Hope Bancorp Inc (HOPE) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to to the Q 3 2006 Nara Bank earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to Mr. Tony Rossi of the Financial Relations Board.

Please proceed, sir.

Thank you, Operator.

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

Joining us from Management from 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, or 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 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 Ms. Min Kim.

Ms. Kim?

Thank you, Tony.

Good morning and thank you for joining us today.

I'm going to provide a brief overview of the third 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 continued to execute well in the third quarter and recorded $0.33 per diluted share, our highest level of earnings per share this year.

This strong performance was driven by continued solid loan growth, tight expense control, and effective balance sheet management.

Our loan growth accelerated in the third quarter as our portfolio increased at an annualized rate of 19%.

The strongest growth came in our real estate segment which increased at an annualized rate of 22% for the quarter.

We were able to achieve this growth while reducing our expenses to first quarter levels.

This helped drive our operating efficiency ratio down to 45.3% from 50.6% last quarter, perhaps most importantly, we were able to achieve meaningful expansion in our net interest margin, despite a challenging operating environment with rates on CD's continuing to remain at elevated levels, we began making greater use of alternative funding sources by increasing our borrowings from the FHLB and the State Treasurer.

These sources presented more attractive pricing during the quarter than the increasing premium being paid on retail deposits.

Our strategy to remain flexible and to utilize funding sources that provide the best value of the Company at a given point in time served as well in the third quarter and was instrumental in our strong performance.

As we indicated last quarter, our change in the [Inaudible - highly accented language] department occurred at the end of the second quarter as result, July's production was very low during the transition period but August and September rebounded nicely.

There is one month lag between loan production and low sales so our gain on sales was depressed this quarter; however, we are very pleased with the pipeline that is now building and we believe the stage is set for a good fourth quarter in this business.

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

Al?

Thank you, Min.

Let me start by providing more color on our net interest margin.

During the third quarter our net interest margin was 5.11% which is an increase of 14 basis points from the net interest margin of 4.97% in the second quarter of 2006.

The average yields on our loan portfolio increased 20 basis points during the quarter to 9.13% while our average cost of deposits increased 23 basis points during the quarter to 3.55%.

This equates to a primary spread our loan yields minus deposit cost of 5.58% which is 3 basis points lower than last quarter.

While our primary spread declined from quarter to quarter our net interest margin increased as we allowed higher costing CD's to roll off, replacing them with lower costing FHLB advances and State Treasurer deposits.

We also used our excess liquidity to fund loan growth and deposit outflow.

One thing that I wanted to mention is that historically, we have not included prepayment penalties in our margin calculation.

In 2005, prepayments were at a much lower level and really didn't impact the margin that significantly, but in 2006, as prepayments have increased, the effect on the margin has become more noticeable and to be consistent with how other companies have been reporting the margin, I wanted to give you some numbers on the net interest margin which includes the prepayment penalties, so as an example, in this quarter, we reported 5.11% when you include the prepayment penalties, it's actually 5.25% and second quarter reported was 4.97% and that increased to 5.05% and first quarter was 5.13% and that increased to 5.17%.

So as the level of prepayment has picked up through the year and so I think what we'll be doing probably is giving you the net interest margin calculations with and without the prepayment penalties.

Our non-interest income was 5.0 million in the third quarter, a decline of 14% from the prior year.

This was primarily due to the decrease in our gain on sales of SBA loans.

We had $922,000 in gains this quarter and 23.3 million in SBA loan originations which compares to 1.8 million in gains and 43.9 million in originations during the same period last year.

As Min indicated, July was the only month adversely impacted by the management change in the SBA department, and we had had 2.8 million in originations for that month.

August and September production was $9.6 million and $10.9 million respectively.

The impact of the low production in July can be seen in our volume of loan sales in the quarter.

During the second quarter, we sold 17.2 million of SBA loans while in the third quarter we sold 15.4 million of loans.

Again, this is largely attributable to the lag effect between production and sales.

We believe the ramp up in SBA loan production will continue into the fourth quarter and our gains on sale will be positively impacted.

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 for the remainder of -- or throughout 2006.

Our efficiency ratio was 45.3% in the third quarter of 2006 compared to 45.4% in the same period last year and 50.6% in the second quarter of 2006.

The improvement in the efficiency ratio from the second quarter is attributable to increasing our ability to increase our revenues by 3% while reducing our operating expenses by 8%.

