Hope Bancorp Inc (HOPE) 2007 Q2 法說會逐字稿

Welcome to the second quarter 2007 Nara Bancorp earnings conference call.

At this time, all participants are in a listen only mode.

We will conduct a question and answer question towards the end of this conference.

(OPERATOR INSTRUCTIONS) I would now like to turn the call over to Mr.

Tony Ross, with the Financial Relations Board.

Please proceed.

Thank you, operator.

Good morning, everyone, and thank you for joining us for the Nara Bancorp second quarter 2007 earnings call.

Joining us this morning from management are Ms.

Min Kim, Chief Executive Officer; Mr.

Alvin Kang, Chief Financial Officer; and Ms.

Bonnie Lee, Chief Credit 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.

Ms.

Kim?

Thank you, Tony.

Good morning, and thank you for joining us today.

I am going to provide a brief overview of the second quarter of 2007 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'll conclude with a discussion of our outlook for the remainder of 2007.

We earned $0.33 per share in the second quarter, and increase of 10% from the prior year.

This increase is even more notable given that we were up against a difficult prior year comparison with our provisions for loan losses.

In the second quarter of 2006 we had a significant improvement in the credit quality which resulted in a very small provision of 142,000.

In the second quarter of 2007 our provision returned to a more normalized level of 1.4 million, the difference in provision represents approximately $0.03 per share.

As we indicated on our last call, although our first quarter loan production was somewhat disappointing we had a very strong pipeline and fully expected our volumes to increase later in the year.

We are very pleased to report that our production increased considerably among all of our lending businesses.

Our new production, our new loan production was 282 million during the second quarter, an increase of more than 100% from the 139 million in the first quarter of 2007.

We were significantly increased our CD loan volume, as we had 57 million in loan production, loan originations during the second quarter, an increase of more than 100% from the 28 million originated in the first quarter.

Including the CD loans our loan production was about evenly split between the California branches, New York branches, and our loan production offices.

This represents a relative increase in the contribution from the loan production offices.

We recently opened our Houston LPO and relocated our Northern California office to improve efficiency and we are very pleased with the results being generated from our investment in new LPOs and business development officers.

As you may recall, during the first quarter we saw reduction in line usage primarily related to two large international trade finance customers that completely payed down their lines during the quarter.

We felt that this will be a temporary occurrence and that indeed proved to be the case.

These customers began drawing on their lines again, which was a partially responsible for the growth we saw in our commercial portfolio during the second quarter.

We also had another successful quarter with the respect to deposits, both in terms of controlling rates and attracting core deposits.

Our new money-market product that offers a 5% rate continues to be popular with our customers.

Our money-market accounts increased by 43 million during the quarter which helped to drive an 11% annualized growth in deposits.

Overall, we believe we are executing well on our deposit strategies as our cost of funds remained essentially flat during the quarter.

We are very pleased that we were able to effectively generate loan and deposit growth while maintaining disciplined expense control.

Our operating efficiency ratio was 46.4% down from 50.6% in the second quarter of last year.

Most importantly, our asset quality continues to remain healthy.

As we indicated on our last call, the increase we saw in non-performing assets last quarter were isolated instance and not indicative of a broader trend in the portfolio.

Our experience in the second quarter supports that belief.

We were able to successfully resolve one of the three large non-performing loans that we discussed last quarter.

It was sold for slightly above par value.

Of the other two large non-performing loans mentioned last quarter, one relationship for $1.3 million is on an interest only worked out for six months and the borrower is paying as agreed.

The other loan for 1.6 million is in the process of a work out which should be finalized in the third quarter.

No loss is anticipated on either loans with a resolution in one of the large non-performers and relative stability in the rest of the portfolio.

Our non-performing assets dropped to 27 basis points of total assets from 42 basis points at the end of the last quarter.

Finally, we were very pleased to announce the lifting of our MOU earlier this month.

This represents a significant achievement for the Company and I would like to thank all of our Board members, management team, and employees who worked so hard to comply with the requirements of the MOU over the past two years.

The guidance and support that we received from the Federal and State regulators was also always positive and encouraging and I thank them as well.

We are a much stronger company now and with the MOU lifted, we will now have more opportunities to create shareholder value in the future.

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

Al?

Thank you, Min.

Let me start by discussing our net interest margin.

Our net interest margin was 4.72% in the second quarter of 2007, compared to 4.62% last quarter.

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

Last quarter we had a reversal of $350,000 in interest income from three loans that were placed on non-accrual, which negatively impacted the net interest margin.

In addition, the level of pre-payment penalty income also impacts the net interest margin.

We had $524,000 in prepayment penalty income in the second quarter of 2007 and $142,000 in the first quarter of 2007.

On an apples-to-apples basis, excluding non-accrual loan interest income and prepayment penalty income, our net interest margin was 4.61% in the second quarter, a decline of 5 basis points from 4.66% last quarter.

The primary reason for the compression in the net interest margin is a decline in the average yield on our loan portfolio.

