Hope Bancorp Inc (HOPE) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the first quarter 2007 Nara Bancorp earnings conference call.

My name is Brandi and I will be your operator for today.

At this time all participants are in listen-only mode and we will conduct a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to 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 first quarter 2007 earnings call.

Joining us this morning from management is Ms.

Min Kim, Chief Executive Officer, Mr.

Alvin Kang, Chief Financial Officer, and Ms.

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 document the Company's 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 provide 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 first quarter of 2007 and then I will turn the call over to Al King, 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 2007.

We earned $0.28 per share in the first quarter, a decline of 7% from the prior year.

The primary factor behind the decline in earnings this quarter was compression in our net interest margin.

Our markets compete to be highly competitive particularly with the with respect to low pricing.

In prior quarters we have been able to offset any compression in our net interest margin with the growth in our earning assets, however, in the first quarter our loan production fell somewhat short of our expectations.

While our commercial real estate segment grew nicely during the quarter at an annualized rate of 16%, we expect it to be even higher.

We believe we lost some lending opportunities to competitors that dropped the rates on fixed rate loans to a level lower than what we were offering.

We have now adjusted our pricing strategies and we have already started to see a pick up in loan production in April.

In addition, our commercial loan balances declined during the first quarter due to a $20 million reduction in line usage primarily related to three line customers that paid down their lines during the quarter.

This typically occurs when a customer has a build up of cash and it makes economic sense to reduce their line usage.

Based on past experience we would expect these three customers to begin drawing on their line again in the near future.

We did have a successful quarter with respect to deposits both in terms of controlling rates and attracting core deposits.

During the fourth quarter we developed a new money market product that offered a 5% rate.

This product proved extremely attractive to our customers and helped us to grow our money market dollars at an annualized rate of 68% during the first quarter.

We were able to bring in these deposits without having a negative impact on our cost of funds.

Our cost of interest bearing liabilities were 4.91% in the first quarter, the same as in the fourth quarter.

We are also pleased that our asset quality continues to remain healthy.

We did have an increase in non-performing assets during the quarter but it was primarily related to three loans that are well collateralized.

These loans are fully secured by hotel property, a gas station, and commercial retail rental property.

Due to the strong collateral we do not expect to realize a loss on any of those loans.

Accordingly, our provision for credit losses remained in a normalized range this quarter.

It is worth noting that each of these customers operate in a different industry and in a different geographic market.

The circumstances that led to their placement in non-performing assets are unique and we do not believe they are indicative of a larger trend in the portfolio.

As we have mentioned over the past few quarters we have seen some deterioration in our smaller borrowers in retail businesses which tend to be more sensitive to a rising interest rate environment.

We would expect this trend to continue and we have budgeted for that in our provision assumptions for the year.

We believe what we experienced this quarter, CRE credits moving into non-performing status is too early to call a trend.

However, we do feel very comfortable with the collateral we have on our CRE loans.

If other CRE loans were to go into non-performing in the future, we do not believe it would have a significant impact on our level of provision given the strong collateral.

We believe that our credit costs will remain with our expected range for the year.

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.

Let me start by discussing our net interest margin.

We had a number of items that impact the comparability of our net interest margin this quarter, and I'd like to provide some color around these items.

As reported, our net interest margin was 4.62% in the first quarter of 2007 compared to 5.10% last quarter.

During the fourth quarter of 2006 we had a non-accrual loan that was placed back on accrual status.

This triggered the recognition of $238,000 in delinquent interest, positively impacting our net interest margin in Q4.

We had just the opposite effect occur in Q1.

As Min mentioned, we had three loans that were transferred to non-accrual status resulting in a reversal of $350,000 in interest income.

This had a negative impact on our net interest margin in Q1.

Prepayment penalties also impact the comparability.

In Q4 we had $92 million in prepayments on loan some of which carried prepayment penalties.

This resulted in the recognition of $553,000 in prepayment penalty income that positively impact net interest margin.

In Q1 we still had a meaningful amount of payoffs amounting to $67 million, but for the most part it was on loans that didn't carry a prepayment penalty.

Our Q1 prepayment penalty income was only $142,000.

Excluding the effect of both non-accrual interest income and prepayment penalty income, our net interest margin was 4.66% in the first quarter of 2007 compared to 4.94% in the fourth quarter of 2006.

I'd like to note at this time that there was a slight error in the press release related to the loan yield on our portfolio at March 31, 2007 and March 31, 2006.

In the press release we said that the yield, excluding loan discount accretion, was 8.65% in 2007 versus 8.58% in 2006 and those numbers should be 8.60% and 8.52% respectively.

The average yield on our loan portfolio declined 50 basis points during the quarter from 9.21% to 8.71%.