On a year-to-date basis, we have maintained positive operating leverage with revenue growth at 16.8% and expense growth at 14%.

The most significant decreases in expenses from the second quarter came in compensation expense due to a lower bonus accrual and advertising and marketing expenses as we did not promote any significant deposit campaigns during the quarter.

Our effective tax rate was approximately 1% lower this quarter than third quarter of last year.

This was due to the resolution of certain tax contingencies that resulted in a reduction in deferred taxes of approximately $180,000.

Moving to the balance sheet, our growth loans, excluding loans held for sale, were $1.66 billion at September 30, 2006, an increase of 16% over the $1.43 billion at September 30, 2005.

This also represents a 19% annualized growth rate over the $1.58 billion at June 30, 2006.

Loan pay -offs continued at the elevated level that we saw in the second quarter; however, more of these pay-offs refinanced with Nara than in the prior quarter so the negative impact on loan growth was not as pronounced.

At September 30, 2006, our loan portfolio consisted of approximately 65% in variable rate loans compared with approximately 70% at June 30, 2006.

We are comfortable with the current mix in the portfolio and future changes will be largely determined by the pricing we are able to get for fixed rate loans.

We anticipate that the demand for fixed rate loans will decline as r more borrowers shift their thinking on the direction of interest rates from a rising environment to a falling environment.

Our total deposits were $1.65 billion at September 30, 2006, an increase of 7% over the $1.54 billion at September 30, 2005.

This also represents a decline from the $1.72 billion at June 30, 2006.

Last quarter, we indicated we would look to alternative funding sources depending on the level and reasonableness of deposit pricing.

Given the continued high level of deposit rates during the quarter, we made a conscious decision to scale back our pursuit of deposits.

We intend to continue remaining flexible in our approach to deposit gatherings and to look to alternative funding sources as needed to effectively manage our net interest margin.

It is also worth noting that our deposit growth is constrained by the MOU we're currently operating under when we are are able to have the MOU lifted and can open new branches, we would expect to see a significant improvement in our ability to gather lower cost core deposits.

Turning to asset quality, our non-performing assets were $4.6 million or 23 basis points of total assets as of September 30, 2006.

This compares to 4.1 million or 21 basis points of total assets at June 30, 2006, and 6.2 million or 35 basis points at December 31, 2005.

Our provision for loan losses was $1.2 million which is roughly in the normalized range given the size and growth rate of the portfolio.

At September 30, 2006, our allowance for loan losses was $1.14% of gross loans receivable compared to 1.15% at June 30, 2006, and 1.22% at December 31, 2005.

Throughout 2006, we have had substantial improvements in the levels of loans classified as special mention and sub standard which reduced the general valuation allowance requirement for those categories of loans compared to year-end 2005.

Net charge-offs were 429,000 in the third quarter representing 11 basis points of average loans on an annualized basis.

This compares to $372,000 of 10 basis points in the second quarter of 2006.

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

As has been our custom, we will continue to aggressively resolve past due accounts and provide for estimated losses on a conservative basis.

Now I'll turn the call back over to Min.

Thanks, Al.

At this point, we would like to update our full year expectations.

We now expect fully diluted earnings per share to range between $1.25 and $1.27 compared to our prior guidance of $1.20 and $1.25.

We expect to see a continuation of many of the trends we experienced in the third quarter.

Our loan pipeline remains strong and we expect to continue generating double digit growth in assets.

The key variables in the fourth quarter will be the direction of our net interest margin and the performance of our SBA lending business.

With respect to our net interest margin, we have a meaningful amount of CD's maturing during the Fourth Quarter and also we have our adjustable rate CD's that are due to reprice higher during the quarter.

These will place downward pressure on our margins.

To offset this effect, we have recently launched a deposit campaign focusing on core deposits.

We will also remain flexible in our use of alternative funding strategies.

At this point, it is difficult to make a projection regarding our net interest margin as it is possible that we could see either a flat or slightly compressed margin in the fourth quarter depending upon variables such as the degree of assessing our deposit campaign and our volume of loan production.

We expect to see steady progress in our SBA lending business.

Our origination volume has quickly recovered as Al indicated and we expect to have a higher gain on sales than we experienced in the third quarter.

We have a very seasoned manager overseeing this business who has improved our infrastructure order to streamline our lending process and provide better service and faster approval times.

We believe this will have a positive effect on our production.

We have also expanded our salesforce by adding some senior SB Marketing Officers in both Northern and Southern California to help increase our penetration of these markets.

