Hope Bancorp Inc (HOPE) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nara Bancorp. fourth quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded for replay purposes.

At this time, I would now like to turn the call over to Mr. Tony Rossi of the Financial Relations Board.

Please proceed.

Thank you, Operator.

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

Joining us this morning from management are Ms. Min Kim, Chief Executive 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 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 fourth quarter of 2006 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 will conclude with a discussion of our outlook for 2007.

We were very pleased with our performance in the fourth quarter.

We earned $0.35 per share, which was an 18% increase over the prior year.

This strong performance was driven by continued solid loan growth and higher non-interest income.

In terms of loan production, we had our strongest quarter of the year.

We began to approach internal limits for certain industry concentration in the commercial real estate portfolio, so we sold approximately 32 million in CRE loans during the quarter.

Adding back these loans to our year-end balance would result in annualized loan growth of approximately 21% for the quarter.

The strong loan growth is partially due to our increased focus on growing our C&I portfolio.

We have mentioned in the past that we believe that our customer base will look to more commercial opportunities rather than primary focusing on commercial real estate.

As has been the case, over the past few years.

We are starting to see this trend materialize and we are aggressively pursuing these lending opportunities.

In the fourth quarter, these result in 36% annualized growth in our C&I portfolio.

We are also very pleased with the ramp up in our SBA loan production.

We have seen steady improvement in this business since installing new management last June.

In the fourth quarter, our gain on sale of SBA loans increased 18% over the prior quarter, based on increased origination and sales and the pipeline continues to build.

Our strong loan production helped to offset compression in our net interest margin caused by CD repricing that we mentioned on our last call.

During the fourth quarter, we have had $244 million of time deposits tied to the prime rate that repriced upward by approximately 34 basis points.

We also had $240 million of other time deposits that either matured or were renewed at significantly higher rates.

As a result of the significant increase in our deposit costs, our net interest margin declined by 15 basis points from the prior quarter.

Nonetheless, we are pleased that we were able to achieve our financial targets despite the challenging environment for gathering low cost deposits.

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

Al?

Thank you, Min.

I'd like to first discuss our net interest margin.

During the fourth quarter, our net interest margin was 5.10% which reflects the positive impact of recovering $238,000 in delinquent interest from a non-accrual loan that was placed back on accrual status.

Excluding this recovery, our net interest margin for the quarter was 5.05%, a decline of 20 basis points from the prior quarter.

If you extract pre-payment fee income, our net interest margin declined from 5.11% to 4.99% or 12 basis points, perhaps a better measure of the margin contraction.

The average yield on our loan portfolio declined 7 basis points during the quarter to 9.21%.

The decline is primarily due to the increased percentage of fixed rate loans in our portfolio, although the percentage of fixed rate loan originations for the fourth quarter decreased to 52% of total origination from 67% for the third quarter.

We have been emphasizing adjustable rate loans during this flat yield curve environment, but we recognize the need to accommodate relatively strong customer preference for fixed rate loans.

Looking at our spot rate report, we've been able to book new loans whether fixed or adjustable, at higher rates than the existing portfolio.

Our average cost of deposits increased 13 basis points during the quarter to 3.68%.

If the yield curve steepens, most likely with short rates falling, we should see more demand for adjustable rate loans.

As Min indicated we had a significant amount of time deposits repricing to current interest rates during the period.

We managed to retain a substantial portion of those maturing CDs but we face significant pricing competition.

The rate of increase in the cost of time deposits has lessened over the last several quarters as the lag effect of deposit repricing has largely run its course.

We are pleased with our ability to increase core deposits from 53% of total deposits at December 31, 2005, to 55% at December 31, 2006.

Also, as part of our plan to manage net interest income, we utilized wholesale funding sources which included FHOB advances, broker deposits, and State Treasurer deposits.

Compared to the average cost of time deposits of 5.22% during the fourth quarter, the wholesale funding sources provided much cheaper funds.