Excluding non-accrual loan interest income and prepayment penalty income, the average yield on our loan portfolio declined 27 basis points during the quarter from 9.02% to 8.75%.

The decline is primarily due to new loans being borrowed at lower rates and the rates of loans being paid off and the increased percentage of fixed rate loans in our portfolio.

At March 31st, 42% of our portfolio were fixed rate loans compared to 39% at December 31.

During the first quarter fixed rate loans represented 50% of total originations compared to 52% in the fourth quarter of 2006.

Although we have been emphasizing adjustable rate loans during this flat yield curve environment, there is still a significant customer preference for fixed rate loans at this point in time.

In addition, 73% of the loan payoffs that occurred in the first quarter were variable rate loans which impacted the loan mix.

Our average cost of deposits increased 12 basis points during the quarter from 3.68% to 3.80%.

As Min mentioned, our deposit rates actually remained relatively stable during the quarter.

The increase in the average cost of deposits is largely attributable to a decline in non-interest bearing deposits during the quarter which causes the interest bearing accounts to have a larger weighting in the calculation.

Our cost of time deposits was the same as last quarter at 5.22%.

As the lag effect of CD pricing has largely run its course, we believe that the cost of time deposits will remain stable or slightly decrease in the future periods as higher rate time deposits begin to reprice downward.

We continue to utilize wholesale funding sources when we see opportunities to add funds at lower rates than our deposits.

During the quarter when rates dipped a bit we added $24 million in advances from the FHLB at a weighted average cost of 4.24%.

We also refinanced $8 million of trust preferred securities, reducing its [related] cost by 195 basis points.

As a result, despite increasing our borrowings from the FHLB, our interests on other borrowings declined by 9% from 6.28% to 5.70% on a sequential quarter basis.

Our non-interest income was $4.6 million in the first quarter, a decline of 9% for the same period last year.

The decline is attributable to a 29% reduction in our net gains on sale of SBA loans.

The volume of loans sold during the first quarter of 2007 was essentially the same as last year first quarter, however, the average premium was 7.56% in the first quarter of 2007, a 101 basis point decline from the last year.

Additionally, broker commissions increased from 2006 levels.

The decline in gains on sales of SBA loans was partially offset by a 5% increase in service fees on deposit accounts which were $1.6 million in Q1 2007.

On a sequential quarter basis our gains on sale of SBA loans increased 12%, consistent with our expectation that this business will show a steady growth as our recent staff additions continues to gain traction.

Our non-interest expense increased 6% compared to first quarter 2006.

The increase was primarily due to higher occupancy and furniture and equipment expense.

This was primarily driven by the additional cost associated with our new corporate headquarters and our new Garden Grove branch.

Our efficiency ratio was 51.0% in the first quarter of 2007 compared to 47.7% in the same period last year and 46.0% in the fourth quarter of 2006.

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

Moving to the balance sheet, our growth loans, excluding loans held for sale, were $1.75 million at March 31, 2007, an increase of 15% from the $1.52 billion at March 31, 2006.

This also represents an 8% annualized growth rate over the $1.71 billion at December 31, 2006.

Our total deposits were $1.75 billion at March 31, 2007, an increase of 6% over the $1.65 billion at March 31, 2006.

This also represents a 9% annualized growth rate over the $1.71 billion at December 31, 2006.

As we indicated on our last call, we had approximately $31 million in non-interest bearing deposits on the balance sheet at year-end that were temporary.

This balance was, in fact, withdrawn in January.

Excluding this amount our total deposits increased at an annualized rate of 16% during the first quarter.

Turning to asset quality, our non-performing assets were $8.9 million, or 42 basis points of total assets at March 31, 2007.

This compares to $3.6 million, or 17 basis points of total assets at December 31, 2006, and $5.4 million, or 28 basis points at March 31, 2006.

As Min mentioned, the increase in non-performing assets primarily relates to three borrowing relationships.

Due to the strong collateral we have on these loans, there was only a minimal additional provision that was required against these loans.

Outside of the impaired loans included in non-performing status, we had a reduction in special mention and classified assets during the quarter of $1.5 million from $6.6 million to $5.1 million.

As a result of these factors our provision for credit losses was $980,000, which we would consider to be in a normalized range.

At March 31, 2007 our allowance for loan losses was 1.07%, of growth loans receivable compared to 1.11% at December 31, 2006, and 1.21% at March 31, 2006.

The lower loan growth and the decrease in special mention and classified assets contributed to the lower ratio at March 31 as well as the higher level of charge-offs taken in the two previous quarters or the first and fourth quarter.

Net charge-offs were $1.3 million in the first quarter, representing 31 basis points of average loans on an annualized basis.

