Hope Bancorp Inc (HOPE) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2006 Nara Bancorp earnings conference call. My name is Lakesha and I will be your coordinator for today.

At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, please key star followed by zero and a coordinator will be happy to assist you.

I would now like to turn the call over to Mr. Tony Rossi of the Financial Relation. Please proceed, sir.

Thank you, Operator. Good morning, everyone, and thank you for joining us for the Nara Bancorp first quarter 2006 earnings call.

Joining us this morning from management are Miss Min Kim, Acting President and Chief Operating Officer, Mr. Alvin Kang, Chief Financial Officer and Miss 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'd like to turn the call over to Miss Min Kim. Miss Kim?

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

I'm going to provide a brief overview of the first quarter of 2006, and then I will turn the call over to Al Kang, our Chief Financial Officer, who will review our financial results. Following Al's remarks, I will conclude with a discussion of our outlook for the remainder of 2006.

We are very pleased with our performance in the first quarter. We recorded net income of 7.9 million for the quarter, an increase of 46% over the prior year. We also earned $0.30 per share, an increase of 36% over the prior year.

Despite the departure of our CEO, we were able to stay highly focused on our efforts to attract new relationships to the Bank. This resulted in strong double-digit annualized growth in both loans and deposits during the first quarter.

In particular, we are seeing good results from our continued penetration of newer markets in Southern California and New York City. During the first quarter, our new branches in Gardenia, California and Bayside, New York, grew their deposits by 26% and 24% respectively.

As we mentioned last quarter, the deposit pricing environment is highly competitive in the Korean-American market and we are focused on tightly managing our cost of funds. We believe we had another successful quarter in that regard, which is demonstrated by the slight expansion of our net interest margin, when you exclude the one-time item that positively impacted the margin last quarter.

We are also pleased with our expense control despite the ongoing fees related to our regulatory compliance efforts. Compared to the first quarter of 2005, our operating efficiency ratio improved by almost two full percentage points from 49.7% last year to 47.8% this year.

In summary, our combination of strong loan and deposit growth, stable net interest margin, outstanding asset quality and tight expense control continued to produce excellent results for our shareholders.

Moving to other significant items, we are very pleased that Howard Gould joined our board of directors during the first quarter.

Mr. Gould is the former Vice Chairman of the Bank of the West and California United Bank, as well as a former California banking regulator. He has already provided valuable guidance to the Company on areas for improvement, including our compliance with MOU.

We continue to work very hard on our compliance efforts and we have prepared ourselves for a rigorous exam that will take place this summer.

Now I would like to give you an update on the CEO position.

We have formally engaged a search firm and the process is still in the early stages. In the interim, the Company is being led by an office of the President, consisting of myself, Al Kang and Bonnie Lee, our Chief Credit Officer.

We believe this is a very effective approach for maintaining continuity and stability in the Company. And we will be conducive to continuing the strong operating performance we had in the first quarter.

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

Thank you, Min.

I'll start by discussing our net interest margin. We continue to devote much of our time on asset liability management, such that our branch managers understand the impact of the positive loan pricing decisions as well as how the volumes they generate are an integral part of managing cash flow.

As an asset-sensitive shop, we have benefited from niche increase in prevailing interest rates and we anticipate another rate increase on May 10, with a lower probability in June. Although I guess based on what Chairman Bernanke said today, that may change.

Our net interest margin was 5.13% in the first quarter, which is a 6 basis point increase from the adjusted net interest margin in fourth quarter of 2005 of 5.07%. The adjusted net interest margin for fourth quarter 2005 excludes the recognition of unamortized discounts totaling $245,000 related to certain purchase loans that paid off last quarter.

The average yield on our loan portfolio increased 15 basis points during the quarter to 8.64%. Adjusted for the recognition of unamortized discount on purchase loans paid off during the quarter, the yield actually increased 21 basis points.

We saw approximately the same increase in our deposit costs during the quarter. Our average costs of deposits increased 20 basis points during the quarter to 2.94%.

This equates to primary spread, our loan yield minus deposit costs of 5.70%. We are very pleased that despite the significant competition on the deposit side, we have been able to maintain stability in our net interest margin.

We expect to see our net interest margin remain flat to slightly lower for the next several quarters. The largest determinant will be the pricing of CDs that mature over the next few quarters, which in turn, is impacted by the Fed's decision on interest rates.

As we indicated before, deposit pricing continues to be very competitive as the number of banks serving the Korean-American market are focused on growth, rather than deposit pricing. We may look to wholesale funding if retail deposits continue to price at significant premiums to the wholesale market.