Our non-interest income was 5.4 million in the fourth quarter, essentially flat with the prior year.

As Min mentioned, we sold approximately $32 million in CRE loans during the quarter, and recognized a gain of 1.3 million.

Depending on the types of CRE loans that we originate in future quarters, we may have additional sales in order to remain within our internal concentration limits.

The gain on sale of CRE loans helped to offset a 53% year-over-year decline in gains on sale of SBA loans; however on a sequential quarter basis, our SBA lending business continues to gain momentum following the management change.

We had 39.2 million in SBA loan originations, an increase of 68% over the $23.3 million in SBA loan originations during the third quarter.

Fourth quarter sales increased 26% to $19.4 million from $15.4 million in the third quarter.

Our service charges on deposit accounts totaled $1.6 billion, essentially flat with the prior year and within our range of expectations.

Our other income was down 26% from the third quarter of 2006 due primarily to write-offs taken on property and equipment related to the relocation of a branch and our corporate headquarters.

Our non-interest expense increased 5% compared to third quarter 2006.

The increase was primarily to increase salary and benefits expense and higher marketing expense to support our deposit campaign and our usual holiday promotional activity.

This was partially offset by a decline in data processing fees as we began performing certain services in house and also to a decline in professional fees.

Our efficiency ratio was 46.0% in the fourth quarter of 2006 compared to 48.6% in the same period last year, and 45.3% in the third quarter of 2006.

The improvement in the efficiency ratio over fourth quarter of 2005 is due primarily to the improved operating leverage as revenue growth increases at a 7.2% pace and expenses increase at a 1.4% pace.

The slippage in the efficiency ratio from third quarter 2006 was due primarily to the effect of margin compression on revenue growth.

Our effective tax rate was 36.2% in the fourth quarter, lower than our typical range.

This is due to the resolution of certain tax contingencies that resulted in a reduction in deferred taxes and a credit to income tax expense of $772,000.

Moving to the balance sheet, our growth loans, excluding loans held for sale, were 1.71 billion at December 31, 2006, an increase of 19% from the $1.45 billion at December 31, 2005.

Adding back the 32 million in CRE loans that we sold in the quarter, this also represents a 21% annualized growth rate over the $1.66 billion at September 30, 2006.

In addition to strong loan production, we also experienced a $25 million decline in loan pay-offs for the third -- from the third quarter.

At December 31, 2006, our loan portfolio consisted of approximately 60% in adjustable rate loans, compared with approximately 65% at September 30, 2006, and 87% at December 31, 2005.

We expect that this percentage may trend down slightly but should end up at the same 60% level by year-end 2007, as adjustable rate loans gain more favor.

Our securities portfolio declined by 19% from the third quarter 2006 level as we sold our municipal bond portfolio and other securities as part of our balance sheet management strategy.

The municipal bond portfolio had long maturities and we wanted to shorten our asset maturities given that we are putting on more fixed rate loans.

We used the proceeds from the bond sale to pre-pay certain FHOB advances that had a high interest rate.

Proceeds from the sale of other securities which were primarily agencies and MDS's were reinvested into higher yielding loans or to pay down overnight advances.

Our total deposits were $1.71 billion at December 31, 2006, an increase of 12% over the $1.53 billion at December 31, 2005.

This also represents an increase from the $1.65 billion at September 30, 2006.

Our largest increases in the quarter came in jumbo CD's and non-interest bearing deposits, although approximately 31 million of the non-interest bearing deposits were temporary and have already been withdrawn in January 2007.

Turning to asset quality, our non-performing assets were $3.6 million or 17 basis points of total assets at December 31, 2006.

This compares to $4.6 million or 23 basis points of total assets at September 30, 2006, and $6.2 million or 35 basis points at December 31, 2005.

At December 31, 2006, our allowance for loan losses was 1.11% of gross loans receivable compared to 1.14% at September 30, 2006, and 1.22% at December 31, 2005.

