.

Thank you very much.

Thank you.

Lana Chan, Harris Nesbitt.

Hi, I want to ask you about -- you said earlier that you were adding more fixed rate loans onto your portfolio to mitigate some of the risk from declining rates later in '06 and '07.

How much -- what are the terms of those fixed rate loans and pricing?

Terms are usually 7 years due, 25-year amortization, and we've already -- but the rates are from -- anywhere from 7.0 to 8.125 depending on the credit.

Okay.

And how much of your loan portfolio would be fixed versus variable rate now?

As of December end, about -- slightly less than 13% is -- are fixed rate loans.

And then the rest is variable, primarily prime based?

Yes.

Yes.

Okay.

Thank you.

Christopher Nolan, Oppenheimer & Co.

Good morning.

The increase in the average share count, is that reflecting the investment by the chairmen in September?

The increase in the share count, yes.

Yes.

Great.

And the earlier comment in terms of anticipation of the margin in the first half of the year staying steady, if that's correct, does that reflect the 5.13 level, or does that reflect the level which would exclude the recognition of unamortized discounts in the fourth Q?

Well, it excludes it, but really we -- we seem to have the ability to have these one-time adjustments almost becoming recurring, but you -- I think you can use either number.

The -- the increase is really not that much different whether you use the adjusted numbers or the unadjusted numbers.

Okay.

Great.

And I guess it's fair to say in this quarter that part of the margin expansion came just basically increasing the mix on the balance sheet towards loans.

Do you anticipate that continuing in first quarter at all?

What continue?

The mix?

Yes, or it is going to be more deposit -- excuse me, is it going to be more balance sheet driven -- balance sheet growth driven?

Well, I think you have two things, one, is obviously, our controlling our deposit costs and also just the repricing of the loan portfolio from the fed increases, and we've just had one.

We've assume that we'll have another on March -- I think it's March 28 or so, but I think 2006, we're going to be focused certainly on loan growth and -- and then the -- the other thing that we're looking at is loan payoffs.

So hope fully -- there are a lot of factors that go into that and hopefully that'll all come together.

Great.

Thank you.

[OPERATOR INSTRUCTIONS].

Manuel Ramirez, KBW.

Good morning, everyone.

Good morning.

I have two questions for you.

On -- on the loan payoffs, can you -- I know the question was asked about payoffs in the third quarter versus the fourth quarter.

Can -- do you have the five-quarter trend in payoffs in front of you, Al, just to give us a sense of whether or not there's a linear trend or if it's really seasonal?

And then I do have a follow-up question.

Yes.

The -- actually the payoffs by quarter -- first quarter was 108 -- I'm looking at the right line, right? 108 million.

Second quarter was 91.

Third quarter was 90.

Fourth quarter was 94.

So --

And that -- that includes scheduled amortization plus prepayments.

Right.

Right.

Okay.

I'm sorry.

What was the fourth quarter number?

94.

And when we look at what happened in 2004, clearly the loan payoffs were higher in 2005, versus 2004.

Okay.

So we're hoping that with the rise in rates and just a change in the economy that the payoffs would -- would come back down.

Okay.

And the -- the second -- second issue is -- I know as part of the -- the MOU, you were required to submit a business plan -- or a revised business plan with the regulators.

I was curious if that business plan has already been submitted or are you still in the process of doing that as a way of completing the process?

It's been submitted.

Okay.

Terrific.

Thank you.

And at this time you have no further questions.

Well, assuming there are no more questions, once again, thank you for joining us today.

We look forward to speaking with you again next quarter.

Thank you, operator.

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

This concludes the presentation.

You may now disconnect.

Have a great day.