When the Fed does stop raising rates, we would expect more margin compression due to the lag effect of deposit pricing.

Our non-interest income was 5.3 million in the first quarter, an increase of 26% over the prior year. The growth was driven primarily by our gain on sales of SBA loans, which increased 129% over the prior year to $1.7 million.

On a sequential quarter basis, our gain on sales of SBA loans was lower, as we typically experience some seasonality in this business. We would expect the contribution of this line of business to trend higher as we move through 2006.

Our service charges on deposit accounts totaled $1.5 million. This is roughly equivalent with the level we saw last year and is within the 1.5 to $1.6 million range that we expect to see throughout 2006.

As Min mentioned, our efficiency ratio was 47.8% in the first quarter of 2006 compared to 49.7% in the same period last year and 48.6% in fourth quarter 2005. As expected, we are beginning to see a decline in legal and consulting expenses related to our MOU compliance efforts.

Our professional fees were $678,000 in the first quarter, which is 10% lower than first quarter of 2005. We would expect professional fees to remain somewhat elevated in the second quarter, particularly in light of the expenses related to the CEO and board member recruitment efforts before trending down in the second half of the year.

Moving to the balance sheet, our gross loans, excluding loans held for sale, were $1.52 billion at March 31, 2006, an increase of 15% over the $1.33 billion at March 31, 2005. This also represents a 22% annualized growth rate over the $1.45 billion at December 31, 2005.

During the first quarter, we saw a strong loan originations of $182 million, increasing $38 million over fourth quarter 2005, primarily in our commercial real estate segment, which increased $31 million over fourth quarter 2005.

We also saw a meaningful slow down in prepayment activity, dropping from $94 million in fourth quarter 2005 to $67 million in first quarter 2006. We do not expect to maintain this growth rate for the full-year, but as we have in the past, we will have loan generation campaigns to bolster interest earning asset growth.

Also, as we indicated last quarter, we are starting to book a greater percentage of fixed rate loans, which helps us be accommodating to our customers that don't a prime-based loan, as well as assist us with our us with our interest rate risk management efforts.

Our total deposits were $1.65 billion at March 31, 2006, an increase of 22% over the $1.36 billion at March 31, 2005. This also represents a 33% annualized growth rate from the $1.53 billion at December 31, 2005.

However, a portion of this growth is attributable to one large deposit relationship, initially totaling $36 million, that we consider to be short-term in nature.

It is currently held in a money market account and could be withdrawn at any time. As such, this balance is being invested in Fed funds.

Excluding the impact of this one deposit account, the adjusted annualized growth rate was 23% and our most significant growth came in short-term CDs with maturities of one year or less.

Turning to asset quality, we saw notable improvement in all of our credit metrics during the first quarter. Our non-performing assets were $5.4 million, or 28 basis points of total assets at March 31, 2006.

This compares to $6.2 million, or 35 basis points of total assets at December 31, 2005. The decrease is primarily attributable to the payoff of four non-accrual loans totaling $1 million.

At March 31, 2006, our allowance for loan losses was 1.21% of gross loans receivable compared to 1.22% at December 31, 2005.

Net charge-offs were $300,000 in the first quarter, representing 8 basis points of our average loans on an annualized basis. This is consistent with the 8 basis points we saw in the fourth quarter of 2005 and a decline from the 18 basis points in the first quarter of 2005.

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

Now, let me turn the call back over to Min

Thanks, Al.

At this point, we would like to reaffirm our full-year expectations. We continue to expect fully diluted earnings per share to range between $1.20 and $1.25. We expect to see a continuation of many of the trends we experienced in the first quarter.

Our loan pipeline remains healthy and we expect to continue generating double-digit growth in assets. We will also continue to place a high priority on gathering core deposits, the conversion of our Fullerton, California, branch to our full-service facility is now completed, and we believe this can be another good vehicle for bringing in deposits.

While our net interest margin may be flat to slightly lower over the remainder of 2006, we believe this will be offset in several areas. First, we anticipate loan growth will pick up some of the slack from potential margin compression.

Second, the volume of SBA loans that we sell should steadily increase as we move through the year. And third, professional fees related to the restatements are behind us and we would expect that our professional fees related to the MOU compliance efforts will decline during the second half of the year.

Collectively, we expect these trends will enable us to continue generating steady earnings growth as we move through 2006.

Now we will be happy to take any questions you might have. Operator, please open up the call.