Our provision for loan losses during the fourth quarter was $1.4 million compared to $857,000 for fourth quarter 2005.

This was due primarily to increased loan growth comparing fourth quarter 2006 and 2005.

Net charge-offs were $1.2 million in the fourth quarter representing 27 basis points of average loans on an annualized basis.

This compares with 429,000 or 11 basis points in the third quarter of 2006. $820,000 of the charge-offs in the fourth quarter of 2006 came from four commercial loans that were primarily retail businesses.

We continued to be aggressive in charging off loans but we are equally as aggressive on recoveries.

Overall, our criticized assets have declined more than 50% year-over-year and our allowance to non-performing loans has increased to 5.8 times at December 31, 2006, from 3.2 times at December 31, 2005.

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 level.

As has been the custom, our custom, we will continually -- 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 provide our guidance for 2007.

We expect fully diluted earnings per share to range between $1.29 and $1.33.

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

Our loan pipelines remains strong and we expect to continue generating annualized loan growth in the 15 to 20% range.

We also expect a continued increase in our gains on SBA loan sales.

We continue to expand our sales force by adding senior SBA Marketing Officers in California and in our SBA offices in other states.

This is having a positive effect on our loan production and we expect to see significant growth in SBA loan origination and sales in 2007.

The most significant challenges to our 2007 performance will be our net interest margin and our expense level.

Our net interest margin is reaching stabilization and we should see less compression, assuming the yield curve remains relatively the same through the year.

We will continue to use cheaper wholesale fundings as dictated by deposit pricing competition, within the Korean American market; however, even with more stability in our net interest margin, we expect that our full year margin will be much lower than the level we experienced in 2006.

For the full year 2007, we expect our net interest margin to range from 4.8% to 4.95%.

With regard to expenses, we have two items that we know will significantly impact this year, our FDIC insurance and our professional fees, particularly legal expenses.

As a result, we believe our operating efficiency ratio may trend higher than we experienced in 2006.

We believe that the future expansion of our footprint will help our core deposit gathering efforts and elevate some of our, some of the pressure on our net interest margins.

We expect to convert our loan production office in Garden Grove to a full branch this quarter, which should positively impact our deposit gathering.

As our ability to expand our footprint increases in the future, we believe this will be an important catalyst in helping our asset growth translate into higher levels of earnings growth.

Lastly, as indicated in our press release, the troubled condition destination was removed by the Federal Reserve Bank of San Francisco on Monday, January 29.

In a recent meeting with our Federal and State regulators, we were encouraged by their comments, given our substantial progress on the MOU.

This is a tremendous step forward for us and we will be relentless in obtaining full relief from the MOU.

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

Operator?

Please open up the call.

Thank you. [OPERATOR INSTRUCTIONS] Your first question comes from the line of Christopher Nolan with Oppenheimer & Company.

Good morning.

Good morning, Chris.

Min, could you give us an idea as to when you anticipate the next banking exam, where the MOU issue is examined again?

We expect to have a full exam second quarter of this year, and based on the results of the exam, then we will be considered to remove from the MOU.

Okay, great.

And I notice that the balance sheet capital levels seem to be continuing to climb, tangible equity and tangible assets in the fourth quarter are about 8.9%.

Any idea in terms of once the MOU comes off, your flexibility in terms of deploying this capital greatly increases.

A, I guess my first question is what do you consider a floor on this basis?

And B) what sort of thoughts do you have in terms of how to deploy this capital?

Well, clearly there's certain things that we would do perhaps sooner than currently because of the MOU; however, we clearly have our idea to expand our business, and so that would be something for the future for us, both organic plus I think we would be interested in looking at some acquisitions.

Okay, rather than share repurchases?

Well, no.

In terms of management of capital, share repurchases certainly is being considered, so we're looking at everything that we can do to maximize the use of capital.

Right and I guess my final question would be on that one of the thought, Al, the current EPS guidance, does that take into account expectations for deploying this capital in some manner which is accretive to EPS in terms of share repurchases?

