Hope Bancorp Inc (HOPE) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the second quarter 2006 Nara Bancorp earnings conference call.

[OPERATOR INSTRUCTIONS]

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

Thank you, operator. Good morning, everyone. Thank you for joining us for the Nara Bancorp second quarter 2006 earnings call. Joining us this morning from management are Ms. Min Kim, Acting President and Chief Operating Officer, and Mr. Alvin Kang, Chief Financial Officer.

Before we begin, I would 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 would like to turn the call over to Ms. Min Kim.

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

I'm going to provide a brief overview of the second 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'll conclude with a discussion of our outlook for the remainder of 2006.

We are pleased with our steady performance in a challenging operating environment during the second quarter. We recorded net income of $7.9 million for the quarter, an increase of 41% over the prior year. We also earned $0.30 per share, an increase of 30% over the prior year. Once again we were able to generate solid double digit annualized growth in both loans and deposits. Our loan production helped to offset higher than expected loan payoffs. During the first quarter of 2006, we experienced 6 to $7 million in payoffs which was a significant decline from what we saw in the prior quarter. However, this trend reversed and payoffs increased to $110 million in the second quarter. This was primarily due to a number of larger payoffs following the sale of the properties. Prior to the first quarter of this year, we had been experiencing a payoff rate of approximately $90 million per quarter and we believe that disparity we have seen in the first half of the year is attributable to the timing of the property sales more than anything else. We would expect payoffs to be more in line with the $90 million level for the remaining quarter of 2006.

Another contributor to the payoffs we saw this quarter was more refinancing activity driven by customers, switching from variable rate to fixed rate loans, given the current interest rate environment. The higher loan payoffs was one of the reasons that we saw more compression in our net interest margin than we expected. Since we are losing variable rate loans that benefit from each increase in the prime rate and taking on more fixed rate loans in order to accommodate the preference of our customers, our net interest margin has come under more pressure than we anticipated. We have been able to offset this to some degree with our success in attracting core deposits. We ran a number of promotions during the second quarter including one tied to the World Cup. These promotions helped us to generate annualized increase of 19% in money market accounts, 32% in jumbo interest in -- in non-interest bearing accounts. And 49% in non-jumbo CDs.

Turning to our non-interest income, we had a temporary shortfall in our gain on sales of SBA loans as we transitioned to new management of this business line during the quarter. This business is now being run by a highly productive SBA manager who has a proven trend record of the success in the Korean-American market. Our pipeline is steadily building. We're confident that our SBA loan production will trend higher in future quarters.

Turning to other significant items, the Company search for a new CEO is making a good progress and the board is moving to a more advanced stage in the process. We also just concluded our annual regulatory exam. We believe we have a good relationship with both the state and federal regulators and that we have made substantial progress in addressing the requirements of the MOU. Our meetings with the regulators have been very positive and encouraging. In our view, it is reasonable to believe that the regulators would want to have the new CEO on board and that a period of time would have to pass to allow for the integration and leadership to take hold.

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

Thank you, Min.

I'll start by discussing our net interest margin. In the second quarter, our net interest margin was 4.97% which is a decline of 16 basis points from the net interest margin of 5.13% in the first quarter of 2006. As Min mentioned, we have seen a significant amount of refinancing from variable to fixed rates which resulted in our yield on loans not increasing at the same rate as our cost of deposits. The average yield on our loan portfolio increased 29 basis points during the quarter to 8.93% while our average cost of deposits increased 38 basis points during the quarter to 3.32%. This equates to a primary spread loan yield minus deposit cost of 5.61%, 9 basis points lower than the previous quarter.

Given the current trends, we would expect to see additional compression in our net interest margin for the next several quarters. Our non-interest income was $4.8 million in the second quarter, a decline of 4% from the prior year. This is primarily due to the impact of non-recurring gains on sales of securities in the prior year. On a sequential quarter basis, our non-interest income decreased by 9%. This is attributable to the shortfall in SBA loan production and sales that Min discussed previously.

Our service charges on deposit accounts total $1.5 million. This is roughly equivalent with the level we saw last quarter and is within the 1.5 to $1.6 million range that we expect to see throughout 2006. Our efficiency ratio was 50.6% in the second quarter of 2006 compared to 51.8% in the same period last year and 47.8% in the first quarter of 2006. The increase in the efficiency ratio from the first quarter is attributable to a slight increase in certain expense items and a lower revenue base due to the shortfall in SBA loan sales and also a lower level of growth in our net interest income. The most significant increases in expenses from the first quarter came in compensation due to the addition of additional staff and also slightly higher stock option expenses. And in advertising and marketing that supported our deposit promotions and finally, professional fees related to the searches for the CEO position and other senior officers.