Excluding non-accrual loan interest income and prepayment penalty income the average yields on our loan portfolio declined 4 basis points during the quarter to 8.72%.

The decline is primarily due to the increased percentage of fixed rate loans in our portfolio which continues to be the preference of our customer base.

At June 30, 46% of our portfolio were fixed rate loans compared to 41% at March 31.

During the second quarter, fixed rate loans represented 53% of total loan originations compared to 50% in the first quarter of 2007.

While the trend in average loan yield has not been favorable, we are offsetting the decline with sufficient loan volumes to help us continue generating strong growth in interest income.

As Min mentioned, we were able to keep our deposit rates stable for the second quarter in a row.

Our average cost of deposits increased 2 basis points during the quarter to 3.82%.

We were also able to increase our balances of non-interest bearing deposits during the quarter which helped our overall cost of funds to remain essentially flat at 3.94% on a sequential quarter basis.

However, we are seeing higher deposit pricing at perhaps questionable levels again, so deposit management will be a challenge going forward.

Our non-interest income was $6.1 million in the second quarter, an increase of 38% from the same period last year.

Our net gains on sales of SBA loans increased 58% to $1.7 million in the second quarter of 2007.

Our average premium was 7.62% which compares to 7.56% in the first quarter of 2007.

We also recognized a gain of $754,000 in the second quarter of 2007 from the sale of $18.7 million of commercial Real Estate loans.

We sold these loans to maintain internal limits related to industry concentration within the CRE portfolio.

Our service fees on deposit accounts were $1.7 million, an increase of 11% from the second quarter of 2006.

Our non-interest expense was essentially flat compared to the second quarter of 2006.

Our largest expense item, compensation, declined 5% primarily due to a decrease in accrued bonuses, partially offset by salary and stock compensation expense increases.

There are also two other notable expense items to discuss.

Our data processing and communication fees declined 15% from the second quarter of 2006 which reflects the priority we have placed on improving our efficiency through better technology.

Initiatives we have put in place to help us better manage our item processing charges and phone lines as well as the increased use of our in house check imaging system have resulted in material cost savings.

Our professional fees increased $267,000 or 34% from the second quarter of 2006.

This is primarily due to legal fees related to an arbitration matter that we have discussed previously.

We believe that most of the expense related to this arbitration has been incurred and we will only have a small amount of additional expense in Q3 prior to the rendering of the decision.

Due to the strong revenue growth and flat expenses, we were able to generate significant improvement in our operating efficiency ratio.

Our ratio was 46.4% in the second quarter of 2007 compared to 50.6% in the same period last year and 51.0% in the first quarter of 2007.

We were able to swing back to positive operating leverage from a negative for the first quarter of 2007.

Moving to the balance sheet, our growth loans excluding loans held for sale were $1.88 billion at June 30, 2007, an annualized increase of 20% from the $1.71 billion at December 31, 2006.

This also represents a 30% annualized growth rate over the $1.75 billion at March 31, 2007.

Excluding the effect of the $18.7 million in commercial Real Estate loans that we sold, the annualized growth rate for the quarter was 34%.

We saw strong growth in both commercial business and commercial Real Estate loans during the quarter with annualized growth rates of 44% and 25% respectively.

Our total deposits were $1.80 billion at June 30, 2007, an increase of 5% over the $1.71 billion at December 31, 2006.

This also represents an 11% annualized growth rate over the $1.75 billion at March 31, 2007.

As Min mentioned earlier, the strongest growth occurred in our money-market account.

The growth in this category has allowed us to run-off some of our higher priced CDs.

Turning to asset quality, our non-performing assets were $6.0 million or 27 basis points of total assets at June 30, 2007.

This compares to $8.9 million or 42 basis points at March 31, 2007, and $3.6 million or 17 basis points at December 31, 2006.

The reduction compared to March 31, 2007, is primarily due to the sale of a 3.3 million non-performing loan at a premium as Min previously mentioned.

Our provision for credit losses was $1.4 million.

This higher provision was driven primarily by the strong growth we saw in the portfolio this quarter and not due to any adverse changes in credit quality.

At June 30, 2007, our allowance for loan losses was 1.02% of gross loans receivable compared to 1.07% at March 31, 2007, and 1.11% at December 31, 2006.

The allowance coverage to non-performing loans increased to 332% from 215% at March 31, 2007.

Net charge-offs were $1 million in the second quarter, representing 22 basis points of average loans on an annualized basis, slightly lower than our recent experience.

In the first quarter of 2007, net charge-offs were $1.3 million or 31 basis points.

Average net charge-offs over the last five years were 18 basis points.

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

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

Thanks, Al.

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

Based on the year-to-date results and our outlook for the second half of the year, we are narrowing our EPS guidance to a range of $1.29 to $1.31 from our original guidance of $1.29 to $1.33.

Following a slow start to the year, we have generated significant momentum in the business that we expected to continue.

The loan pipeline continues to be healthy in all of our lending businesses, although loan production may not be quite as strong as it was in the second quarter; however, we expect to generate sufficient volume to offset any further compression in our net interest margin.