No.

Okay, thank you very much.

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

Please proceed.

Hi, good morning.

Good morning, Mike.

A couple questions.

I noticed there was a $20 million difference between the SBA originations and what was sold, and I'm wondering, will that difference eventually be sold or are you retaining that for your loan portfolio?

Well, I think that a lot of it is just due to timing.

But we have certain targets that we have in mind.

It would be great if we could retain some excess production because the SBA loans provide a good yield.

Yes, and then there must be more than 20 million in inventory so to speak, and what number would that be?

What number in terms of--?

Dollar amount in our pipeline?

Yes, well, no, in inventory.

I mean there was 20 million left over this quarter for timing issues.

Was there 20 million to start the quarter as well or-- ?

Out of the about 39 million production, there is of course about 25% is the unguaranteed portion that we usually keep in house.

I guess what I'm getting at is--.

The difference is categorized under the loans held for sale.

Okay.

And when the commercial loans were sold, when during the quarter were they sold or more accurately, how much interest income, up until what period of time did you get to keep, one month's worth or three months?

We sold in December.

Those are seasoned loans.

It wasn't new production.

Okay, so they were sold in December with the interest for the month of December going to the buyer?

Yes.

And then were there any expenses, and can you quantify them, that were incurred in the fourth quarter that we should not build into our run rate going forward?

You mentioned there was an increase in advertising for a deposit program which may not carry forward.

I'm wondering how much that was and what should we take out of our expense run rate numbers?

Well, We think our quarterly run rate is probably 14.5 to 14.7.

Okay, thank you very much.

Your next question comes from the line of James Abbott with FBR.

Please proceed.

Yes, hi.

Good morning and congratulations on a good quarter of loan growth.

Thank you.

I was wondering if you could give us a sense as to the dollar amount that you would expect on the FDIC fees in 2007?

And the timing of that, assuming that it's not lumpy in all the first quarter, assuming it's spread evenly?

Or if it is lumpy, if you could describe that.

The total fees we think will be approximately 1.6 billion.

Million, I'm sorry. 1.6 million, and there is a credit that all, well, most institutions will receive, and so we'll probably have an offset of about maybe 400,000, so the net is maybe 1.2 million for the full year, and it's about--.

Is that amortized evenly?

Yes.

And it's about double what we had last year.

Okay.

And also on the tax rate going forward, which tax rate should we use?

I would say 41.5.

Okay.

And one of my other questions, I guess Chris Nolan also asked this, was the capital levels.

From a risk-based capital perspective, the regulatory capital ratio, what's a comfortable level there for the Company, assuming that the MOU is removed at some point?

Would it be around 11%?

I calculated you're roughly at about 13.5% right now.

Yes. 11% will be a comfortable level.

Okay.

So that's about $40 million of capital in rough terms.

You could retire, I suspect, your trust preferred issue outstanding.

Is that a possible option or are the pre-payment penalties too high on that, et cetera?

Or what can you tell us about that?

Yes, the pre-payment penalties are far too high, and I think trust preferred is a good form of capital for us.

Okay.

I just -- looking at your trust preferred rate of about 9.4%, there are a lot of companies that are running in the 7% range at this point, maybe even a little bit less.

Well, we have one trust preferred that is fixed for a long period of time so we want can't pre-pay it and the prepayment penalty would be too high.

We are looking to exercise our early redemption on one that's coming due in the first quarter, and so that will reduce our trust preferred cost.

Okay.

And then I guess the last question was kind of a follow-up to a comment that you made that the legal expenses would be high in 2007?

Could you touch on why?

Is that due to a lawsuit that's pending or is that due to converting branches or what would that be?

Well, we're a plaintiff in an arbitration matter that we would prefer to keep confidential, so that will cause us to incur additional legal fees.

Can I ask how much you're seeking in damages?

I think we would prefer to keep that confidential.