Moving to the balance sheet, our gross loans excluding loans held for sale were $1.58 billion at June 30, 2006, an increase of 14% over the $1.39 billion at June 30, 2005. This also represents a 16% annualized growth over the $1.52 billion at March 31, 2006. The most significant growth came in our real estate portfolio segment which increased at an annualized rate of 24% during the quarter. At June 30, 2006, our loan portfolio consisted of approximately 70% variable rate loans, a decline from approximately 80% at March 31, 2006. We are comfortable with the current mix in the portfolio and future changes will be largely determined by the pricing we're able to get on our fixed rate loans. Our total deposits were $1.72 billion at June 30, 2006. An increase of 15% over the $1.50 billion at June 30, 2005. This also represents a 17% annualized growth from the $1.65 billion at March 31, 2006. We are highly focused on gathering non-interest bearing and money market accounts as well as non-jumbo CDs and this is where the majority of our deposit growth occurred in the second quarter. Core deposit growth accounted for approximately $61 million of the $69 million in total deposit growth.

Turning to asset quality, we saw notable improvement in all of our credit metrics during the quarter. Our non-performing assets declined to $4.1 million or 21 basis points of total assets at June 30, 2006. This compares to $5.4 million or 28 basis points of total assets at March 31, 2006. The decrease is primarily attributable to loan charge offs and one large credit being placed back on accrual status during the second quarter. The decline in non-performing assets as well as an $8.9 million improvement in classified and special mention loans resulted in a lower than expected provision for loan losses of $142,000. At June 30, 2006, our allowance for loan losses was 1.15% of gross loans receivable compared to 1.21% at March 31, 2006. Net charge offs were $372,000 in the second quarter representing 10 basis points of average loans on an annualized basis. This is relatively consistent with the 8 basis points we saw in the first quarter of 2006. Overall, we are pleased with quality of our loan portfolio and don't see any trends to indicate that non-performing assets will deviate significantly from the current level.

Now, I'll turn the call back over to Min. 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 half of the year, first half of 2006. 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 and our success in this regard should allow us to effectively manage our deposit costs. We also continue to expect that our professional fees related to the MOU compliance efforts will decline during the second half of the year which should help drive earning growth. Perhaps most importantly, our SBA department is now in excellent hands and we expect that the shortfall in production during this transition to new department leadership should be short-lived. We fully expect our gains on sales of SBA loans to be a more and significant contributor to our earnings team in the future quarters. Now, we'll be happy to take any questions you might have. Operator, please open up the call.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of James Abbott with Friedman Billings. Please proceed.

Hi, Min.

Hi, James.

Hi, Al, too. Could you talk about the loan pipeline? You mentioned that it was good -- at a good level. Could you give us maybe a number, compare it to what it was at the beginning of April, I guess?

You mean the loan production in second quarter?

Sorry, the pipeline number.

Oh, the pipeline is always stable. And we always have been able to maintain the same level of the loan pipeline but I will be reluctant to give actual dollar amounts.

Okay. If it is stable and prepayments slow down, would loan growth in the third quarter then be stronger?

Yeah, I think it is up to the level of the payoff. You know, we had very extraordinary loan production in the second quarter and -- but also we had a very unexpected higher charge -- the higher payoff in the second quarter. So, I think it is all up to the level of the payoff during the second remaining quarters.

Okay. And what gives you -- you made a comment that you think the payoffs would be at a comparable level to historical levels like the $90 million. What is your basis for that? Are you able to see some of the properties that are for sale and not for sale and so forth or is it reversion to the mean?

Well, during second quarter, we had an unusual high dollar amount sale transaction. During the second quarter. And it was -- we feel that it was extraordinary payoff. And most of the payoff was due to the change of the fixed rate from variable rate to fixed rate. So that we think that we will be able to maintain the same level of the previous prior quarters.

James, also, the payoffs in the first quarter was actually down and so it might have something to do with the timing of property sales also. Perhaps some of the sales that would have occurred in the first quarter actually occurred in the second quarter. But if you look at the previous quarters, it seemed to go back to about the $90 million level.