In the coming months, we plan to add two to three more senior marketing officers in some of our offices outside of California.

We have had good success in these markets and we believe scaling our operation can produce positive results.

Overall, we feel very good about our SBA lending business and we believe it is well positioned to make a significant contribution to our growth in the future years.

In summary, as we enter the fourth quarter, we believe that we are executing well on our key growth and profitability strategies.

Despite a challenging operating environment, we believe we can continue to produce good results for our shareholders.

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

Operator, please open up the call.

Thank you. [OPERATOR INSTRUCTIONS] And your first question comes from the Brett Rabatin with FTN Midwest.

Hi.

Good morning, everyone.

Good morning, Brett.

Couple questions.

First off, can you give us any additional color on the deposit campaign and the whole industry is having a very difficult time growing core non-CD deposits right now and so I'm just curious if could you give us any color on why that -- this campaign would be effective in raising core deposits in the current environment?

And just any color on that campaign would be helpful.

Well, we introduced a few, actually one or two new products to be introduced in the market to attract more core deposits, and we have, we developed a certain very targeted strategy to target some segments of the customers to be able to attract more core deposits.

Cash management and some other related ancillary type products.

Is that a good--?

Well, we reserve the cash management products for the next year, but it's more of the new deposit products which will be very attractive to the customer, especially business segments of the customer, and also we will be emphasizing cross-selling to our existing customers.

Okay.

And then secondly on the margin going forward, you mentioned that it's obviously a little difficult to tell what the future holds.

How much of your loan portfolio right now is variable rate prime?

Variable prime, about--.

We're currently at 65% variable.

Okay.

Just assuming, let's assume that the Fed does begin tightening or I'm sorry, easing next year with the amount of variable rate loans and potentially CD costs lagging on the downside, would there be other reasons that the margin would be stable?

I know you've obviously pulled liquidity out.

How much more can you pull-down out of the securities portfolio and will construction continue to be a higher proportion of loans or can you give us any thoughts on things you can do to mitigate the pressure that would be otherwise sort of structural next year with your repricing?

Well, I think that there's always going to be a lag in how the assets and liabilities reprice, but I think one of the strategies that we started back in the fourth quarter 2005 was in fact to put more fixed rate loans on the books in anticipation of a falling rate environment, so I think the increase in fixed rate loans will help us as rates do fall, but there could be a lag as deposits reprice.

The other thing is we have actually a fixed rate slot which will help us in a falling rate environment, and we have consciously kept our deposit base very short in terms of maturity so that as rates do fall, our deposits will reprice quicker.

So we've done a lot of, taken a lot of things all together that we hope will be able to maintain or stabilize our margin as the rate environment changes.

Okay, and then on the expense base, is -- this $13 million run rate, is that a core base to build off of or is there anything that -- you obviously had the reduction in the third quarter.

Might there be some higher marketing and other expenses in Q4 that would boost that number back up?

Yes.

I think there will be some additional costs in the fourth quarter, so I think probably a good rate would probably be 14.5 to 15.

We know that we have some costs, additional costs coming in, including marketing for this campaign, and so I think probably 14.5 to 15 is probably a good run rate.

Okay, thank you very much.

And your next question comes from the line of James Abbot with Friedman Billings Ramsey.

Please proceed.

Good morning.

Good morning.

Quick question if I can on -- it's tied to the expense question, but the salary expense was down sequentially and I was wondering if you could talk about that.

It was quite a substantial amount, maybe 2.4 million annualized or something thereabouts.

It has to do with the accrual for bonuses and ESOP contribution.

In the Korean American community, there's a bonus, a half year bonus and a year-end bonus, and so the accrual of the first half year bonus plus the year-end bonus creates a higher accrual in the first half versus the second half, and then we reduced the amount of the ESOP contribution.

We had a pretty healthy ESOP contribution in 2005, so we reduced the level in 2006.

And that was in the third quarter you made that adjustment?

Yes.

Okay, and could you characterize approximately how much that was?

Was it a contra-expense meaning that it had a negative or just you went to zero or went to something less than what you had been doing?

It's less than what we had been doing.

So it wasn't a reversal of a previous account?

No.

Okay, thank you.

And then you talked about adding some Marketing Officers.

What's your -- what can you comment about the stability of your employee base right now?

I know that there had been some turnover, it was pretty well publicized on the SBA side but maybe a little bit on the other employees too, and I'm not just talking one quarter but over the last year or two, what can you tell me about the recent last two or three months?