We don't have any exposure to the Company.

It's -- I think we're very confident that we will succeed in the case and so we believe there's upside.

Right.

That's what I was trying to get at, so you're not a defendant, which is good.

No.

We're the plaintiff.

All right, I think that sums up my questions, so I appreciate it and thanks again.

Okay.

Your next question comes from the line of [Thomas Monaco with Fund Point].

Please proceed.

Hi.

Thanks for taking the question.

Just getting back to your guidance.

If you could, I noticed this quarter you took these -- you took some CRE loan sale gains.

Is that embedded in your guidance I guess going forward or just a one-time event?

It is not in our guidance.

Okay, not in your guidance, okay.

And can you also talk about the level of pre-pay activity that's embedded in net interest margin, what you're looking for next year?

Trends seem to be coming down.

The pre-payment activity, third quarter and fourth quarter were relatively the same.

We don't try to predict that and we don't include it in our calculations for margins.

Okay, and maybe you could talk about my last question, some of the trends you're seeing I guess in the Korean American banking community that may be an opportunity or a concern that you're seeing over the last quarter?

Well, I think the general condition, which we've heard from the other banks is that the deposit pricing seems to have leveled off, but I think we're all still faced with relatively high CD costs, and I don't know if you have anything else?

Well, I think that's pretty much -- the competition that we are experiencing, gathering deposit has been very challenging in this community for the last several quarters, so [while] we expect to see more challenges going forward in terms of gathering core deposits.

Okay, thank you very much.

Okay.

Your next question comes from the line of Joe Gladue with Cowen & Co. Please proceed.

Hi, Min.

Good morning, Joe.

I just wanted to see if you could give us a little bit better color on the CD repricing going forward, what's sort of the average maturity on the time deposits and how much of that will -- how much has run through at current rates and when do you think that will sort of stabilize as long as the Fed doesn't raise rates any time soon or lower rates.

Well, I think we're approaching stabilization and quite a few of our CD's have already repriced to current market-rates.

We have about 250 million repricing in this first quarter, and I think on average, they will probably reprice pretty close to their current rates, so we don't see much in the way of increased pressure on our net interest margin.

We do have, if you'll recall from the third quarter, we talked about our prime based CD's which repriced up, we said that it would reprice up, and those will be coming due in the first two quarters of 2007.

We hope that might have a positive impact as they -- hopefully we will be able to reprice those down.

Okay.

So I think on average, we shouldn't see much, too much more upward pressure on the deposit side, but it will probably be still a little bit of increase.

Okay, thank you.

That's it.

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

Please proceed.

Hi, good morning.

Good morning, Brett.

Quite a few questions, let me just ask a few here.

The loan growth expectations that you have seem a little more optimistic than the other banks in the Korean space and so I'm curious to hear if you have higher growth expectations for the East Coast franchise, which you have a stronger presence in than your competitors is question one.

And then secondly, the sale of the CRE loans that reduce the exposure to a certain segment -- I was curious if that was hotel/motel and where that stands in relation with the portfolio today?

Well, in the past, gathering loan origination was not the problem for this bank.

Not only we were be able to increase from New Orleans and Southern California.

We do have a very well experienced and proven Marketing Officers throughout the United States and they are the ones have been a driver in gathering loans, and so we are experiencing very stabilized loan pipeline and we expect to continue to have the same level of the loan growth.

And the C&I loans that we -- the commercial real estate loans that we sold was related to concentration and the industry was the hospitality industry.

We do have a certain limit, internal guideline that we would like to maintain, and due to concentration, we sold, and those were mostly hospitality and also car wash industry.

Okay, maybe a little more clarification on the loan growth side.

It sounds like you're not seeing what some of the other banks have been considering in terms of slower demand on commercial real estate and maybe less transactions.

Is that fair to say from your customers?

Yes, of course, there was some slowdown in the commercial real estate purchase side but since we are only concentrating in California market only, there are still a lot of loan demands outside of the California market, so we are still experiencing very stable loan growth in the loan pipeline.