This compares to $1.2 million, or 27 basis points in the fourth quarter of 2006.

Our first quarter of 2007 charge-offs primarily consisted of loans to retail businesses.

The exceptions were a $300,000 loan to a supermarket borrower to close the business due to competition, and a $211,000 loan to a dentist who filed for bankruptcy due to a domestic problem.

In closing, we continue to closely monitor the financial condition of our borrowers and we remain comfortable that credit quality in the portfolio will remain healthy in the foreseeable future.

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

Min?

Thanks, Al.

At this point we would like to reaffirm our guidance for 2007.

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

While we are disappointed in the way the year started, we believe we can make up ground in the coming quarters.

I would like to review a few of the factors that lead us to be optimistic about the remainder of the year.

First, since adjusting our loan pricing strategy we have seen a meaningful increase in loan production in both the CRE and commercial portfolios.

Based on loans booked in April and the strong pipeline we have, we believe that our loan production will return to the higher levels we experienced last year.

We also expect to see higher line usage as our line customers return to their normal balances.

Second, we are encouraged by our progress on the deposit side.

During the first quarter we were able to grow deposits while keeping our cost of funds relatively stable and we believe this is a trend that will continue.

Third, we can expect that our non-interest income will increase steadily as our SBA lending business continues to gain traction.

Typically the first quarter is soft for the SBA business as many loan applications are on hold until after tax season.

Last year was an exception in terms of first quarter production which was mainly due to the imminent departure of our SBA manager and his efforts to close out his pipeline before leaving.

We have seen a strong pick up in production in April and we expect SBA loan production to be almost twice as much as the first quarter.

Given the pipeline we have we believe our production over the rest of the year will remain strong.

Fourth, we recently changed our deposit fee structure which we believe will have a positive impact on non-interest income.

We are also more actively pursuing loans that can be placed into (inaudible) programs and we believe we can generate meaningful levels of referral fees over the remainder of 2007.

And finally, we expect our asset quality to remain healthy and our credit costs to continue in a normalized range.

While it appears that economic conditions may not be as robust in our markets as in years past, we believe that there continues to be sufficient demand to support solid balance sheet growth.

We believe that with solid execution over the remainder of the year we can achieve our financial goals in 2007 and continue to build a strong foundation for future growth.

Now we will 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 Christopher Nolan.

Please proceed.

Good morning.

Good morning, Chris.

Min, a quick question.

(Inaudible) all the Korean banks this quarter have seen credit quality deterioration, material credit quality deteriorization, particularly on the charge-off front but also on the non-performing asset front.

And there seems to be a multi-quarter type of trend within the Korean niche and it seems somewhat isolated.

Can you give your perspective on this, please?

Well, I can't speak to what the other banks are experiencing but we can only speak to what we are experiencing in our portfolio.

And in the first quarter we saw three different [large] credits all move into non-performing for unique reasons and they are all in different industries and different geographic markets.

We would have cause for concern if there was some commonality between them but there isn't.

So outside of these three loans, we think that reduction in classified assets and special mention loans during the past two quarters, we believe that it is very stable and generally we do have a very healthy loan portfolio.

I'm sorry, Al, were you going to say something?

Yes, let me add something to that.

We took a look at our total watch list loans going back over the last 12 quarters and the average rolling 12 quarter watch list total was about $16 million.

And so this year, or at March 31, that number was $14 million.

So we're actually lower than our rolling 12 quarter average.

And also the second thing is it seems that we went back and looked at our numbers at March 31, '05 and '06.

In '05 and '06 we actually had $20 million in watch list loans.

So the fact that our balance at 331, which includes the pick impaired loans that we talked about at $14 million, is actually less than our three-year experience.

So I think this gives us quite a bit of comfort that we're not outside of what we normally see.

Great.

And I guess as a quick follow up to that, just because of the credit quality deterioration which seems to be focused pretty much in the Korean niche, how are the regulators looking at your reserve levels?

I mean do they look at equity capital levels together with your reserve levels sort of in combination or are you guys getting more attention from regulators recently because of the recent credit quality weakness within the niche?

Our regulators are very comfortable with reserve levels that we have in the past and currently as well.

They look at the trends, they look at the overall growth of the portfolio.

They look at the past (inaudible) loans, non-performing classified.

So a number of efforts going into the reserve and we have a very comprehensive reserve methodology that we look at.

Also the regulatory (inaudible) as well.

So we had actually complements on our reserve on that solid (inaudible) from the regulators.

Thanks Bonnie.

Okay.

Thank you.

Your next question comes from the line of James Abbott.

Please proceed.

Hi.

Good morning to you, good afternoon to us.