Well, actually, our previous quarter, we have not had any significant management turnover other than clerk level and we don't anticipate any more management turnover at senior level at present time, so we consider that our management is now stable and very strong in terms of experience and their contribution.

Okay.

Thanks and we haven't heard a lot about the small start-up banks over the last conference call, or last quarter's conference call or two from any of the Korean-American banks.

Have they sort of subsided as far as the pressure that you get there or is that still pretty stiff competition from both the deposit pricing and from a staffing perspective?

Well, I don't know if we can attribute it to the smaller banks or the other banks, but I think we have seen a slight moderation in the deposit pricing.

It's still very competitive and higher than mainstream, but there has been some moderation.

If I look at the increase in the rate of -- or if I look at the rate of the increase in deposit cost between the second quarter and third quarter, there clearly was a slower rate of increase.

Okay.

Last question.

With the substantial amount of your loan portfolio in variable rate loans and the Fed not moving up, would you expect the loan yield to move up sequentially in the fourth quarter or would you expect it to remain fairly stable?

I think it will be stable.

There might be a slight uptick only because we're getting better pricing on our fixed rate loans.

And could you characterize what level those fixed rate loans are at?

Around the 8% area.

Okay.

Thank you very much.

Appreciate the time.

And your next question comes from the line of Don Worthington with Howe Barnes Hoefer & Arnett.

Please proceed.

Good morning.

A couple things.

In the press release you mentioned options expense.

Just curious as to what the level is there in terms of either dollars or EPS impact of the options expense this year.

You mean the total for the year?

How about the quarter and then year-to-date if you have it?

Yes.

For the quarter it was 333,000 and -- well, I'll give you the number.

It's 288 for first quarter, 360 second quarter, and we're projecting about another 360 for fourth quarter.

Okay, great.

And then you mentioned two large CRE loans, went on nonperforming status.

Do you have any more color on what those are?

No.

Those are not actually CRE loans.

Those are just--.

Oh, C&I, from commercial lines?

Those are commercial loans.

Okay.

Yes.

It's just the two plus $0.5 million loan. [Inaudible] One of them, actually the business is going through our sale, so for the timing of it because of the statement status we've had it federalized -- and the other loan that there is a litigation going on.

We may have to end up taking loss on that second.

So on the first one you'd expect to be paid off when the business is sold?

Right.

All right.

Thank you.

And your next question comes from the line of Mike McMahon with Sandler O'Neill Partners.

Please proceed.

Hi, Al, you said 65% were variable rate.

Does that mean prime or variations of prime and adjustable that might do quarterly or semiannual or something like that ?

We have -- it's all prime but we have daily prime and quarterly prime.

Right.

And that implies the other 35% are fixed I guess?

Yes.

And how far out on average are you going with your fixed rate loans?

Are these like two and three year or are they five year or less than five year?

About 3 to 5 year.

Okay.

And is there any update on the search for the CEO or will perhaps the Board realize they have a very good one right there in the room?

Well, it has been their priority for the last several months and we think that it is one day closer than yesterday , and they are still in the process of making decisions.

Okay.

I realize that's an awkward question, thank you.

[OPERATOR INSTRUCTIONS].

And your next question comes from the line of Christopher Nolan.

Please proceed.

Quick question.

What's the duration on the securities portfolio, please?

I think it's around four years.

And I noticed that in the quarter, a lot of the liquidity in the balance sheet seems to be used up.

The cash and equivalents is down by about 100 million on a linked quarter basis and so for in the fourth quarter to grow, for earnings, you'll have to rely either on deposit or corporate borrowings; is that correct?

Deposit alternative sources, that could be broker deposits, State Treasurer deposits, HFOB advances with the level of loan payoffs remained and that's certainly another source, plus the normal amortization on the loans, so -- but I think we feel pretty good about our deposit campaign.

Okay, so -- but I guess what I'm trying to get at is squeezing access -- any remaining liquidity from the balance sheet is not really going to be so much of an option in the fourth quarter as it is in the third; correct?

Yes.

We're not looking at that as our primary option.

Great.

Okay.

There's my question, thank you.

And I show no further questions in the queue.

I would now like to turn the call back over to management for closing remarks.

Once again, thank you for joining us today and we look forward to speaking with you in the next quarter.

This concludes the presentation.

You may all now disconnect.

Good day.