But you'll notice this quarter, our increase was contributed by the non-commercial real estate loans, mainly commercial and retail business loans and I think we are in a little bit better advantage in the fact that we -- our presence in the East Coast definitely produced more business loans, C&I loans.

Okay and let me just ask one other question.

On the FTE's you added about 12 people linked quarter.

Can you give us some thoughts on where those people were added and what your expectations are for growing the FTE base in '07?

It was mostly from the addition in our SBA department.

We added a number of Marketing Officers and Loan Officers in our SBA department to strengthening our team, so there was a major increase, and we expect to maintain about the same level of the number of employees for the first and second quarter and maybe we may anticipate adding a few due to the expansion of our branch network going forward.

Okay, thank you very much.

Okay.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Lana Chan with BMO Capital.

Please proceed.

Good morning.

Couple of questions.

Just trying to get to sort of a core run rate, or core EPS number for the fourth quarter, and Al, before when you talked about the non-interest expense run rate of 14.5 to 14.7 million, was that referring to the first quarter or what you thought the fourth quarter was?

That's kind of an average, so the first quarter is going to be higher, probably a little bit at the higher end.

Okay.

So was there anything unusual in the fourth quarter non-interest expense besides for -- to get the bump up from 13.7to 14.5 besides for the insurance costs and the legal fees that are going to start coming in in '07?

Well, the '07 has those two items we talked about, FDIC insurance and then legal expenses.

Right.

But I'm just trying to figure out besides for that, how do you get the jump from 13.7 to almost--?

Well, we have our increase in salary costs, and part of that is salary increases.

The other part is increase in headcount.

And then we have higher occupancy costs that will kick in more fully in 2007, related to our corporate location and branch lease renewals.

We have probably a higher equipment cost because we made a pretty substantial investment in IT, equipment, hardware and software.

So it really came from a combination of things where we really focused on our infrastructure and really made substantial incentives.

Okay, thanks, and the other question was on other fee income, the other fee income line.

There was somewhat of a decline from the third quarter.

Was anything related to that?

It went from 1.9 or so to like--.

Oh, the other income, that's where we had recognized the write-off of equipment due to the relocation and then we had some other costs related to the costs of derivatives, it was about 87,000 or so.

The equipment write-off was about 230,000.

Okay, great.

Thank you, and then my last question was with regards to the SBA loan sale gains.

I had expected it to be -- the rebound to be a little bit stronger this quarter relative to the third quarter, and especially since the sales volume increased so substantially.

What are the thoughts and expectations about that business going forward?

I mean, are you seeing some pricing pressure that we should start thinking about going into 2007?

Yes, definitely the yields that we have been getting on the -- on loan pricing has been down due to the competition, but it was, the reason for less loan sales during the fourth quarter was that again, it was a timing issue; however, our SBA loan origination has been continuously increasing and we see very positive trends in our SBA pipeline, so we expect to have higher loan origination and also sales going forward.

And gains as a result.

Okay, thank you.

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

Please proceed.

Hi, good morning, everyone.

Hi.

Just two questions.

One is a question for Al on kind of refining your commentary on loan yields and specifically the yield on your new originations versus your existing portfolio.

Am I mistaken?

Did you say that your yield on new loans has been better than your yield on existing portfolio or did I mix up something you're trying to say?

No, that's what I said.

Okay.

Yes, we track it month by month and just looking at the spot rates and the yields on our new loans, whether fixed or variable, have exceeded the portfolio yields.

Okay.

I just want to reconcile that with your loan yields for the third quarter to fourth quarter.

It seemed like they were down probably, X the interest recovery, down about 10 to 15 basis points.

That was -- was that the ongoing shift from variable to fixed?

That was reflected in that number?

Yes, the mix played some part in that, and actually, the yield on the new loans have increased over the last quarter and on a monthly basis, but it's the shift in the loan mix, that actually has brought the overall yield down slightly.