Okay. And what is your -- is there any sense that the loan growth would slow down as we get -- is there any seasonality in the loan growth during -- as we get into the end of the year? Maybe into December, January or into the early part of 2007? Or is there anything that would cause the loan growth to slow into those early parts of 2007?

Well, in the past we have not experienced seasonality in terms of production. Pretty much the dollar level of the production has been very consistent throughout each quarter. So, I think it is all up to the level of the payoff.

Okay. Thank you very much.

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

Good morning. I guess I would like to ask a little bit about loan originations. First, could you give us the amount of originations in the second quarter versus first quarter?

First quarter, we had about $181 million loan production and in second quarter, we had about $208 million loan production.

All right. And secondly, in regard to the production and I guess also regarding the payoffs, could you tell us your approach to -- I guess originating the fixed rate loans versus variable rate loans and I guess how you compare with the competition and how aggressive you are in offering fixed rate loans right now?

Well, I think the market has been looking for fixed rate loans so we've been accommodating that. I think everyone has been pressured to making more fixed rates than variable rate loans. I understand from previous calls that perhaps some of the other shops are beginning to taper off on fixed rate lending. I think for us, the fixed rate lending could continue; however, I think it is a matter of pricing. And as I've said in our comments that we're comfortable with our level of fixed versus variable. It really was consistent with what we're trying to accomplish with the mix. But from here on out, we'll probably be a little more sensitive to the pricing of fixed rate loans.

About what percentage of what you originated in the second quarter was fixed?

About 57% fixed.

57%?

Two-thirds.

Okay. I guess I also wanted to touch on the deposit side. You did generate a good amount of core deposit growth in the quarter. And just wanted to -- that's been very difficult for anyone in the industry to achieve recently. Just wondered where your pricing in terms of the competition and how you achieve that growth and can we expect that to continue?

Well, we have been tightly managing our deposit pricing. I think our major competitors have been trying to do the same thing. I think our competition comes more from the smaller shops. But we've been really watching that quite closely. I don't think we're going to be putting ourselves at the top of the market.

I guess how do you explain this strong core deposit growth in the second quarter?

Well, the emphasis on our deposit growth was on non interest bearing deposits. And also the other components of core deposits which are money market accounts and non jumbo CDs. If you look at our balance sheet changes, the deposit cost position changes, that is really where our growth came. Non interest bearing deposits went up about $30 million. Non jumbo CDs went up about $23 million and money market accounts went up about $10 million. Our jumbo deposits increased only slightly by $8 million. So, we were trying to focus more on core deposits and to offset or stay away from the high price jumbo deposits.

I recognize that. I guess I'm just trying to figure out how you did that because other people are focusing on core deposit growth, too. But everyone else -- almost everyone else is seeing still a significant shift from those lower cost deposits to CDs whereas you're still achieving good growth in the non interest bearing and money markets and such.

During the first half of the year, we had a number of a serious of ongoing marketing programs to promote non interest bearing accounts and so we were able to capture additional core deposit throughout the campaign.

Do you expect that -- those same trends to continue in the next quarter?

It will be ongoing marketing program. So that hopefully we can be able to maintain or increase portion of the non interest bearing accounts throughout the year.

Alright. Thank you. I'll let somebody else jump in.

Your next question comes from the line of Brett Rabatin with FTN Midwest.

Good morning.

Good morning.

Couple of questions for you. First off, I was curious if you could give any thoughts on how much of a decrease in professional fees you might see in the second half of the year as you were alluding to in your comments earlier? Regarding reduced regulatory cost?

Right. I think we'll see a little bit of a dip in the third quarter from second quarter and then probably even more in the fourth quarter. In comparing to the previous year, most of our professional fees came in in the fourth quarter. Comparing fourth quarters, we should have a significant improvement.

Comparing second quarter to third quarter, sequentially, the change won't be material?

Well, it could be $100,000 or $200,000.

Okay. That's good color. Then secondly, I was hoping for some guidance with the change in the SBA leadership. The one is how much of an improvement can we expect or what is your thoughts on the ramp rate on SBA loan production from here and loan sales. Can they move back towards first quarter numbers in Q3 or does that take a few quarters to achieve or can you provide any additional clarity on the SBA operations?

We had -- an unanticipated turnover on our SBA management to the second quarter -- towards to the end of the second quarter and we were able to replace the team with a highly productive manager. And we are expecting to recover the dollar in terms of loan production to the first quarter of the year 2006 level. And we'll continue to remain focused on the SBA loan production through out the next quarter or so.