As most of you are aware, we have built up a significant amount of excess capital during the period in which we were operating under the MOU.

With the MOU terminated, we are actively looking to deploy that capital in the most productive way.

We do not want to get into specifics at this time, but our primary focus with respect to the capital deployment will be investments in the business either through acquisitions or branch openings.

We continue to see strong economic activity in Korean- American markets around the country and we believe the Company is the best to serve by utilizing our capital to increase our presence in the most attractive areas.

We believe this approach will ultimately generate the most long term value for our shareholders.

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 Brett Rabatin, please proceed.

Good morning.

Good morning, Brett.

A couple questions for you.

First off, I was curious on the funding side, just looking at the cost of FHLB advances and borrowings versus what you're gathering in terms of money-market and CDs and I'm curious about sort of your internal limits on the borrowings and advances kind of given the difference in the pricing in the two and not that the loan to deposit ratio needs to be 140% or anything but just any thoughts on an increase of the borrowings to help offset any pressure that you might see from the loan competition on the fixed rate side?

Yes, Brett, our capacity is in excess of 400 million for additional FHLB advances, so we have the ability to take down a lot more in advances and we will continue to do that, given the difference in the cost of funds.

Okay, but is it fair to assume that the asset yields are somewhat of a mitigating, more than a mitigating factor in any kind of movement in the consummate spring funds meaning i.e., natural margin pressure has to probably occur for the next few quarters?

Well, the shift in the loan mix in the loan portfolio is slowly driving the loan yield down, as fixed rate loans, more fixed rate loans come on the books and the higher variable rate loans pay off and that has an adverse effect on the loan yields, so most of the pressure is coming from that side.

On the liabilities side, we really are trying to control not only our deposit costs but all of our liability costs and certainly, the FHLB advances has been very good for us because it's a cheaper funding cost.

Okay, and then on the really strong loan growth and production, if I missed it I apologize but I'm assuming that the East Coast franchise delivered a substantial portion of that.

Can you go through, I know you mentioned SBA production was split evenly, but just where all of this loan production came from and/or any club deals or what not involved in the growth?

Well, Brett, as I mentioned, it was evenly contributed from three different segments of our operations.

One-third came from California operation and one-third from New York region and one-third from various different loan production offices, so it was not concentrated in one area.

It was evenly spread out through our production offices.

Okay, was that SBA production or just loan production?

Both, including commercial and SBA.

Okay, so that includes the entire production?

Yes.

Okay.

And then just lastly on the SBA, I notice that the gain on sale margin was up slightly from a linked quarter perspective.

Any thoughts on gain on sale margin and just if that's a sustainable level going forward?

I think that premium is more of the reflection of the loan yields, so we were able to charge a little higher interest rate than the previous quarter, so I think that that is the reflection of the overall interest yield on our SBA loan portfolio.

Okay, great.

Thank you.

Okay.

Your next question comes from the line of Manuel Ramirez, please proceed.

Hi, good morning.

Hi.

Min, on your comment about capital, excess capital and uses of it, you mentioned business expansion and acquisitions.

On acquisitions, obviously you can't be specific on anything there, but could you give us kind of a sense of what size deals you would be interested in, if you do manage to identify one?

And then secondly, on the provisioning level this quarter, obviously it was a little bit higher because of the loan growth, but should we expect a similar provision level even if loan growth is a little bit slower and see a subsequent increase in the reserve ratio the second half of the year?

Thanks.

Yes, I will answer the first question and the second question I will ask Bonnie to answer that.

Basically, our strategy has been that eventually we would like to convert our loan production offices outside of California market to have a branch network, and we have not identified any specific target at this time, but it has a lot of timing and opportunity, so it will be very natural that we will look for any potential targets outside of California, where we have strong loan production offices and where we have a customer base that we feel very comfortable doing business, so that's our ongoing strategy in terms of deploying our excess capital.

And Bonnie?

First, our loan loss provision is concerned, I think this should be the range going forward.

Okay, terrific.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Aaron Deer.

Please proceed.

Hi, good morning, everyone.

Good morning.

Just a quick I guess follow-up question on the loan pricing side.

Can you maybe give some specifics in terms of these fixed rate loans that you have seen a lot of demand for, what kind of prices are you typically getting on that?

And then also on the deposit side, it sounds like your deposits in terms of your overall cost has been fairly stable, but what are you seeing in the marketplace just in terms of competition?

Is it still pretty cut throat out there or are things a little bit more relaxed these days?

On the loan side, the range -- on the fixed rate loans, the range is about anywhere from 7.5% to 8% in that range, and on the variable loans, maybe prime over 50 basis point to 75 basis point.

And on our deposit side, there are a lot of smaller banks who are offering very irrational pricing on CDs and we are still seeing over 5.5% on a jumbo CD, so it's still very competitive interest environment.

Okay, great.

That's helpful.

I appreciate it.

And there are no further questions at this time.

I'd like to turn the call back over to Ms.

Kim for closing remarks.

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

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.