Okay, so you were talking like product by product?

Right.

Oh, got you.

And I can presume that your C&I yields are a little bit better than your real estate yields so that would help your average yield going forward, assuming the growth there is better?

Right.

Okay and then a non-numbers question.

Just kind of curious what your thoughts are on what adjustments should be made to your deposit gathering model in light of the current environment and in light of your refinements in your deposit pricing methodologies over the last year plus.

It seems like the strategy in the market that you participate in has competitively been very price driven and then everyone has been fairly aggressive opening branches, and everyone sort of -- it seems to me like most of the players pursued the same business strategy, at least in Southern California.

But given what you've seen and what you know and sort of the restrictions you've had with MOU on opening new locations, is there anything that you see there you think you could build a little bit better mouse trap?

Well,--.

I guess if you knew you would have already done it.

Well, I think there's several things.

One is that we look at our deposits and we try to target where we want growth to occur, and last year, we knew we really had to focus on core deposits like everybody else, but we were able actually to reduce or increase our core deposits from 53% to 55% of total deposits.

And if you look at the components of where it increased, some of that came in the savings account area which we thought that we could target that area because nobody seemed to be focusing on it and also, we focused on our smaller CD customers and try to stay away from the jumbo CD customers.

So if you look at the change between product types, you can see what we attempted to do.

And then the other thing is that we're very comfortable in using alternative products, wholesale financing.

Strange as it may seem, wholesale financing is cheaper in our marketplace because we pay so much for retail deposits so we have been an advocate of using wholesale funding and we believe that we have some methods or techniques that perhaps has helped our funding cost.

Okay, that's very helpful, and one last follow-up on the deposit question, and sorry, for the [ablation] of time here, but on your comment about the 32 million of non-interest bearing deposits that left the bank shortly after the New Year, was that meant to kind of convey that the deposit growth that you had was a little bit misleading or was that just normal sort of seasonal trends you see every year?

It is kind of seasonal but it was such a large dollar amount we wanted to make sure that you understood that this wasn't a permanent increase in our DDA's.

Okay, terrific.

Thanks a lot.

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

Good morning.

On the MOU, how much effort or resources do you need to allocate to this over the next quarter to get it resolved?

Don, we are pretty much fully in compliance with our MOU, so we don't anticipate to spend any extra dollars in compliance with MOU items.

Okay, just a matter of the regulators coming in and taking a look?

Right.

And then in terms of the comments on at least being open to looking at acquisitions, are you focused on Southern California or other markets outside California or both?

Both.

Okay, thank you.

Your next question is a follow-up question from the line of James Abbott with FBR.

Please proceed.

Yes, thanks for the quick follow-up question.

What time during the quarter did you sell the municipal bonds and then pay the FHLB borrowings down and also what would be the yields on each of those?

Oh, James.

We sold the bonds in October, and we paid off about 5 million advances, I think, in the same month.

The other security sales were in November, and I don't have the bond yield, but we were able to realize a gain on the sale of the municipal bonds, which more than offset -- we prepaid some high rate advances.

The advances were costing us 6.7% so we paid those off and so we incurred a pre-payment penalty that the gain more than offset that and then we had some losses on the other security sales.

So we were trying to just manage our cash flow.

We thought it was a good opportunity to get rid of some low balance securities as well as securities that had relatively nominal losses in them.

So the stuff that you paid down had a very close to nil net interest margin if you will or nil spread?

If the funding was 6.7%?

Yes, if you look at it that way, they weren't really generating net interest income for us, so any time we have that kind of opportunity to put the cash into higher yielding loans, we're going to do it.

Okay, good enough.

Thank you very much.

At this time, there are no questions in queue.

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

Once again, thank you all for joining us today.

We look forward to speaking with you next quarter.

Thank you.

Ladies and gentlemen, this concludes the presentation.

You may now disconnect.

Thank you, and have a good day.