It sounds like you think that could happen pretty quickly.

We are targeting to have the same level of the production of first Q.

In Q3?

Yes.

Okay. That's good color as well. Tax rate was higher this quarter. I was curious if there was anything material that affected that in the second quarter and if you provide any color on where that might go going forward and why?

No, there wasn't anything unusual. The run rate would be about the same.

So, 42% is good run rate going forward?

Yes.

Okay. And then lastly, in your earlier comments, you mentioned some additional compression on the margin. What was curious from an assumption perspective if the magnitude of that compression would be diminished from the pressure that you experienced during Q2 or if you saw the combination of continued pressure on the funding increases and the fixed rate originations would continue to have a similar impact or can you provide us with any additional clarity on that as well?

I think that the compression won't be as severe but a lot of it depends on, you know, the components that drive that interest margin. So, assuming that we can have good results on those components, then I think the margin compression won't be as great as in the second quarter.

And that doesn't assume -- are you assuming anything with the Fed not increasing or anything in particular on interest rate assumptions on that, Al?

Well, we're kind of assuming that -- we're not counting on a rate rise.

Okay. So, you're assuming the Fed is actually done and we sort of sit here from a yield curve and interest rate environment?

Right. There will be some deposit repricings. There may still be some variable to fixed conversions. We're hoping that our loan volumes will -- you know, stay the same or increase. And that payoffs will be more normalized. So, if those things occur, then we'll be much better off than in the second quarter.

Okay. Thank you very much.

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

Hi. Good morning, everyone.

Good morning.

I had two questions. One is kind of following up on the margin-related question. Al, do you have a good sense of what the impact of the shift from fixed to variable rate loans between the first and second quarter have on your earning asset yields? Your average yield on loans did not go up nearly as significantly as it had in previous quarters. Obviously the shift from floating to fixed explains that. I was curious if you could quantify that. Based on the percentages you gave us before about the percentage of the portfolio from variable versus fixed, it sounds to me like the floating rate component declined pretty significantly between the first and the second quarter and I wanted to square that up with your expectations for pretty healthy loan growth in the second half the year if your appetite for fixed rate loans is pretty much filled up at this point and as a percentage of the portfolio. Thanks.

Those are long questions, Manny.

I tried.

The impact of the variable to fixed, let's see our yield on the portfolio went from 864 to 893. And of course we had the rate rise in there but it probably had a 10 or 11 basis point effect and your second question was --

If I use -- I think the numbers you gave were 70% of the portfolio is variable rate at June 30th versus 80% at March 31. Is that accurate?

Right.

Just doing the math on that using your end of period balances would suggest that your variable rate loan portfolio would decline pretty materially between the first quarter and the second quarter. I just wanted to make sure my math was right.

Right.

That's right? Okay. But you're still optimistic that assuming a 70/30 mix, that you would be able to continue to put up double digit loan growth for the second half of the year?

Yes. We think we'll still have loan growth, the mix of the production and we'll just have to see. But we -- as they said, it will depend on our pricing as to whether we take on too much more in the way of fixed rate loans.

So, you could have more -- you could have some pricing pressure on your variable rate loans it sounds like to me if you're still trying to achieve double digit loan growth in the second half of the year.

Well, I don't think we have anymore pricing pressure than what we currently have.

Okay. Okay. Yeah, I'm just trying to get a sense of why you guys think that you'll be able to flip the mix of new production from two-third fixed to one-third floating this quarter to something exactly the opposite next --

We didn't say we were going to flip it exactly the opposite. I think we're going to offer both variable and fixed as we've always done. It really is a function of what the market is going to demand. But if others are pulling out of the fixed rate market, you know, I think that provides us an opportunity.

Okay. And can you remind us -- roughly speaking, the pricing differential based on the prime rate today between the fixed rate loans and the floating rate?

Variable rates, it is about prime over 50 basis point. And the fixed rate is anywhere from low 7% to 8% range.

Okay. Do you have prepayment penalties?

Yes. We do.

Okay. Great. Thank you very much for your time.

Your next question comes from the line of Peter Mork with Mork capital.

Hey, guys. I jumped on the call late so you might have talked about this but just wanted to see if you had any thoughts on what a slowdown in the real estate market would do to business?

Well, we still are experiencing a lot of real estate purchase in the Korean community. And we have not -- the value still holds at the same level of the last year. So, I think that due to the increasing environment, interest rate environment, there may be some slowdowns but in the past, up to second quarter, we haven't experienced any slowdown in the real estate loan originations.