I was just wondering if you could give us a sense on the expense growth for the balance of the year.

I know that had you some initiatives and so forth and you seem pretty comfortable with your EPS outlook.

Could you give us a sense as to whether that's a sustainable run rate level, that it would be relatively stable in the second quarter or should we see a decline or an increase?

Well, the guidance we gave was 14.5 to 14.7.

I think that's is still a good run rate.

If you look at the first quarter we're 13.9, we had one non-recurring item that really got us back to the 14.5 level.

So I think that that same range is probably good for your modeling.

Okay.

And does that incorporate the expense needed to maintain the stronger loan growth that you're talking about now?

Yes, James.

Okay.

And then another question that I had is on the loan yields.

I was wondering what the yield on the incremental loan production was in the first quarter, if you have an idea of that, whether it was 7.5% or 7 or 8?

It was actually 8.71 and that was consistent with the fourth quarter.

The last six months we vetted loans at about an 8.70 clip.

Part of it's fixed the other part's variable but on a weighted average basis it was 8.70.

You said it was 8.76 on an incremental basis in the fourth quarter?

No, actually it was 8.71 if you want to be real exact.

8.71 in the first quarter '07 and the fourth quarter '06?

About the same.

About the same.

And so really the decline on a linked quarter basis in the core loan yield the 20, I think you said 27 basis points?

That was due to higher yielding loans that were running off more than it was on an incremental production basis.

Right.

Yes, the loans running off are running off with higher yields on them and also the fact that we're adding, still adding fixed rated loans then it changes the loan mix.

So those two things pull down the --

Okay.

The overall.

Now the loan mix, though, would be incorporated in the 871, correct?

Well, the 871 was new production.

Yes, but that would include both fixed and variable, correct?

Yes.

Right.

And then, so I think in the press release it mentioned and, Min, you just talked about it, but the second quarter pricing has changed on loans and so I was wondering if you expect 871 in the second quarter on an incremental production basis or if you would expect it to be 10 basis points or 20 basis points lower than that or how much of a magnitude has changed?

Well, we made only a pricing adjustment on fixed rate loans.

During the first quarter we were (inaudible) 8% or more.

8% or higher.

But during the second quarter we reduced our pricing strategy by 50 basis points on the fixed rate loans.

So I think it all depends on what kind of production mix that we will be experiencing in second quarter.

We think that out of total origination probably you will be about 50% fixed and 50% variable.

Okay.

That's your best estimate at this point in time.

And are the variable, what sort of yields are you getting on the variables, is it prime?

Prime over about, what, 50 basis points.

Prime over 50 basis points (inaudible).

That's pretty typical.

And is the prime that you're speaking about, is that standard prime of 8.25?

Right.

Wall Street general prime.

General prime.

Okay.

And so I think those are some of my basic questions.

I may circle back with a couple later depending on other people in the queue.

Thanks.

Thanks.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Manuel Ramirez.

Please proceed.

Hi.

Good morning.

I had two questions.

One was on the composition of your loan portfolio.

It seems like at some point you're going to hit a floor on variable rate loans relative to fixed rate loans because if I, please tell me if I'm thinking about this wrong.

I presume that most of the C&I portfolio's still floating and your competitors are not really offering fixed rate C&I loans at a significant extent.

So that if I assume that your commercial real estate portfolio went to 100% fixed, which is unrealistic, that's sort of the level of fixed rate loans in the overall portfolio that I would see in a worse case scenario.

Is that the right way to think about it?

Yes.

On a C&I loan, yes, we charge the variable rate with the prime over 50 basis points or so and on the C&I loans, yes, most of the loan production is with the fixed rate.

Right.

And construction is floating rate and then your SBA loans are typically floating rate.

Right.

Even on the real state secured loans, right?

Yes, that's correct.

Okay.

So it seems like most of the shift to fixed will have already played out here in the next couple of quarters.

Is that the right way to think about it?

Yes.

That's very fair statement.

Okay.

So that the only risk to the margin from that point would be competitive pricing on, more competitive pricing within the market on both fixed and adjustable rate loans so your loan spreads would come in.

Right.

Okay.

And then secondly, I was wondering if you had any comments on capital at this point, your tangible common equity ratio's at 9% which is probably a good problem to have, but if there are any thoughts of where that should be or if that's going to be worked down over time.

Yes, I think that until the MOU is listed then there really isn't much that we're going to do in the near-term.

But assuming that we get the MOU lifted then we do have very definite plans of how we want to deploy that capital.

So that's really what you're waiting for.

Right.

Okay.

Terrific.

Thank you.

Bye.

At this time there are no more questions.

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

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

Thank you, operator.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.