[ OPERATOR INSTRUCTIONS ] Stand by for your first question. Your first question comes from the line of James Abbott with FBR. Please proceed.

Good morning.

Good morning, James.

It was nice to see a good quarter as far as production goes. I was wondering if I could ask a couple of questions?

It looked like the timing of the loan growth appeared to come at the beginning of the quarter, I was just comparing the average balance sheet data versus the end of period. So, maybe I was getting too smart for my own good -- or could you characterize that?

Is there a, was it pretty strong growth at the beginning of the quarter and that's benefited the earnings and then the pipeline levels? Could you characterize the pipeline levels?

Actually I think we had a strong January. It dipped a little in February and then we had a strong March, so--

Okay. Okay. All right. Thank you.

And so the pipeline is comparable to where it was in April or bigger than April? I'm sorry, bigger than January?

Well, our pipeline still remains very stable and strong.

So no material change either way?

Right.

Okay. Thank you.

And then also some questions on the margin and maybe I'll play devil's advocate for just a second. The deposit growth was extraordinary during the quarter even if you strip out the short-term deposit relationship that you brought in and it was across several categories, and it's commendable, but I'm wondering if the cost of that deposit base, or the cost of that growth might actually have a significant adverse impact on the margin in the second quarter?

Could you tell us maybe what the incremental cost of deposits that you brought on during the quarter was? As opposed to the cost of deposits on average for the quarter was, but cost of incremental deposits?

Well, I can give you the changes in spot rate, if that will help you.

That would be great.

Okay.

For our CDs, the spot rate went from 409 to 450 so we did see a pretty significant increase. And jumbos went from about 417 to 455.

Okay. And that's end of period to end of period?

Right. Yeah. 12/31/05 to 3/31/06.

Okay.

Our total spot rate went up about 30 basis points.

Okay.

And then, and so the end of -- as long as we're on that topic, do you have the end of period, or the spot rate for the total cost of deposits, again, comparing it to the 294 average?

Yeah, the total cost of deposits went from 286 at the end of December to 316 at the end of March '06.

Okay. So not a significant increase at the end relative to the average.

And then as far as the production of loans during the quarter, just trying -- what I'm trying to triangulate into is an incremental margin. Is it ultimately dilutive to your 5-plus percent net interest margin? What are the -- I think in the majority of the loans you're producing these days are probably fixed rate, is that correct?

50, 50% -- slightly less than 50%.

Roughly 50/50.

Right.

And the pricing on fixed rate loans these days?

It's averaging anywhere from -- the range is from 7% to 8.5%.

Okay. Would you say it's more weighted toward the 7% or the 8.5?

Weighted average about 7 --

Weighted average about 7.5%, actually.

7.5? Okay. And I think that's it for me.

Most of those, actually, most of those loans owner occupied or non-owner occupied?

Our owner occupied as is less than 50%, but it's pretty hard to state that at this point because the regulators have proposed guidelines on the definition of owner occupied loans.

Okay. So, about 50 -- a little bit less than 50% is owner occupied.

Yes.

I think that's on a conserved -- our own conservative calculation or definition of owner occupied.

Okay. Thank you very much for your time again.

Thank you. Your next question comes from the line of Brett Rabatin with FTN Midwest. Please proceed.

Good morning, Al and Min.

I was curious, you gave the CD rate at the end of the quarter of 450 and I noticed the average cost of CDs, which was 422 in the quarter, only increased 27 basis points in the first quarter, which was a 10 basis point lower increase than the previous quarter and if you're booking CDs at 4.5% presently, it sounds like the ramps, so to speak, in the CD cost, is not going to be that incremental, even though your CD rates that you're paying seem to be somewhat less than the market is --

How are you guys being able to pay a little bit below what I would consider the market, I guess, is what I've been seeing recently, in terms of CD rates and just curious on sort of the ramping of the CD costs going forward?

Well, I think that we have made asset liability management a very strong focus and we pay a lot of attention to our deposit pricing and we know that there's a lot of competition out there, but just in managing our cash flow, we know when we have to step on the accelerator and we know when to let off. And we have a program in place with our branch managers so that they understand fully, you know, where we are in terms of deposit pricing and in many cases, we deal with customers individually.

And believe me, we constantly get requests to pay up on deposit rates and we try, you know, if we don't need the money, then we try to stay within our deposit guidelines rather than paying an excessive rate. So, we manage deposit pricing very closely.

And then also, our deposit programs, we've really been trying to target core deposits. We've been successful in that, you know, we've been able to raise probably a lower rate of core deposits and we focus less on the jumbo deposits.