And going forward, do you -- you don't foresee anything big at this point? Are you forecasting anything?

Probably there may be some slowdown in real estate transaction but it will not be significant -- by the significant number.

Alright. Thanks.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of [Soren Rubel] with BlackRock.

Hi, how are you?

Fine, thank you.

I have a couple of questions. One of my questions related to I guess sensitivity on the yield of your loans and the price of deposits versus the Fed rate. Say if the Fed would continue to increase say by once or twice 25 base points increase. How much would be transferred down to your loans and your costs? And then the second question would be in other loan growth this quarter, how much of that loan growth was driven by refinanced from variable to fixed from your own accounts and how much was because of new loans generated?

On the yield side, if rates rise, then we're still slightly asset sensitive so we would see an increase on our interest earning assets and there would be a little bit of a lag on the deposit side so we should see the net interest margin expansion if that were to be the case. And on the loan growth question --

Only a 10% of our loan origination in the second quarter was from the refinancing of our own loan changing from variable rate to fixed rate and then 90% of our loan production was new originations.

Okay. Okay. Thank you.

Your next question comes from the line of Christopher Nolan with Oppenheimer.

Hi, guys.

Hi, Chris.

Most of the questions have been answered. This is more of a macro question. For some of these smaller Korean bank competitors who have been driving some of the irrationality in pricing, are they the ones who are basically being forced to pull back in terms of offering extraordinarily high CD rates or what's the dynamic here with deposit pricing? Might be coming back a little bit from previous levels?

I don't know what is driving the smaller shops. Most of them -- in fact, they're all private so we don't really have good information. But I think probably with the small shop there's only so much you can do. Maybe they topped out that I think -- what I heard from the other calls, too. There seems to be a moderation in the deposit pricing.

Great. Are you still seeing a heavy flow of deposits coming in from Korea?

No. We have not recognized any big in flow from Korea. It is mostly local deposits.

I don't know if you addressed this earlier but the CEO search, is it still open to internal candidates or is it primarily focusing on external candidates?

I think that's more of a question for the board. We cannot comment on that.

Oh, come on. You can help. All right. Thank you very much.

Your next question question is a follow-up from James Abbott.

Yes thanks again. For one real quick follow-up question. Looks like the end of period demand deposit account balance was significantly higher than the average for the quarter. The average I guess was $372 million and at the end of the period of March, it was $376 million and it must have dipped down obviously or it sat at that lower level for much of the quarter then at some point rose back up quite substantially to $405 million at the end of the period. Can you give us a sense as to whether that might be related to one large depositor that might be at risk of walking away or not? Should we anticipate -- would it be fair to model going forward that that $405 million is sticky or is that not a valid assumption?

I don't think we had any large EDA customer but there is variability in our DDAs. So, we see it fluctuate from day to day and from period to period.

Okay. On a related note, I noticed that the Fed funds sold rose as well. About $14 million sequentially and it actually sits at a fairly steep level. Is it possible to deploy that cash somehow? I suspect that's artificially deflating your net interest margin and that if you were able to transition that out of cash and deploy the non interest bearing deposits at the same time that you would actually have margin expansion. Is that something you would work on in the third quarter?

We actually have been doing that so our Fed fund position has trended down and we are making additional securities investments as well as you know, watching the -- or providing for loan fundings as well as watching the deposit maturities.

Okay. Al, could you give us the margin in the month of June or maybe a sense as to whether it was at the end of the quarter so we can get a reasonable starting point since it fell a little bit more than I think most of us had modeled?

The interest margin in June -- for the month of June?

Correct. If you have that.

It was 495. So, actually, it ticked up a few basis points from May.

Okay. And then your outlook for the third quarter is down a little bit obviously. Is there a large CD -- lower cost CD maturity that's coming due that you expect to have to be priced upward or something? Is that why -- ? Or just competitive pressures in general?

No. I think it's the deposit maturities, those will all be priced upwards. So, it is a matter of the other components whether we'll be able to offset that deposit repricing.

And how much is the deposit repricing? And approximately the rate on that?

You know, I don't have those numbers with me.

Okay. Sorry. It is a fairly technical question. Apologize. If you could maybe follow up, that would be helpful.

Okay.

Thank you very much.

There are no further questions in the queue at this time. I would now like to turn the call back over to management for closing remarks.

Once again, thank you for all joining us today. We look forward to speaking with you next quarter. Thank you.

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