Okay.

Yes, you definitely had nice deposit growth this quarter and I was impressed that the CD cost didn't move up that much. Is there a, and Nara has, out of the group, probably the most established East Coast franchise.

Is the East Coast franchise -- is that an area where you're being more aggressive with growth and the market there is less competitive? Or would you ascribe your success relative to peers this quarter to that or to something else in general? In terms of deposits?

Well, I think it's a combination of things, but clearly, we have a bigger presence on the East Coast than our primary competitors, so we have that advantage and the business generation is pretty much equal in the sense of what they can produce versus what the West Coast can produce.

But the pricing is becoming competitive on the East Coast, as well, although I guess if you go back to the recent history, we've been able to enjoy a little better pricing advantage, both on the loan as well as on the deposit side on the East Coast.

Okay.

And then last question, on expenses, the last quarter, a lot of the Korean banks ran some promotions and heavier advertising and that seems have been lower this quarter as expected. Should we anticipate expenses ramping up any from those sort of activities or is there anything else that might drive expenses and I guess is part one of that question.

And the second part is, as you roll through your higher regulatory/compliance costs, you know, could we expect those to continue to abate going forward?

Well, as for the second half of your question, yeah, we clearly expect our compliance costs to be trending down, particularly in the second half. We are going to experience some additional costs in the second quarter.

But on the advertising side, it's pretty much normal advertising costs. It does pick up towards, in the last quarter of each year, as you have year-end promotional items and - but it's pretty much constant throughout the year.

Okay. Thank you.

Your next question comes from the line of Joe Gladue with Cohen Brothers. Please proceed.

All right, thanks.

First off, let me ask you to go back. Could you repeat the loan origination numbers for the quarter?

182 million.

Okay. And that was versus 38 million in the fourth quarter?

No, fourth quarter was, I think 144 million. It was up about 38 --

Oh, I'm sorry, that's what was confusing. Okay.

I guess in the press release you talked about, I guess in the -- in non-interest expense on the compensation, that a lot of the increase from last year was due to management and staffing additions, just curious, how much of that was in the first quarter in terms of new staffing?

First quarter of 2000 -- are you talking about last year or this year?

I'm talking about first quarter of 2006? What did you add in terms of staffing?

What did our FTEs go up by? I don't know, we'll have to get that number, the FTEs. Don't have that right off hand.

Okay. All right. I think that's it. Thanks.

Your next question comes from the line of JoyAnn Fell with Sandler O'Neill. Please proceed.

Good morning, I just had a real quick question.

You mentioned that there was 26% growth in Gardenia and 24% growth in Bayside. Was that annualized link quarter or year-over-year?

No. You know, I don't know the answer to that. I'll have to get back to you on that, too. But let me see-- We'll have to get back to you on that.

Okay. Thank you.

Your next question comes from the line of Don Worthington with Hoefer & Arnett. Please proceed.

Good morning.

In terms of the SBA loan sales and originations, you mentioned that that may ramp-up in terms of the gain on sale over the course of the year. Any order of magnitude there that you can provide?

Well, we expect to have about 25% growth compared to the last year in terms of loan origination. And historically, usually third -- second and third quarters are very strong quarters in terms of loan originations.

Okay. And then what's the outstanding balance of SBA in the portfolio at the end of March?

End of the March?

Yeah.

Just a dollar amount.

100 million --

100 million.

100 million? Okay.

And then in terms of the breakdown between fixed and adjustable rate lending, you said currently it's about 50/50. What was that, say, a year ago?

It was about approximately -- it's about 70/30.

70/30. Okay. Okay, great. That's all I've got. Thank you.

Your next comes from the line of Manuel Ramirez with KBW. Please proceed.

Hi, good morning. I have three questions for you. The first is -- I apologize, I missed this.

Did you give the dollar amount of your SBA originations in the quarter? Secondly, well actually, let me get [inaudible] that question first then I'll move to the next two.

The originations were about 35 million.

35. Great. Thank you.

The second issue is, Al, how should we think about the downside potential for the net interest margin assuming that your scenario for the Fed, which as you mentioned, is kind of a moving target, but if that scenario plays out and you kind of know how you're, roughly speaking, how your liabilities are going to reprice and you're adding more fixed rate loans to the portfolio, which I think makes a lot of sense at this point in the rate cycle, you know, how much pressure could we ultimately see for best case scenario, worst case scenario in your mind going forward?

Well, that's really hard to estimate. I think we're okay for the next quarter and maybe the quarter after that and then I think it really depends on whether the Fed pauses or there is a sharp decline in rates, which, I guess, I really don't expect.

So, it's more a matter of how the deposit repricing affects our margin, you know, just the lag effects from a deposit repricing. But I really can't tell you, you know, how much that is going to be in terms of basis points.

In thinking about the repricing of your time deposit at this point, I would imagine the majority, again, a scenario where the Feds stopped increasing rates, and maybe they flatten out, I would imagine a majority of the repricing pressures is not due to sort of incremental competition, but just sort of a maturation of the current book and repricing of the current market rates. Is that the right way to think about it?

Right.

Okay.

We're trying to keep our deposits very short. So hopefully when they do reprice later during the year or early 2007 that we can reprice down as rates move down, if they do.

Right.

And then the final question is, you've obviously done a terrific job of managing this transition period without a formal CEO. I'm kind of curious what the Company's perspective on how long the CEO search might take because the previous two CEO searches took quite a long time and I think most people would agree that the results were suboptimal and I have seen other companies in this kind of position where the CEO search seems to be kind of extended.

So, I was wondering how you perceive the board is thinking about this whole process?

This is a primary focus of the board, so, you know, this is within their purview. It's not really something that we can comment on.

Okay. Fair enough. Thank you.

Your next question comes from the line of Christopher Nolan with Oppenheimer and Company. Please proceed.

Could you give us a little bit more detail in terms of some of the initiatives you're taking trying to resolve the MOU? Do you have, some of the other banks, which might have PSA MOUs are doing sort of dry run exams and so forth and I'm just curious whether or not, given that your MOU's a little bit different, that there might be something that you're doing now which might increase the chance of favorable resolution.

Well, we've been doing a lot! We've devoted quite a bit of time to improving all of our processes, policies and procedures and certainly the board has really put a lot of time and effort into governance-type issues. So, everybody in the Company is very focused on it.

And, you know, we've evaluated our own performance, as well as we've had a target exam, a preliminary exam, if you will, that kind of gave us an indication of what too expect for the upcoming exam and what areas we could continue to improve upon. So, we're addressing those.

I think we're making good progress on all fronts and we hope that we'll be ready for the exam.

Great. Thank you.

[ OPERATOR INSTRUCTIONS ] Your next question comes from the line of Lana Chan with Harris Nesbitt. Please proceed.

Hi, can you hear me?

Yes.

Sorry about that.

Just one quick question, a follow-up on the professional fees declined fairly meaningfully from the fourth quarter. How much more of that is really related to the MOU and expected to decline in the second half of '06?

Well, right now the additional professional fees do relate primarily to the, well, two things, the MOU and also we have some fees in connection with board and CEO searches. So, as I said, the second quarter, we're probably going to see a little elevation in that, but it should trend down significantly in the second half of the year.

Okay.

And my overall sense, talking to some of the other companies out on the West Coast, is that deposit pricing seems to have gotten a little bit more aggressive toward the end of the first quarter, into April. And if I look at -- you guys are advertising 5.5% CD rates on your Web site, you know, I'm just curious as far as going into the second quarter, how much of your CDs are repricing and at what rate they're running off at?

I don't know that I can give you that. I don't have that right off hand, the deposit maturities by time buckets. But, you know, we constantly look at our deposit pricing so we constantly evaluate not only the market and competition, but our cash flow needs and we base it on that.

But is it fair to say that given the spot CD rates that you quoted to us at the end of March and the rates that you're offering today, it seems like the deposit pricing has picked up since the end of the first quarter?

Well, the deposit pricing has -- in the first quarter has picked up but I'm not sure that it will continue. It really kind of depends on what the Fed does. We know that we probably have another Fed rate hike in May that we don't know, really, what's going to happen beyond that.

So there may be a slight increase, although I think from our own perspective we're going to try to hold where we are. It seems like we're able to manage our cash flow so we don't necessarily need to go out and compete at the top of the market.

Okay, thanks, Al.

If I can, let me go back to Joe's question on FTEs. We went from 376 at the end of December to 387 at the end of March. So, we picked up 11 people. FTEs.

And then, as to the question on whether the Gardenia and Bayside branch growth was annualized or not, that is the annualized growth rate. But, effectively, they, you know, they weren't open before, so--

[ OPERATOR INSTRUCTIONS ] There are no further questions at this time.

Well, once again, thank you all for joining us today. And we look forward to speaking with you next quarter.

Thank you, everyone.

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